On a low hill overlooking Reykjavik's harbour the members of a small camera crew wrapped in many layers of winterwear are wrestling with the horizontal snow in an attempt to film a short comedy sketch. The set-up of the skit, one explains, involves "a bum, he lives in the park and he is trying to sell tickets at crazy high prices for the show".

The show in question is taking place in a nearby white building, and the joke turns on the fact that, three and a half years after what is known here simply as The Crash, Icelanders have learned the hard way that you can't, after all, value something worthless simply by naming your price, and then adding zeroes.

That's not to say that what is taking place inside the white building – Reykjavik's Culture House – is not, in its own way, a hot ticket.

In a smart wood-panelled former library on the first floor a special criminal court has been convened for the first time in the country's history. Its purpose is to try the former Icelandic prime minister Geir Haarde over the spectacular economic collapse in October 2008 which catastrophically bankrupted the small island nation.

Haarde, 60, is to date the only politician anywhere in the world to face criminal charges over the financial crisis. The charges, which he denies, include "serious neglect of his duties … in the face of major perils looming over Icelandic financial institutions and the state treasury, a danger he knew of, or should have known of".

If convicted he could face up to two years in prison.

If the world has been rocked by the financial collapse, its effect on Iceland was convulsive.

Once the poorest country in Europe, which before 1990 did not have its own stock market, Iceland in the years after the millennium set out to reinvent itself as a global financial hub, embarking on what has been described as "one of the purest experiments in financial deregulation ever conducted".

Successive politicians privatised Iceland's natural resources and dismantled its regulatory mechanisms, sparking an economic bonanza for its bankers and mixing for its citizens the now-familiar toxic cocktail of bountiful credit, flaccid financial oversight and an unspoken collective agreement not to ask too many questions but just keep on spending. In 2007 Iceland topped the UN Human Development Index as the most developed country in the world.

Its three main banks, controlled by a tiny elite cabal, had a paper value of more than 10 times the country's GDP.

"I had the belief that Iceland could become an international financial centre," Haarde, who became prime minister in 2006, told the court this week. "None of us realised at the time that there was something fishy within the banking system."

The collapse of the three banks, requiring the country to take an emergency IMF loan, was "the most terrible shock", says Silla Sigursgeirsdottir, assistant professor of public governance at the university of Iceland.

"Those first two weeks of October [2008], it was like the sky had fallen on our heads. Most people didn't know anything about this." Prefiguring what would happen elsewhere, the country was forced to enact harsh cuts to public services, and many families suddenly found themselves sharply poorer.

It has left a bitter taste, she says. "The sense of injustice is very strong here, because people feel they were deceived. They were kept in the dark and they were fooled.

"We were told the world had never seen entrepreneurs like this before. This was preached here by the people in positions of authority, like the president.

"When people suddenly realised, what the hell is going on here?, they were taken aback. How could I ever have gone along with this?"

She stresses, as does everyone I talk to, Iceland's tiny size – with 320,000 inhabitants it is only slightly larger than Hull. Betrayal feels much more personal when everyone knows everyone else.

Margre Tryggvadóttir, then a literary theorist and editor, was living abroad until 2008, and had scratched her head, she says, over how "Icelanders could go abroad and live like millionaires. There were a lot of moments when you read something or noticed something and thought, this really can't be how things work."

Iceland's entire political elite failed, she believes, in not holding the executive, or the bankers, to account. "I was just a regular person out there, taking care of my kids and working, but after the crash I just felt like my whole existence was based on a lie."

Angered and appalled, she stood for the Althing, Iceland's ancient parliament, and was elected as an MP in 2009 in the wave of protest that saw Haarde ousted in favour of current PM Jóhanna Sigurðardóttir.

It was the country's parliamentarians, as empowered by the country's constitution, who unearthed an obscure piece of legislation many thought to be obsolete and sought to prosecute four of the principal political players.

After a series of legal challenges and political concessions, charges could be made to stick only to Haarde.

Tryggvadóttir voted for the indictments, and was disappointed the other three did not stand. "Some people have said of course that it's ridiculous to blame one man for this, and that's a little bit true.

"The Crash was of course the result of a lot of things, not just the fault of the man who was PM for a while."

She still believes the case is worthwhile, however. "I think it's very important to get to the truth, even if just for regular Icelanders to feel that this was not OK.

"Nobody wants to say, 'I was responsible for this thing that went wrong, and I have to live with it.' Everybody says, 'It was someone else's fault.'

"I don't think we can live here and raise our children here unless we feel that there is some kind of justice."

While the anger with bankers is palpable, however, few legal observers believe there is much chance of Haarde being convicted; many people say they don't want to see the former PM go to prison – an acknowledgement of responsibility would be enough.

Shoppers and cafe customers braving the Reykjavik wind largely purse their lips or shrug when asked about the prosecution.

Sunna Mgoll is typical – she lost her job as a care worker in a home for the elderly as a result of public sector cuts, and says her mother, a hairdresser, lost IKR 80,000 (£400) from her income in the space of a month.

And yet, "when all this was on the news I stopped watching the news". Is she angry? She shrugs. "I live a good life even though I have less money."

Like many, she is less inclined to blame Haarde than Davíð Oddsson, PM for 13 years until 2004, who chaired the Icelandic central bank at the time of the collapse.

Oddsson is one of the three against whom charges collapsed. He now edits Iceland's main newspaper.

Eirikur Bergmann, director of the centre for European studies at the Bifrost University in Iceland, sees Haarde's trial as "vastly significant".

But he stresses it is only one of a number of processes that are "marking the resurrection not only of Iceland's economy but its society".

These include criminal indictments against a number of bankers, still pending, the debate over Iceland's possible entry into the EU, and the redrafting of the constitution, a process in which he is personally engaged and from which he has snatched a short break to meet in a lively Reykjavik cafe.

Iceland's economic fightback has certainly begun – its economy grew by 1.9% in the last quarter alone, while its credit rating was revised by Fitch last month from junk to an investment grade BBB+.

But Bergmann says the country must emerge from the ruins of its collapse "almost a renewed society, so it will become something different in a significant way from what it was before" – less elitist, more open, more democratic.

In this context, the Haarde trial "kind of feels like a circus, really".

"Nothing is anyone's fault. As of yet it doesn't yet really provide us with what it was meant for, that we'd get some sort of closure, an understanding of what happened.

"Not to punish, but to say once and for all, this is what happened, now we move on."