First of all, Iceland has seen a significant decline in its economy: http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-post-crisis-miracle/ http://krug

First of all, Iceland has seen a significant decline in its economy: http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-post-crisis-miracle/ http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-po... Second of all, it is easy for a small country to bounce back by devaluing its currency, but it is harder for a big country to do that. To devalue is to gain via exports (or import substitution), but to grow Iceland by 1% requires less of the world than getting the USA to grow by 1%. This is a simple matter of ratios. The USA represents a greater total of the world economy than Iceland does, therefore its requires more of the world economy to get the USA to grow 1% via exports (or import substitution). Thirdly, a lot of banks have been allowed to fail: http://www.calculatedriskblog.com/2010/11/bank-failure-147-gulf-state-community.html http://www.calculatedriskblog.com/2010/11/bank-failure-147-g... Fourthly, no doubt some of the bigger banks should also have been allowed to fail. Nationalization and rehabilitation would have been more fair to the public than simply bailing out the existing management. Fifthly, please think about what you are writing: "the short term pain of some bankruptcies for the long term pain of years of deflation". There is no trade off there. Bankrupt banks lead to decline in the monetary base which will lead to deflation unless offset by some other factor, such as massive devaluation, as in the case of Iceland.