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Katla Adalsteinsdottir was at a sewing machine, her eyes fixed on the bobbing needle, when I wandered into the Collective of Young Designers in Reykjavik, Iceland. Loops of down-tempo rhythmic whirring and electronic blips streamed from a small set of shabby speakers. She greeted me, glancing up quickly from her handiwork an embroidered beige wool skirt that she would later add to the shop's inventory of dresses, plush tunics and whimsical, flowing capes. The charming, cluttered shop is in a stone-walled subterranean level of a coffee shop that becomes a bar by late afternoon.

"The ceiling is not so tight, so if someone spills a beer, it comes right through," Adalsteinsdottir said, pointing to the creaky wooden planks none-too-high above her when she noticed my befuddled reaction to a sudden heavy pounding.

The Collective was started by four designers in April 2010. Now there are 10 members. And a waiting list. Everyone pays a share of the rent and works at the store a few days each month.

"It's good, because we pay less rent and have more variety," said Adalsteinsdottir, pulling at the skirt's new stitchings. "It's an easy way to get your ideas out there. And make a little money on a hobby."

In 2008, when the Icelandic financial system imploded, the national currency collapsed, banks defaulted on their bonds, prices rose and stores shuttered. But you'd hardly know it today walking up Laugavegur, Reykjavik's steep retail strip. Instead of global monoliths like H&M and the Gap, there are stores with meticulously arranged window displays of dresses and blazers, their designs defined by the clean, sharp lines that characterize so much of the architecture in this eccentric harborside capital city. There are boots and hats of leather, fur and feathers. And there are jewelry displays with pieces so simple and glistening, they appear to have been inspired by astronomy. Most of these are the work of Icelandic designers who have harnessed their creativity to find solutions to their financial hardships.

Over a hefty mug of Viking, the local lager, at Kex, a funky budget hotel/upscale hostel, I learned the extent of what's perhaps best called the indie design scene. I had come to Reykjavik for the Iceland Airwaves festival, an event that started in 1999 as an informal bash in an airplane hangar. Now, with the formal support of Icelandair, it has evolved into a full-blown event on the global festival circuit, drawing a roster of indie and electronic artists from Scandinavia, the United Kingdom and other parts of Europe, as well as the U.S.

It's that scrappy, DIY-start-up- cum more-formalized-institution that defines post-crash Reykjavik. And somehow, there's an indie spirit that never wanes.

Take, for instance, Kex. It boasts a sprawling ski-lodge-like gastropub with an outdoor beer garden. Local art is everywhere. Owner Petur Marteinsson was bouncing around greeting guests -- blond boys in skinny jeans and leather jackets, Danes in track suits, tribes of tattooed hipsters clicking away on MacBooks.

Marteinsson, a former professional soccer player, told me that when he leased the place with three fellow pro athletes in late 2010, it was a wreck, and the neighborhood was considered a slum. The building, circa 1930, had been the Fron Biscuit factory, a local institution. "During the economic boom, developers wanted to tear down the place and build a dream skyscraper," he said. "But they didn't have the money to build their dreams after the meltdown. We're making the best of what they had."

The morning after my visit to the Collective, I went up the street to one of the boutiques: Kiosk, another cooperative. This one was more polished, airy and galleryesque than the Collective. I tried on a black silk blouse with a plunging neckline, an open-backed dress with a billowing skirt, a classically tailored trench coat. The dress was designed by the svelte, chipper clerk, Solveig Ragna Guomundsdottirthe, who wore a vintage-inspired dress with a high waistline and a priestlike collar. She created the label Shadow Creatures with her sister. Dealing with management of the stores that sold their clothing had become a trial, she said. Then the crash happened.

"I was working abroad for a few months. When I came back, the shops totally changed," she said. "There were new shops because the old ones went bankrupt." So she and other designers banded together and started a business. Now, she says, the biggest problem is getting new clothing to production on time because they sell out so quickly. As I left, she chirped, "Have you been to Mundi yet?"

No, but on my way to Kiosk, I'd been handed a card in the city's main square. It was an invitation to "Chained and Dumped in the Ocean," a fashion show for designer Mundi Vondi's newest collection. I stopped by the store, which opened on Laugavegur in 2009. The decidedly couture space has an Escher-like pattern painted on a wall, mannequins in fitted sweater dresses, electric-colored tights and hooded capes with scarves attached that wrap mummylike around the body. The young woman at the store gave me Mundi's mobile number so that I could arrange to meet him. His mother answered when I called. His fashion show was about to begin. She instructed me to come to the after-party at the store later that night.

With the afternoon to spare, I stopped by the discreetly tucked away Iceland Design Centre, which I'd learned about at a tavern the night before. In conversation with a heavily tattooed photographer who bought me a shot of Brennivin, the bracing, intense Icelandic liquor, he told me about Reykjavik Fashion Festival, which the center organizes.

I'd intended to pop in and snatch some RFF brochures. I left 75 minutes later, after a conversation with Kristin Gunnarsdottir, a young project manager who explained that the center's founders, a group of Icelandic designers and architects, borrowed pages from the British and Norwegian design centers' playbooks to establish theirs in April 2008. Today, the center is funded by the Ministry of Education, Science and Culture and the Ministry of Industry, Energy and Tourism.

"Design is really young in Iceland. There wasn't even a word for it until 1950," Kristin said, sounding incredulous. "People think it's something to decorate with. It's about how we create society on good value. We try to get people to understand the value of design and re-create systems to suit humans. How we want to live -- everything is design related." The center's programs include what she called "speed dating" events that introduce young designers to finance types. It has fostered a blitz of collaborations, and those exchanges turned out to be particularly fruitful after the crash.

Mundi's after-party was a lively scene. Beers disappeared from a cooler at a steady clip. Mundi, 25, has wan, boyish features and tousled hair. He welcomed friends with quick kisses and received effusive congratulations with efficient nods.

"Wool is usually used in a classic sense, but it's always been quite extreme in my design," he said. "It's like thick woven ribbon that unwinds and doesn't know where it's going. I just make stuff my hand draws."

Eggert Johannsson, on the other hand, is less laissez faire in his work. His shop, a museum of sorts, is five minutes off Laugavegur. Eggert is a furrier who introduces himself as a tailor. His bearlike hands are coarse from hours spent breaking in his mare each morning. He quotes Homer Simpson. He started his business in 1974 and moved into his triple-decker cottage in 1986. His workshop occupies the first two stories; he lives on the top floor. There are hundreds of items on the ground floor. Everything is exquisite.

In the workshop, sections of charcoal-colored marten were laid out on a table. Eggert and his soon-to-be son-in-law, Harper, a punk-inspired Beau Brummell, were piecing them together for a coat.

"Skins with different characteristics dictate where each goes. It's insane -- the amount of work," said Harper, a trained milliner. Suddenly he dashed to the studio space he shares with his fiancee, also a milliner. "Did you send the hats to Oslo?" he shouted.

Eggert told me that he recently had signed on to work with 66 Degrees North, an iconic Icelandic outerwear company, to produce a hat made of Icelandic lamb fur and perch, fit for the Arctic's frigid conditions. He handed me a prototype, remarking how surreal it was for him to see the 66 Degrees North logo emblazoned on the brim.

I gazed at the logo. Somehow, it seemed fitting -- a maverick indie spirit and the establishment coming together.