Iceland Loses Its Banks, Finds Its Wealth

Discussion in 'Media' started by hvactec, Nov 3, 2011.

  1. hvactec

    hvactec VIP Member

    Jan 17, 2010
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    The most important question about Iceland these days (after “How come Iceland is green and Greenland is icy?”) is what we can learn from its economic recovery. In 2008, the tiny island nation in the North Atlantic became a byword for both boom-time excess and recessionary disaster. After inflating its financial service sector with a pile of foreign-currency debt and risky combinations of short-term debt instruments with long-term loans, Iceland, which is not a member of the European Union, endured one of the most unpleasant recessions in recent memory.

    The country’s three largest banks, whose total assets were 11 times larger than Iceland’s GDP, proved too big to fail and then too big to rescue, bankrupting the central bank that took them over and leaving foreign creditors empty-handed. Inflation in the import-heavy economy reached 18 percent, while the stock market plunged by 90 percent. Between 2007 and 2009, according to the World Bank, GDP dropped by 40 percent. The Icelandic króna turned into a pariah currency, and even the country’s durable fishing and aluminum businesses were crippled by heavy leverage.

    A collapse of this size needs a villain, and it will surprise nobody to learn that libertarians, who exert an iron grip on political and economic practice throughout the world, took the blame. In a 2008 story for Fortune, Peter Gumble blamed deregulation and putatively free market reforms for destroying the banking system. New York Times economic poetaster Paul Krugman said the small nation had been “hijacked by a combination of free-market ideology and crony capitalism.” Huffington Post columnist Iris Erlingsdottir blamed the late Milton Friedman (who had once praised 10th-century Iceland’s approach to government) for failing to “take into account the predictably irrational character of human nature,” and concluded, “It is time for the grownups to take over again.”

    As always, we had to look to the legendary Icelandic songstress Björk for real wisdom. In a London Times essay blasting the country’s ruling conservatives, Björk lamented the way the boom/bust cycle had wiped out small entrepreneurs as big money pursued an oversupply of aluminum smelters—which was not an excrescence of the free market but a product of public industrial policy. Former Reykjavik mayor and Prime Minister Davíð Oddsson did indeed pepper his tenure as head of Iceland’s central bank with free market rhetoric. But that’s about as far as it went. In their new study of the crisis, Deep Freeze: Iceland’s Economic Collapse, economists Philipp Bagus and David Howden illustrate how thoroughly Iceland’s financial boom combined a Scandinavian nanny state—which consumes 41.1 percent of GDP and features unemployment insurance that provides three years of benefits—with the worst practices of boom-happy central bankers and government agencies everywhere.

    READ MORE Iceland Loses Its Banks, Finds Its Wealth - Reason Magazine
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