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Can you give some examples of where a country defaulted and was worse off? I think most recently Iceland defaulted and they seem to be doing alright - but maybe

Can you give some examples of where a country defaulted and was worse off? I think most recently Iceland defaulted and they seem to be doing alright - but maybe given it's size it doesn't really count.

venomsnake 10y ago
Iceland didn't default. They let their commercial banks die without intervention from the government. Also known as what the US Treasury should have done in 2008. If something is too big to fail - it must be killed immediately.
- krapp 10y ago
  No offense to Iceland, but the world economy is far less affected by the loss of Icleandic financial institutions than American ones.
  - AnimalMuppet 10y ago
    But you're moving the goalposts on this discussion. The question wasn't the impact on the global economy; it was the impact on the national one. So the Iceland example is directly relevant.
    - krapp 10y ago
      Part of this discussion seems to be whether or not the Treasury should have done what Iceland did, and I'm just trying to point out that they had valid reasons to do anything but that.
      - AnimalMuppet 10y ago
        Clarification: Do you mean the US Treasury? If so, yes, I agree with you. And yes, that has been part of the discussion.
        krapp 10y ago
        Sorry, yes I meant the US Treasury.
    - rhino369 10y ago
      The reason is that the global financial institutions are arguably more important than national ones. If Icelandic banking institutions fail, their economy can still be serviced by global banking institutions. Technically that is true for America too. American economy could be serviced by foreign banks. However, the American banking industry is big enough to knock out the entire global financial system. Iceland's isn't. Just one bank, Lehman Brother, almost caused the whole house of cards to come down.
  - SilasX 10y ago
    Well, yes, American banks were able to threaten a lot more mutually-assured destruction so as to intimidate the government into continuation of their too-big-to-fail status. Not sure how that's an argument in favor of paying the Danegeld though.
    - krapp 10y ago
      >Not sure how that's an argument in favor of paying the Danegeld though. Because not paying it would likely have tipped an already precarious global economy further towards depression, and that's not acceptable. So you pay the Danes off until you can actually kill them without killing yourself in the process.
      - venomsnake 10y ago
        Eight years later and the Danes are thriving. We already paid the social costs of total economic meltdown. But we have nothing to show for it.
      - SilasX 10y ago
        Just so we're on the same page, do you understand the logic behind not paying extortionists? The "later" doesn't come, and the payment only makes them better at extorting you, and draws in more people to try the same. You typically won't get a better opportunity. If you come up with a rationalization for how you absolutely must defer the reckoning today, why won't you come up with one tomorrow as well?
        krapp 10y ago
        The US government could have done something about the banks after having bailed them out without wreaking havoc, but they didn't. Not because the government didn't have the power to, but because it apparently didn't have the will. Simply letting the US banking industry collapse and take the country with it as a power play of refusal to give in to "extortion" would have been insane.
        10y ago
- treebeard901 10y ago
  If something is too big to fail -- it must fail immediately? That is an interesting perspective.
  - venomsnake 10y ago
    And that is called paying the Dane-geld; But we've proved it again and again, That if once you have paid him the Dane-geld You never get rid of the Dane.
- dragonwriter 10y ago
  > If something is too big to fail - it must be killed immediately. No, if its too big to fail, it must not be allowed to fail -- but also must be as expeditiously as possible broken up into units which are not too big to fail.
  - Florin_Andrei 10y ago
    Kind of like gradually splitting up your giant monster truck Java thing running all your endpoints into a variety of microservices.
    - dragonwriter 10y ago
      > Kind of like gradually splitting up your giant monster truck Java thing running all your endpoints into a variety of microservices. That's a perfectly apt analogy. "Too big to fail = must be killed immediately" is like saying if you have an Java monolith that is a SPOF for your entire business, you must immediately blow up the server running it to protect yourself from the danger of it failing later...
  - venomsnake 10y ago
    I am afraid you are wrong. Any entity strong enough to blackmail you into bailing it out, is strong enough to demand for the bailout to be no strings attached.
    - dragonwriter 10y ago
      > Any entity strong enough to blackmail you into bailing it out, is strong enough to demand for the bailout to be no strings attached. "Too big to fail" -- if they genuinely are [0] -- banks are not in a position to blackmail anyone into bailing them out; the danger of them failing is indirect effects of that failure, not actions the bank triggers if it is not bailed out -- its not blackmail. While policymakers have a strong public-interest incentive to prevent them from failing (that's literally what "too big to fail" describes), they have a similar public interest incentive to take steps to make sure that they aren't in the position to choose between similar failures and costly bailouts in the future -- and, quite often, the way that manifests is through conditions on the bailout which can extend as far as government taking control of the institution it is bailing out. This is born out by the past history of US government bailouts of institutions that were deemed to critical to the economy to fail, many of which had management conditions attached, and some of which extended to government taking significant control of the entity for some period, and those who previously controlled the entity losing out -- the entity (itself a legal fiction created by government) was preserved, the actual people the entity belonged to were not always bailed out. There are times when bailouts had no or weak conditions, which may be a policy failure, but clearly does not demonstrate that imposing conditions on bailouts is impossible. [0] "Too big to fail" can also be an pretext for policy-maker favors to people with whom they have personal, social-class, or other connections, rather than a genuine fact, in which case its still not blackmail, but a whole different problem.
- oh_sigh 10y ago
  And in their situation, it helps that it was mostly the wealth of foreigners that was lost. Iceland would have been much much worse off if most of the country was involved with those banks in a meaningful manner.
retube 10y ago
Iceland has a population of 330k. I.e the size of a small back water town. Whatever they do has 0 impact globally.
- AnimalMuppet 10y ago
  See my reply below to krapp.
msh 10y ago
Iceland did not default and was partly bailed out by denmark and norway.

venomsnake 10y ago

Iceland didn't default. They let their commercial banks die without intervention from the government. Also known as what the US Treasury should have done in 2008. If something is too big to fail - it must be killed immediately.

krapp 10y ago
No offense to Iceland, but the world economy is far less affected by the loss of Icleandic financial institutions than American ones.
- AnimalMuppet 10y ago
  But you're moving the goalposts on this discussion. The question wasn't the impact on the global economy; it was the impact on the national one. So the Iceland example is directly relevant.
  - krapp 10y ago
    Part of this discussion seems to be whether or not the Treasury should have done what Iceland did, and I'm just trying to point out that they had valid reasons to do anything but that.
    - AnimalMuppet 10y ago
      Clarification: Do you mean the US Treasury? If so, yes, I agree with you. And yes, that has been part of the discussion.
      - krapp 10y ago
        Sorry, yes I meant the US Treasury.
  - rhino369 10y ago
    The reason is that the global financial institutions are arguably more important than national ones. If Icelandic banking institutions fail, their economy can still be serviced by global banking institutions. Technically that is true for America too. American economy could be serviced by foreign banks. However, the American banking industry is big enough to knock out the entire global financial system. Iceland's isn't. Just one bank, Lehman Brother, almost caused the whole house of cards to come down.
- SilasX 10y ago
  Well, yes, American banks were able to threaten a lot more mutually-assured destruction so as to intimidate the government into continuation of their too-big-to-fail status. Not sure how that's an argument in favor of paying the Danegeld though.
  - krapp 10y ago
    >Not sure how that's an argument in favor of paying the Danegeld though. Because not paying it would likely have tipped an already precarious global economy further towards depression, and that's not acceptable. So you pay the Danes off until you can actually kill them without killing yourself in the process.
    - venomsnake 10y ago
      Eight years later and the Danes are thriving. We already paid the social costs of total economic meltdown. But we have nothing to show for it.
    - SilasX 10y ago
      Just so we're on the same page, do you understand the logic behind not paying extortionists? The "later" doesn't come, and the payment only makes them better at extorting you, and draws in more people to try the same. You typically won't get a better opportunity. If you come up with a rationalization for how you absolutely must defer the reckoning today, why won't you come up with one tomorrow as well?
      - krapp 10y ago
        The US government could have done something about the banks after having bailed them out without wreaking havoc, but they didn't. Not because the government didn't have the power to, but because it apparently didn't have the will. Simply letting the US banking industry collapse and take the country with it as a power play of refusal to give in to "extortion" would have been insane.
        10y ago
treebeard901 10y ago
If something is too big to fail -- it must fail immediately? That is an interesting perspective.
- venomsnake 10y ago
  And that is called paying the Dane-geld; But we've proved it again and again, That if once you have paid him the Dane-geld You never get rid of the Dane.
dragonwriter 10y ago
> If something is too big to fail - it must be killed immediately. No, if its too big to fail, it must not be allowed to fail -- but also must be as expeditiously as possible broken up into units which are not too big to fail.
- Florin_Andrei 10y ago
  Kind of like gradually splitting up your giant monster truck Java thing running all your endpoints into a variety of microservices.
  - dragonwriter 10y ago
    > Kind of like gradually splitting up your giant monster truck Java thing running all your endpoints into a variety of microservices. That's a perfectly apt analogy. "Too big to fail = must be killed immediately" is like saying if you have an Java monolith that is a SPOF for your entire business, you must immediately blow up the server running it to protect yourself from the danger of it failing later...
- venomsnake 10y ago
  I am afraid you are wrong. Any entity strong enough to blackmail you into bailing it out, is strong enough to demand for the bailout to be no strings attached.
  - dragonwriter 10y ago
    > Any entity strong enough to blackmail you into bailing it out, is strong enough to demand for the bailout to be no strings attached. "Too big to fail" -- if they genuinely are [0] -- banks are not in a position to blackmail anyone into bailing them out; the danger of them failing is indirect effects of that failure, not actions the bank triggers if it is not bailed out -- its not blackmail. While policymakers have a strong public-interest incentive to prevent them from failing (that's literally what "too big to fail" describes), they have a similar public interest incentive to take steps to make sure that they aren't in the position to choose between similar failures and costly bailouts in the future -- and, quite often, the way that manifests is through conditions on the bailout which can extend as far as government taking control of the institution it is bailing out. This is born out by the past history of US government bailouts of institutions that were deemed to critical to the economy to fail, many of which had management conditions attached, and some of which extended to government taking significant control of the entity for some period, and those who previously controlled the entity losing out -- the entity (itself a legal fiction created by government) was preserved, the actual people the entity belonged to were not always bailed out. There are times when bailouts had no or weak conditions, which may be a policy failure, but clearly does not demonstrate that imposing conditions on bailouts is impossible. [0] "Too big to fail" can also be an pretext for policy-maker favors to people with whom they have personal, social-class, or other connections, rather than a genuine fact, in which case its still not blackmail, but a whole different problem.
oh_sigh 10y ago
And in their situation, it helps that it was mostly the wealth of foreigners that was lost. Iceland would have been much much worse off if most of the country was involved with those banks in a meaningful manner.

retube 10y ago

Iceland has a population of 330k. I.e the size of a small back water town. Whatever they do has 0 impact globally.

AnimalMuppet 10y ago
See my reply below to krapp.

msh 10y ago

Iceland did not default and was partly bailed out by denmark and norway.