14 ms·

Let banks fail: Iceland’s plan looks to be working

338 points by jpatokal 13y ago

Mikeb85 13y ago
This is how capitalism is supposed to work. If a firm goes bankrupt, just let it fail. Might bring some short term pain, but it creates a healthier economy in the long run. Bailouts are contrary to the spirit of capitalism.
- rosser 13y ago
  Bailouts are contrary to the spirit of capitalism. Someone should explain that to what passes for capitalists nowadays.
  - Mikeb85 13y ago
    You might call that crony capitalism. In non-western countries giving money to an official in return for favourable economic conditions is called a bribe, in the US, Canada and Europe it's called 'lobbying'.
    - ergoproxy 13y ago
      The terms crony-capitalism, klepto-capitalism, and casino-capitalism are all very descriptive of the US economic system, which has become like a bad Yakov Smirnoff joke: "In America, bank robs you!" So what's happened to the $85 billion a month ($1 trillion a year) that Ben Bernake has pumped into the banks in the last year, during the third round of quantitative easing (QE3)? "It all got bottled up in the banks, and essentially none of it ... got lent out." Source: http://www.npr.org/2013/12/17/251796694/year-in-numbers-the-federal-reserves-85-billion-question http://www.npr.org/2013/12/17/251796694/year-in-numbers-the-...
      - bubbleRefuge 13y ago
        QE as any kind of remedy is a farce. At best it has a kind of placebo effect on the stock market. In reality, with QE the Fed exchanges reserve deposits for treasury securities to execute policy aimed at lowering longer term rates which is supposed to increase demand for loans. Those reserve deposits are not lent out because reserve deposits are never lent out. Reserve deposits are used for interbank settlement.
    - Tycho 13y ago
      Bailoutism.
- jordanb 13y ago
  Problem is, that was exactly what drove policy in the United States between 1929 and 1933. In the mean time, lending disappeared which caused grave liquidity problems for otherwise solvent firms both in the financial sector and in the "real economy." Those firms failed to meet their obligations producing a chain reaction which continued until severe government intervention put a stop to it years later. Bernanke and many others were playing off the 1933 script in 2008. Bernanke himself had actually written a book about the Great Depression. I'm not at all happy with what has happened on wall street since 2008 but Bernanke and many others were operating in good faith trying to prevent a catastrophe. There is really no parallel between the USA (in 2008 or 1929) and Iceland in 2008. In the case of Iceland, you have a series of hedge funds, basically, domiciled in Iceland but speculating on foreign securities using foreign capital. They had little to do with cod fishing or hot springs or aluminum smelting but when they exploded, the foreign bondholders wagged their fingers at Iceland and said "this is your problem now, you fix it." Icelanders wisely said "no," they opted not to impoverish themselves to make good the debts of local private hedge funds to the foreign speculators.
  - burntsushi 13y ago
    > Problem is, that was exactly what drove policy in the United States between 1929 and 1933. I don't understand how people think that the policy during 1929-1933 was "do nothing" when the following things occurred during that time period: Smoot-Hawley Tariff Act, Glass-Steagall Act, the Federal Home Loan Bank Act, the Emergency Relief and Construction Act, the Reconstruction Finance Corporation, the Hoover Dam(!), and more. Despite Hoover stating that he wanted less government intervention, that isn't actually what happened. Basically, the notion that "we did nothing" during 1929-1933 (as you've suggested) is a giant misconception that really needs to die. You can read more about it here: http://en.wikipedia.org/wiki/Herbert_Hoover#Great_Depression http://en.wikipedia.org/wiki/Herbert_Hoover#Great_Depression N.B. I don't claim that these policies were effective. Just that "nothing" is far from the truth.
    - jordanb 13y ago
      The Glass-Steagall Act, at least, what people mean when they say "Glass-Steagall" was passed in 1933 and signed by FDR.[0] You are correct, of course that Hoover didn't "fiddle while Rome burned" but fiscal policy was largely non-interventionist and monetary policy tight until the Emergency Banking Act of 1933[1] which was the "severe government intervention" I mentioned in the OP. [0] http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legislation http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legislat... [1] http://en.wikipedia.org/wiki/Emergency_Banking_Act http://en.wikipedia.org/wiki/Emergency_Banking_Act
- hessenwolf 13y ago
  That's not really true. Companies regulated under Solvency II will require sufficient capital to survive a 1 in 200 years worst case event. Sort of (but not really), 1 in 200 companies will face death-knell liquidity crisis every year. The question is, what do we do then? Do we let a company that took 50 years to build up fail? It is so easy to destroy something, and such a pain in the ass to build it. Maybe the idea instead is to make it such that we only have to bail out a portion of the 1 in 200 companies that fail each year? The portion that should be considered a going concern. What about General Motors? That is an incredible wealth-generating asset. A blip in the cash-flow statement could have made that into 1-2% of its productive capability, but the US didn't let that go down.
  - icelancer 13y ago
    >What about General Motors? That is an incredible wealth-generating asset. A blip in the cash-flow statement could have made that into 1-2% of its productive capability, but the US didn't let that go down. You make it sound like GM had no control over it. And that additionally, when a company goes bankrupt, all the wealth just disappears into thin air. Neither is true.
    - hessenwolf 13y ago
      It does not disappear into thin air, in the same way the rubber from a burst balloon can still be used to tie your hair back (but not as severe, and the recovery rate might be as high as 60%, but I would suspect very, very much lower in the case of a fire-sale of GM's assets)
  - marcosdumay 13y ago
    > The question is, what do we do then? Do we let a company that took 50 years to build up fail? It is so easy to destroy something, and such a pain in the ass to build it. What's the alternative? Tax people and give their money to the aristocracy (because you just created one)?
    - hessenwolf 13y ago
dschiptsov 13y ago
Too-big-to-fail banks is a rational compromise. Some Russians might still remember the failure of Sberbank in 90ths which was a disaster for millions of families (it was the only place to have savings account). You probably cannot imagine what a hell it will be if something like AIG or BoA would allow to fail. At least no government or rich elite could survive such kind of event which very probably will trigger a new period of forceful and bloody wealth redistribution (which is what all revolutions is all about). So govt choices to print its way out of being overthrown. What Iceland did is subtly different. It lets foreign banks to fail, to bear the consequences of their own risky and stupid investments, and refused to tax its own people to cover foreign bankers loses. Russians do even "better", they just says to its own folks "sorry, your money is gone" (what can you do?). Sometimes they bother to invent excuses for foreign investors, such as "tax returns" or "market cobditions", but that's very uncommon event. Usually your money just gone and people who did it are "clever guys".) Notice also how gun ownership indirectly restricts a corrupted government from just plainly robbing it's citizens and promt it to invent some more complicated, less efficient, slow schemes.) So, nothing to see here.
- yapcguy 13y ago
  AIG failed. A team in London trading CDS broke the company. The only reason why the corpse of AIG was kept alive was because AIG owed Goldman Sachs a lot of money. Taxpayer bail-out funds that went to AIG passed straight through and into the bank account of Goldman Sachs. I recently saw an ad by AIG. It's actually sickening. This company failed. Their assets should have been taken over by good insurance companies who managed their risks properly and did not engage in speculative instruments. By rewarding bad actors like AIG, moral hazard has been introduced into the markets. Anybody who says they support free markets and capitalism must surely agree that AIG should have been allowed to fail. Yes, it would have caused chaos but that's why lawyers and bankruptcy courts exists. With politicians picking the winners and losers, it's no wonder lobbying is such a popular business.
  - protomyth 13y ago
    AIG should have been allowed to fail, and I don't think it would have caused as much chaos as we actually got. The insurance parts of AIG (regulated by the states) were good, it was the financial products division (regulated by the feds) that double dipped and failed. The states would have dealt with the insurance parts in a better manner than the fed. GM should have been allowed to go into bankruptcy (given the Feds wanted to kill Buick, the best seller for GM in China) and dig out themselves. [edit] although Iceland's bank and AIG are totally different scenarios
RayVR 13y ago
This is pretty misleading. Iceland could let their banks fail for several reasons. First, they were not essential to the global banking system. Second, while Iceland's equity market lost a lot of its market value, it really did not hurt the citizens of Iceland - they invested as most do, in U.S. and Europe with some emerging markets allocation. As is pointed out, the decision to let the banks in Iceland fail is applauded by many...but this is due to the ridiculous size of Iceland's banking system compared to the rest of its economy. Also, don't forget, the same IMF that says they did the right thing now, said 6 months before the crash that there was no problem with the size of Iceland's banking sector relative to the rest of the economy. This article seems to selectively reveal information based on a pre-existing belief held by the author.
- deleted 13y ago
  [deleted]
joe_the_user 13y ago
All the claims about Iceland doing things differently are useless and I am quite sick of hearing them. Like the US, Iceland provided financial support for its ailing bank system when the crisis appeared. That Iceland officially nationalized banks and the US left the banks officially in private hands is really a trivial detail. Iceland supported their banks and ultimately returned them to the control of their previous owners, the same effective strategy as the US. And some unsecured creditors lost in Iceland and in the US, depending on the circumstances. Again, a detail, not the main picture, which wasn't really that different than here. Just stop with the "Iceland's different" baloney, just stop. http://en.wikipedia.org/wiki/2008%E2%80%9311_Icelandic_financial_crisis http://en.wikipedia.org/wiki/2008%E2%80%9311_Icelandic_finan...
- jcampbell1 13y ago
  Let's not forget that Iceland's banks were bailed out by foreign governments. All those UK "Icesave" high interest savings accounts were bailed out by the Bank of England. If Iceland had more than 300,000 people, you can be damn sure the debt wouldn't have been forgiven, and there would be tariffs on cod and aluminium until it was paid back.
  - seanmcdirmid 13y ago
    It was UK investments, UK investors, and UK depositors. The only thing Icelandic in this case was the flag of the bank.
    - peteretep 13y ago
      And where the profits went too.
      - seanmcdirmid 13y ago
        Right, it was UK capital, UK profit, UK risk, they were just using the Icelandic banks for more favorable tax and trading conditions. I swear, it sometimes seems like the whole of UK is in finance and looking at screwing the system globally.
unhe 13y ago
So, all the biggest examples come from the little things...
deleted 13y ago
[deleted]
throwaway_yy2Di 13y ago
Any comments on the capital controls that are a key component of this? Iceland banned Bitcoin too, for the same reason: https://en.wikipedia.org/wiki/Legal_status_of_Bitcoin#Iceland https://en.wikipedia.org/wiki/Legal_status_of_Bitcoin#Icelan...
- randomafrican 13y ago
  There's no other way to prevent capital flight, right ?
onion2k 13y ago
Iceland has a population of 320,000. It's the size of a small city. And all of the banks they let fail dealt primarily with money from outside of their borders - letting those banks fail had not material impact on their economy. If it had been a bank where Icelandic people got their mortgages they'd have bailed it out just like every other nation.
- hugi 13y ago
  That's just wrong. The failed banks owned around half of all mortgages in Iceland, including my own.
- marcosdumay 13y ago
  Well, ok. Brazil has a 200 million population, and banks that deal almost exclusively with internal deposits. At the 90's the country faced a very similar problem, and applied almost exactly the same remedy - nationalized the banks, the governemnt paid the depositors, and sold the resulting banks out (the part that differs). If you care to look, it endend about as well as Iceland, a short term impact, with growth resuming just after it.
  - rhino369 13y ago
    Practically, that's not really all that different from what the United States did, but instead of a drawn out process they did it in quickfire sales. The government forced the bankrupt banks to sell themselves to the non-bankrupt banks for virtually nothing. And it loaned and took stock (which is partial nationalization) in the non-bankrupt banks so those banks could pay the debts of the newly acquired failed banks. The government basically forcibly reorganized the banking system in a matter of weeks. The only difference is stockholders from the failed banks only lost 98-99% of their investment instead of 100%. A small price to pay for a quick solution to the largest financial crisis in 80 years.
nixy 13y ago
Given the population size of Iceland policies that work well there might not be instantly replicable on a larger scale. Nevertheless, Iceland is a fantastic place to visit. Being such a small welfare nation makes Iceland special in many ways. Their political openness and strong traditions of democracy are very interesting to observe, popular examples of which are the Bobby Fischer and Wikileaks stories. Iceland is often considered the world's oldest active democracy, their parliament was founded in 930 A.D. Also the rugged nature is incredibly fascinating, and while easy to overlook it is one of the most amazing holiday destinations I have ever experienced.
erazor42 13y ago
One does not simply compare a 320k people country with a 50+ millions one.
acd 13y ago
If we skip central banks and let the big banks fail we will have real market economy. As it now private banks make new debt money from thin air and are being saved again and again by central banks. The big banks pay them selfes big bonuses during good years, the people pay for this by inflation by the new debt money the central bank creates too save the too big to fail banks. The middle class is being bleeped since 1975. Checkout the graph on gdp per capita vs median income. http://www.quora.com/Economics/Why-is-there-a-divergence-between-median-family-income-and-GDP-per-capita-Where-does-the-balance-money-go http://www.quora.com/Economics/Why-is-there-a-divergence-bet... http://lanekenworthy.net/2008/09/03/slow-income-growth-for-middle-america/ http://lanekenworthy.net/2008/09/03/slow-income-growth-for-m...
veganarchocap 13y ago
Iceland were spot on in letting the market decide the fate of the banks. Here in the UK we claim banks have too much power and point the finger at 'Capitalism'. But Brown bailed out our banks with tax money which artificially empowered and allowed for risks.
relate 13y ago
Icelander here - there seem's to be a lot of misconception about what happened in Iceland. We technically let the banks fail, but at no point did my debit card stop working, my online bank go down or my money disappear. Joe_the_user says we simply nationalized the banks, but that's not true - here's how it was done: For each bank X (Glitnir, Kaupthing, Landsbanki), there government created their own new X. The following was by force brought into each new X: * Regular loans * Checking accounts * Credit cards * e.t.c. This of course created a debt between the new X and the remains of each old X, which took some time to resolve. On the other hand, a lot of things were left in the falling banks, including international branches, investment accounts (i.e. accounts with interests related to stock performance) and more. These selective operations of course caused a international controversy (Icesave dispute, e.t.c.), but if the government had let all the banks fail without these transfers - the damage to our economy would have been much greater.
- Beltiras 13y ago
  The proper term for what happened is the old banks were put into receivership. This has lasted for a lot longer than is healthy and the husks of the old banks are really poisonous to the economy and the political landscape. Some argue it would have been better to face the catastrophe of a crash than the languishing death spiral that ensued.
  - pessimizer 13y ago
    >Some argue it would have been better to face the catastrophe of a crash There was a crash, and the catastrophe was faced by putting the banks into receivership. The alternative was a public bailout, and is only preferable for people who make their incomes by investing in undercapitalized banks.
    - Beltiras 13y ago
      I meant: put through bankruptcy. That would have been catastrophic for the economy because Iceland would not have had a financial sector at all for some time.
mrfusion 13y ago
One thing to remember about Iceland is that it has a very small population. (About 400,000). So the whole country has about the same population as Miami, FL.
Symmetry 13y ago
To quote the inestimable Scott Sumner: Iceland did almost everything right. They stiffed the bank creditors to avoid aggravating the moral hazard problem, just like the textbooks recommend. In the eurozone the bank creditors are being bailed out. They relied of fiscal policy to address S/I and debt issues, and let monetary policy address AD, just as the New Keynesians were recommending in the 1990s. In the eurozone they combined tight money with reckless deficits. And now Iceland is growing fast and the eurozone is stagnating. http://www.themoneyillusion.com/?p=14895 http://www.themoneyillusion.com/?p=14895
pasbesoin 13y ago
Reducing to the extreme, I think the current banking/finance crisis can be reduced to the aphorism: Cross me once, shame on you. Cross me twice, shame on me. And much of the world has let itself descend far too far into the second sentence. People abused the finance system and related laws and regulation, severely. Those people should not have been given a second chance. Keep the system. Throw out the bad actors and policy. Instead, we have set ourselves up to be crossed again, by bad actors that have as a result grown even more powerful. Kudo to Iceland, for giving theirs the boot -- and in some cases, a jail cell.
debt 13y ago
Boomerang by Michael Lewis is a pretty book on the Icelandic financial crisis. If you've read the Big Short, then Boomerang is a look at the reverberating effects of the financial crisis of 2008 throughout the third world.
perlpimp 13y ago
This is weird but it seems very little countries have alot going for them. They have to be efficient I guess. Estonia is the other one, government and all processes are entirely computerized and PKI is used to control access. Yeah I know it is a tangent - but the other summer I make from the story is that the smaller the government the more tansparent it has to be - there are fewer combinations for government bureaucrats to use to further their own private agendas that may well be to the detriment of the entire country.
axilmar 13y ago
Greece's unemployment is 28% (unofficially over 40% - my estimation) not because of the banks being saved, but because of a bureaucratic economic model that is stuck in the 70s.

338 points by jpatokal 13y ago

This is how capitalism is supposed to work. If a firm goes bankrupt, just let it fail. Might bring some short term pain, but it creates a healthier economy in the long run. Bailouts are contrary to the spirit of capitalism.

rosser 13y ago
Bailouts are contrary to the spirit of capitalism. Someone should explain that to what passes for capitalists nowadays.
- Mikeb85 13y ago
  You might call that crony capitalism. In non-western countries giving money to an official in return for favourable economic conditions is called a bribe, in the US, Canada and Europe it's called 'lobbying'.
  - ergoproxy 13y ago
    The terms crony-capitalism, klepto-capitalism, and casino-capitalism are all very descriptive of the US economic system, which has become like a bad Yakov Smirnoff joke: "In America, bank robs you!" So what's happened to the $85 billion a month ($1 trillion a year) that Ben Bernake has pumped into the banks in the last year, during the third round of quantitative easing (QE3)? "It all got bottled up in the banks, and essentially none of it ... got lent out." Source: http://www.npr.org/2013/12/17/251796694/year-in-numbers-the-federal-reserves-85-billion-question http://www.npr.org/2013/12/17/251796694/year-in-numbers-the-...
    - bubbleRefuge 13y ago
      QE as any kind of remedy is a farce. At best it has a kind of placebo effect on the stock market. In reality, with QE the Fed exchanges reserve deposits for treasury securities to execute policy aimed at lowering longer term rates which is supposed to increase demand for loans. Those reserve deposits are not lent out because reserve deposits are never lent out. Reserve deposits are used for interbank settlement.
  - Tycho 13y ago
    Bailoutism.
jordanb 13y ago
Problem is, that was exactly what drove policy in the United States between 1929 and 1933. In the mean time, lending disappeared which caused grave liquidity problems for otherwise solvent firms both in the financial sector and in the "real economy." Those firms failed to meet their obligations producing a chain reaction which continued until severe government intervention put a stop to it years later. Bernanke and many others were playing off the 1933 script in 2008. Bernanke himself had actually written a book about the Great Depression. I'm not at all happy with what has happened on wall street since 2008 but Bernanke and many others were operating in good faith trying to prevent a catastrophe. There is really no parallel between the USA (in 2008 or 1929) and Iceland in 2008. In the case of Iceland, you have a series of hedge funds, basically, domiciled in Iceland but speculating on foreign securities using foreign capital. They had little to do with cod fishing or hot springs or aluminum smelting but when they exploded, the foreign bondholders wagged their fingers at Iceland and said "this is your problem now, you fix it." Icelanders wisely said "no," they opted not to impoverish themselves to make good the debts of local private hedge funds to the foreign speculators.
- burntsushi 13y ago
  > Problem is, that was exactly what drove policy in the United States between 1929 and 1933. I don't understand how people think that the policy during 1929-1933 was "do nothing" when the following things occurred during that time period: Smoot-Hawley Tariff Act, Glass-Steagall Act, the Federal Home Loan Bank Act, the Emergency Relief and Construction Act, the Reconstruction Finance Corporation, the Hoover Dam(!), and more. Despite Hoover stating that he wanted less government intervention, that isn't actually what happened. Basically, the notion that "we did nothing" during 1929-1933 (as you've suggested) is a giant misconception that really needs to die. You can read more about it here: http://en.wikipedia.org/wiki/Herbert_Hoover#Great_Depression http://en.wikipedia.org/wiki/Herbert_Hoover#Great_Depression N.B. I don't claim that these policies were effective. Just that "nothing" is far from the truth.
  - jordanb 13y ago
    The Glass-Steagall Act, at least, what people mean when they say "Glass-Steagall" was passed in 1933 and signed by FDR.[0] You are correct, of course that Hoover didn't "fiddle while Rome burned" but fiscal policy was largely non-interventionist and monetary policy tight until the Emergency Banking Act of 1933[1] which was the "severe government intervention" I mentioned in the OP. [0] http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legislation http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legislat... [1] http://en.wikipedia.org/wiki/Emergency_Banking_Act http://en.wikipedia.org/wiki/Emergency_Banking_Act
hessenwolf 13y ago
That's not really true. Companies regulated under Solvency II will require sufficient capital to survive a 1 in 200 years worst case event. Sort of (but not really), 1 in 200 companies will face death-knell liquidity crisis every year. The question is, what do we do then? Do we let a company that took 50 years to build up fail? It is so easy to destroy something, and such a pain in the ass to build it. Maybe the idea instead is to make it such that we only have to bail out a portion of the 1 in 200 companies that fail each year? The portion that should be considered a going concern. What about General Motors? That is an incredible wealth-generating asset. A blip in the cash-flow statement could have made that into 1-2% of its productive capability, but the US didn't let that go down.
- icelancer 13y ago
  >What about General Motors? That is an incredible wealth-generating asset. A blip in the cash-flow statement could have made that into 1-2% of its productive capability, but the US didn't let that go down. You make it sound like GM had no control over it. And that additionally, when a company goes bankrupt, all the wealth just disappears into thin air. Neither is true.
  - hessenwolf 13y ago
    It does not disappear into thin air, in the same way the rubber from a burst balloon can still be used to tie your hair back (but not as severe, and the recovery rate might be as high as 60%, but I would suspect very, very much lower in the case of a fire-sale of GM's assets)
- marcosdumay 13y ago
  > The question is, what do we do then? Do we let a company that took 50 years to build up fail? It is so easy to destroy something, and such a pain in the ass to build it. What's the alternative? Tax people and give their money to the aristocracy (because you just created one)?
  - hessenwolf 13y ago

dschiptsov 13y ago

Too-big-to-fail banks is a rational compromise. Some Russians might still remember the failure of Sberbank in 90ths which was a disaster for millions of families (it was the only place to have savings account). You probably cannot imagine what a hell it will be if something like AIG or BoA would allow to fail. At least no government or rich elite could survive such kind of event which very probably will trigger a new period of forceful and bloody wealth redistribution (which is what all revolutions is all about). So govt choices to print its way out of being overthrown. What Iceland did is subtly different. It lets foreign banks to fail, to bear the consequences of their own risky and stupid investments, and refused to tax its own people to cover foreign bankers loses. Russians do even "better", they just says to its own folks "sorry, your money is gone" (what can you do?). Sometimes they bother to invent excuses for foreign investors, such as "tax returns" or "market cobditions", but that's very uncommon event. Usually your money just gone and people who did it are "clever guys".) Notice also how gun ownership indirectly restricts a corrupted government from just plainly robbing it's citizens and promt it to invent some more complicated, less efficient, slow schemes.) So, nothing to see here.

yapcguy 13y ago
AIG failed. A team in London trading CDS broke the company. The only reason why the corpse of AIG was kept alive was because AIG owed Goldman Sachs a lot of money. Taxpayer bail-out funds that went to AIG passed straight through and into the bank account of Goldman Sachs. I recently saw an ad by AIG. It's actually sickening. This company failed. Their assets should have been taken over by good insurance companies who managed their risks properly and did not engage in speculative instruments. By rewarding bad actors like AIG, moral hazard has been introduced into the markets. Anybody who says they support free markets and capitalism must surely agree that AIG should have been allowed to fail. Yes, it would have caused chaos but that's why lawyers and bankruptcy courts exists. With politicians picking the winners and losers, it's no wonder lobbying is such a popular business.
- protomyth 13y ago
  AIG should have been allowed to fail, and I don't think it would have caused as much chaos as we actually got. The insurance parts of AIG (regulated by the states) were good, it was the financial products division (regulated by the feds) that double dipped and failed. The states would have dealt with the insurance parts in a better manner than the fed. GM should have been allowed to go into bankruptcy (given the Feds wanted to kill Buick, the best seller for GM in China) and dig out themselves. [edit] although Iceland's bank and AIG are totally different scenarios

RayVR 13y ago

This is pretty misleading. Iceland could let their banks fail for several reasons. First, they were not essential to the global banking system. Second, while Iceland's equity market lost a lot of its market value, it really did not hurt the citizens of Iceland - they invested as most do, in U.S. and Europe with some emerging markets allocation. As is pointed out, the decision to let the banks in Iceland fail is applauded by many...but this is due to the ridiculous size of Iceland's banking system compared to the rest of its economy. Also, don't forget, the same IMF that says they did the right thing now, said 6 months before the crash that there was no problem with the size of Iceland's banking sector relative to the rest of the economy. This article seems to selectively reveal information based on a pre-existing belief held by the author.

deleted 13y ago
[deleted]

joe_the_user 13y ago

All the claims about Iceland doing things differently are useless and I am quite sick of hearing them. Like the US, Iceland provided financial support for its ailing bank system when the crisis appeared. That Iceland officially nationalized banks and the US left the banks officially in private hands is really a trivial detail. Iceland supported their banks and ultimately returned them to the control of their previous owners, the same effective strategy as the US. And some unsecured creditors lost in Iceland and in the US, depending on the circumstances. Again, a detail, not the main picture, which wasn't really that different than here. Just stop with the "Iceland's different" baloney, just stop. http://en.wikipedia.org/wiki/2008%E2%80%9311_Icelandic_financial_crisis http://en.wikipedia.org/wiki/2008%E2%80%9311_Icelandic_finan...

jcampbell1 13y ago
Let's not forget that Iceland's banks were bailed out by foreign governments. All those UK "Icesave" high interest savings accounts were bailed out by the Bank of England. If Iceland had more than 300,000 people, you can be damn sure the debt wouldn't have been forgiven, and there would be tariffs on cod and aluminium until it was paid back.
- seanmcdirmid 13y ago
  It was UK investments, UK investors, and UK depositors. The only thing Icelandic in this case was the flag of the bank.
  - peteretep 13y ago
    And where the profits went too.
    - seanmcdirmid 13y ago
      Right, it was UK capital, UK profit, UK risk, they were just using the Icelandic banks for more favorable tax and trading conditions. I swear, it sometimes seems like the whole of UK is in finance and looking at screwing the system globally.

unhe 13y ago

So, all the biggest examples come from the little things...

deleted 13y ago

[deleted]

throwaway_yy2Di 13y ago

Any comments on the capital controls that are a key component of this? Iceland banned Bitcoin too, for the same reason: https://en.wikipedia.org/wiki/Legal_status_of_Bitcoin#Iceland https://en.wikipedia.org/wiki/Legal_status_of_Bitcoin#Icelan...

randomafrican 13y ago
There's no other way to prevent capital flight, right ?

onion2k 13y ago

Iceland has a population of 320,000. It's the size of a small city. And all of the banks they let fail dealt primarily with money from outside of their borders - letting those banks fail had not material impact on their economy. If it had been a bank where Icelandic people got their mortgages they'd have bailed it out just like every other nation.

hugi 13y ago
That's just wrong. The failed banks owned around half of all mortgages in Iceland, including my own.
marcosdumay 13y ago
Well, ok. Brazil has a 200 million population, and banks that deal almost exclusively with internal deposits. At the 90's the country faced a very similar problem, and applied almost exactly the same remedy - nationalized the banks, the governemnt paid the depositors, and sold the resulting banks out (the part that differs). If you care to look, it endend about as well as Iceland, a short term impact, with growth resuming just after it.
- rhino369 13y ago
  Practically, that's not really all that different from what the United States did, but instead of a drawn out process they did it in quickfire sales. The government forced the bankrupt banks to sell themselves to the non-bankrupt banks for virtually nothing. And it loaned and took stock (which is partial nationalization) in the non-bankrupt banks so those banks could pay the debts of the newly acquired failed banks. The government basically forcibly reorganized the banking system in a matter of weeks. The only difference is stockholders from the failed banks only lost 98-99% of their investment instead of 100%. A small price to pay for a quick solution to the largest financial crisis in 80 years.

nixy 13y ago

Given the population size of Iceland policies that work well there might not be instantly replicable on a larger scale. Nevertheless, Iceland is a fantastic place to visit. Being such a small welfare nation makes Iceland special in many ways. Their political openness and strong traditions of democracy are very interesting to observe, popular examples of which are the Bobby Fischer and Wikileaks stories. Iceland is often considered the world's oldest active democracy, their parliament was founded in 930 A.D. Also the rugged nature is incredibly fascinating, and while easy to overlook it is one of the most amazing holiday destinations I have ever experienced.

erazor42 13y ago

One does not simply compare a 320k people country with a 50+ millions one.

acd 13y ago

If we skip central banks and let the big banks fail we will have real market economy. As it now private banks make new debt money from thin air and are being saved again and again by central banks. The big banks pay them selfes big bonuses during good years, the people pay for this by inflation by the new debt money the central bank creates too save the too big to fail banks. The middle class is being bleeped since 1975. Checkout the graph on gdp per capita vs median income. http://www.quora.com/Economics/Why-is-there-a-divergence-between-median-family-income-and-GDP-per-capita-Where-does-the-balance-money-go http://www.quora.com/Economics/Why-is-there-a-divergence-bet... http://lanekenworthy.net/2008/09/03/slow-income-growth-for-middle-america/ http://lanekenworthy.net/2008/09/03/slow-income-growth-for-m...

veganarchocap 13y ago

Iceland were spot on in letting the market decide the fate of the banks. Here in the UK we claim banks have too much power and point the finger at 'Capitalism'. But Brown bailed out our banks with tax money which artificially empowered and allowed for risks.

relate 13y ago

Icelander here - there seem's to be a lot of misconception about what happened in Iceland. We technically let the banks fail, but at no point did my debit card stop working, my online bank go down or my money disappear. Joe_the_user says we simply nationalized the banks, but that's not true - here's how it was done: For each bank X (Glitnir, Kaupthing, Landsbanki), there government created their own new X. The following was by force brought into each new X: * Regular loans * Checking accounts * Credit cards * e.t.c. This of course created a debt between the new X and the remains of each old X, which took some time to resolve. On the other hand, a lot of things were left in the falling banks, including international branches, investment accounts (i.e. accounts with interests related to stock performance) and more. These selective operations of course caused a international controversy (Icesave dispute, e.t.c.), but if the government had let all the banks fail without these transfers - the damage to our economy would have been much greater.

Beltiras 13y ago
The proper term for what happened is the old banks were put into receivership. This has lasted for a lot longer than is healthy and the husks of the old banks are really poisonous to the economy and the political landscape. Some argue it would have been better to face the catastrophe of a crash than the languishing death spiral that ensued.
- pessimizer 13y ago
  >Some argue it would have been better to face the catastrophe of a crash There was a crash, and the catastrophe was faced by putting the banks into receivership. The alternative was a public bailout, and is only preferable for people who make their incomes by investing in undercapitalized banks.
  - Beltiras 13y ago
    I meant: put through bankruptcy. That would have been catastrophic for the economy because Iceland would not have had a financial sector at all for some time.

mrfusion 13y ago

One thing to remember about Iceland is that it has a very small population. (About 400,000). So the whole country has about the same population as Miami, FL.

Symmetry 13y ago

To quote the inestimable Scott Sumner: Iceland did almost everything right. They stiffed the bank creditors to avoid aggravating the moral hazard problem, just like the textbooks recommend. In the eurozone the bank creditors are being bailed out. They relied of fiscal policy to address S/I and debt issues, and let monetary policy address AD, just as the New Keynesians were recommending in the 1990s. In the eurozone they combined tight money with reckless deficits. And now Iceland is growing fast and the eurozone is stagnating. http://www.themoneyillusion.com/?p=14895 http://www.themoneyillusion.com/?p=14895

pasbesoin 13y ago

Reducing to the extreme, I think the current banking/finance crisis can be reduced to the aphorism: Cross me once, shame on you. Cross me twice, shame on me. And much of the world has let itself descend far too far into the second sentence. People abused the finance system and related laws and regulation, severely. Those people should not have been given a second chance. Keep the system. Throw out the bad actors and policy. Instead, we have set ourselves up to be crossed again, by bad actors that have as a result grown even more powerful. Kudo to Iceland, for giving theirs the boot -- and in some cases, a jail cell.

debt 13y ago

Boomerang by Michael Lewis is a pretty book on the Icelandic financial crisis. If you've read the Big Short, then Boomerang is a look at the reverberating effects of the financial crisis of 2008 throughout the third world.

perlpimp 13y ago

This is weird but it seems very little countries have alot going for them. They have to be efficient I guess. Estonia is the other one, government and all processes are entirely computerized and PKI is used to control access. Yeah I know it is a tangent - but the other summer I make from the story is that the smaller the government the more tansparent it has to be - there are fewer combinations for government bureaucrats to use to further their own private agendas that may well be to the detriment of the entire country.

axilmar 13y ago

Greece's unemployment is 28% (unofficially over 40% - my estimation) not because of the banks being saved, but because of a bureaucratic economic model that is stuck in the 70s.