Top Economists: Iceland Did It Right … And Everyone Else Is Doing It Wrong

George Washington's picture

Nobel prize winning economist Joe Stiglitz notes:

What Iceland did was right. It would have been wrong to burden future generations with the mistakes of the financial system.

Nobel prize winning economist Paul Krugman writes:

What [Iceland's recovery] demonstrated was the … case for letting creditors of private banks gone wild eat the losses.

Krugman also says:

A funny thing happened on the way to economic Armageddon: Iceland’s very desperation made conventional behavior impossible, freeing the nation to break the rules. Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net. Where everyone else was fixated on trying to placate international investors, Iceland imposed temporary controls on the movement of capital to give itself room to maneuver.

Krugman is right.  Letting the banks go bust – instead of perpetually bailing them out – is the right way to go.

We’ve previously noted:

Iceland told the banks to pound sand. And Iceland’s economy is doing much better than virtually all of the countries which have let the banks push them around.

Bloomberg reports:

Iceland holds some key lessons for nations trying to survive bailouts after the island’s approach to its rescue led to a “surprisingly” strong recovery, the International Monetary Fund’s mission chief to the country said.


Iceland’s commitment to its program, a decision to push losses on to bondholders instead of taxpayers and the safeguarding of a welfare system that shielded the unemployed from penury helped propel the nation from collapse toward recovery, according to the Washington-based fund.




Iceland refused to protect creditors in its banks, which failed in 2008 after their debts bloated to 10 times the size of the economy.

The IMF’s point about bondholders is an important one:  the failure to force a haircut on the bondholders is dooming the U.S. and Europe to economic doldrums.

The IMF notes:

[The] decision not to make taxpayers liable for bank losses was right, economists say.

In other words, as IMF put it:

Key to Iceland’s recovery was [a] program [which] sought to ensure that the restructuring of the banks would not require Icelandic taxpayers to shoulder excessive private sector losses.

Icenews points out:

Experts continue to praise Iceland’s recovery success after the country’s bank bailouts of 2008.


Unlike the US and several countries in the eurozone, Iceland allowed its banking system to fail in the global economic downturn and put the burden on the industry’s creditors rather than taxpayers.




The rebound continues to wow officials, including International Monetary Fund chief Christine Lagarde, who recently referred to the Icelandic recovery as “impressive”. And experts continue to reiterate that European officials should look to Iceland for lessons regarding austerity measures and similar issues.

Barry Ritholtz noted last year:

Rather than bailout the banks — Iceland could not have done so even if they wanted to — they guaranteed deposits (the way our FDIC does), and let the normal capitalistic process of failure run its course.


They are now much much better for it than the countries like the US and Ireland who did not.

Bloomberg pointed out February 2011:

Unlike other nations, including the U.S. and Ireland, which injected billions of dollars of capital into their financial institutions to keep them afloat, Iceland placed its biggest lenders in receivership. It chose not to protect creditors of the country’s banks, whose assets had ballooned to $209 billion, 11 times gross domestic product.




“Iceland did the right thing … creditors, not the taxpayers, shouldered the losses of banks,” says Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York. “Ireland’s done all the wrong things, on the other hand. That’s probably the worst model.”


Ireland guaranteed all the liabilities of its banks when they ran into trouble and has been injecting capital — 46 billion euros ($64 billion) so far — to prop them up. That brought the country to the brink of ruin, forcing it to accept a rescue package from the European Union in December.




Countries with larger banking systems can follow Iceland’s example, says Adriaan van der Knaap, a managing director at UBS AG.


“It wouldn’t upset the financial system,” says Van der Knaap, who has advised Iceland’s bank resolution committees.




Arni Pall Arnason, 44, Iceland’s minister of economic affairs, says the decision to make debt holders share the pain saved the country’s future.


“If we’d guaranteed all the banks’ liabilities, we’d be in the same situation as Ireland,” says Arnason, whose Social Democratic Alliance was a junior coalition partner in the Haarde government.




“In the beginning, banks and other financial institutions in Europe were telling us, ‘Never again will we lend to you,’” Einarsdottir says. “Then it was 10 years, then 5. Now they say they might soon be ready to lend again.”

And Iceland’s prosecution of white collar fraud played a big part in its recovery:

[The U.S. and Europe have thwarted white collar fraud investigations ... let alone prosecutions.] On the other hand, Iceland has prosecuted the fraudster bank heads (and here and here) and their former prime minister, and their economy is recovering nicely … because trust is being restored in the financial system.

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malek's picture

Krugman also says:

A funny thing happened on the way to economic Armageddon: Iceland’s very desperation made conventional behavior impossible, freeing the nation to break the rules.

Am I the only one who has a slight perception problem with such phrasing?

knukles's picture

No, you've plenty of company.
Krugman's writing makes little sense because his thoughts make little sense.
It's not his grammar or writing style that's cumbersome.
It's his thought process... has about as many holes as a Goth girl's nose.

honestann's picture

They leave out the important part --- what "Iceland" actually did right.  That was for regular folks to literally, physically chase predators-DBA-government and predators-DBA-banksters out of dodge (Iceland).  If those predators were still in control, NONE of the good stuff would have happened.  Therefore, the bottom line is, what Iceland did right was... to have a quickie revolution.

torabora's picture

Is it true that you get a fresh cod  in exchange for opening an account in an Icelandic bank?

supermaxedout's picture

Yeah Iceland showed the way. The way to kill the banks and the banking system of the West owned by US and UK.  Remember when Iceland did it. The UK was close to declare war to Iceland. They immediately confiscated everything in reach which was somehow connceted to Iceland.

GTerrece is somewhat bigger than Iceland. Thats why bankruuptcy has to be avoided by all means. The Germans have the fault that Greece is so dep in the debt thats why the Germans should pay the bill. But unfortunately they do not like to pay the bills of Greece.

So Greece declares bankruptcy very soon but why should they go back to Drachma. The people there like the Euro and anyhow they have no other money. The Greek government is anyhow not capable to organize something like going back to the Drachma.

So the banks go bust. But there is a solution. There are two players which always boast that their currencies are superior to the Euro because they can just print as much as they want no matter what happens to the value. These two player UK and US can now show how fast there presses can run. Full speed and overtime 24/7 that is needed to save the systemic important banks all over the world. Its their system anyhow owned by the US and UK. So the two have to take care if they want to continue with their bullshit system.

dlmaniac's picture

Iceland banks did not have hundreds of trillions derivatives stuck on their book like Morgue, GSucks and so on. US banks are too beyond the point of no return to pull an Iceland.

honestann's picture

You don't get it.  It was not the government or banks that "pulled an Iceland", it was the people who literally chased the politicians and banksters out of their country.  Screw the predators-DBA-government and screw the predators-DBA-corporations involved in these scams.  Chase them out of dodge, lock them in cages, or hand them.

THAT is what Iceland did right, and THAT is why nowhere else has or will.

Westcoastliberal's picture

The very idea that the taxpayers should somehow make private bankers whole on their losses (based on stupidity) is in itself ludicrous. The only reason it has happened here in the U.S. is the idiotic political system which makes all politicians for sale to the highest bidder.  Political capital is the one investment that brings the highest return; we need to find a way to stop it and be like Icelanders.  Screw the banksters.

ltsgt1's picture

Where is Jon Corzine? Who lets him off the hook?

areopagetica's picture

GW-  Would love to see articles like this putting up ideas for us here in Illinois.  We need ideas from smart financial folks like you and your readers because our political class and media are clueless, and the real numbers for state and local government here are insurmountable.  Together with other problem states we represent a multi-trillion dollar systemic risk to the economy.  People like me who have been screaming about how bad it is for ten years continue to be ignored.  Help!

AnAnonymous's picture

'Americans' are publically limited in their analysis.

Iceland did something well: they robbed blindly,knowingly and openly and were not punished for that.

Nothing new save that they managed to rob from other 'Americans' who usually are extremelly reactive when it comes to that kind of stuff...

Of course, neither 'american' Stilgitz or Krugmann can confess that...

Fact is Iceland is working on its currency in order to keep consuming.

Griffin's picture

Icelanders never robbed anyone, the banks that went bust were privately owned companies.

There was no state guarantee or any obligation for the the state to pay any of this. Iceland never defaulted on any loans.

The failed banks were put into administration and their assets used to pay creditors, depositors were given priority over other investors.

When people look at the enormous size of the banking system in numbers they should realize that a large piece of that pie has been created with market manipulation and all kinds of magic tricks.


TheFourthStooge-ing's picture

AnAnonymous, rewriting history again:

Iceland did something well: they robbed blindly,knowingly and openly and were not punished for that.

Nope, wrong again.

Bankers in Iceland robbed blindly, as is the eternal nature of bankers. When the scheme collapsed, the people of Iceland refused to be punished for the crimes of the bankers.

It's as simple as that, unless you're trying your same old tricks of offuscation.

Fact is Iceland is working on its currency in order to keep consuming.

Fact is you are wrong again, as is your habit.

I suggest you meet a few Icelanders and learn how to fish fishes when they are in the sea.

dizzyfingers's picture

Yes, almost anything would have been better than what has happened. The reality is the rich were rescued, the rest of us are sinking, but gee the Wall Street numbers look so good! It's all crap.

24KGOLD FOIL HAT's picture

The rich will have the mobs riot against the suburbs.  The media will stir them up when things collapse.   Divide and conquer.

Slightly Insane's picture

Personally, I'ld love to hang the freakin bastards in the streets .... by their nuts!  Convicted of massive fraud, thievery, corruption ..... firing squad in the street!  Start with the top a-holes!  Where's that freakin John Corzine ....

I'm telling you, I smell blood running in the streets  .... and if th powers to be don't want to punish the miscreants, we will ..... and then we'll come after them. 

24KGOLD FOIL HAT's picture


Machetes, clubs and guns arent used by suburban Princesses [male and female].  The mobs will kill suits, new SUV drivers  and pink people.  Us and family.

The night before it blows, Sunday 5pm EST, the 1% will jump in their boats in Manhattan and head to the hideouts with mercenaries.   If you or I are in the city or burbs when it blows, even guns wont allow us to flee to the boonies on Monday. 

Jefferson said were done when we vote ourselves benefits and its geting to be about time.  Australia here I come!

Marco's picture

Uhm, Australia is a welfare state ... a welfare state which has much less qualms at "punishing success" than the US at that (supertaxes).

sgt_doom's picture

Great blog posting, GW

The Final Word

If there's any validity to the USA Today polls (not a rag I normally pay any attention to), that most Americans are disenchanged with both Romney and Obama, than there may, just may, be a sliver of hope for the American future.

With Romney we are presented with a super-Nazi; with Obama a Nazi.

Yes, I am unequivocally stating that anyone who repeatedly invokes the Espionage Act against American whistleblowers is a Nazi; anyone responsible for preemptive arrests of American activists is a Nazi; anyone who fights against due process and supports indefinite detention is a Nazi.

And on the economic front, anyone who appoints the tope three jobs offshoring specialists in America:  Diana Farrell (McKinsey Global Institute, editor of Offshoring, and author of McKinsey's infamous report urging the offshoring of all jobs excepting hers), Jim Kolbe and Jeffrey Immelt (GE) is a certified Nazi; and Romney is only worse!

There is no lesser of evils when the choice is between the likable fascist, Obama, or the jackhole ultra-fascist, Romney.

Now the finest presidential candidate in my lifetime, at least since President Kennedy, is Dr. Jill Stein of the Green Party.

We are both highly fortunate and privileged she has chose to run, given the corporate-controlled media propaganda machine extant in America today.

Our last, our final chance, in this country is to elect Jill Stein in 2012!

Let us pray that not only those USA Today polls are valid, but that the American electorate finally wakes up.

24KGOLD FOIL HAT's picture


The 1% are using Jill to enact a new tax on energy, paid by the middle class.  She means well but Rockefeller started the environmental movement.  1% will have the Marxists fight the suburbs in order to destroy the Constitution.  1% will have destroyed any chance of middle class saving the US.  We'll all be poor then.  The 1%'s Marxist stooges will gladly take revenge on the 1%'s middle class stooges people.  Goodbye Republic, hello Roman Empire!

hannah's picture

iceland doesnt half 75% of the population living off the gov teet like we have in the usa. the entitles classes (unions/military/welfare) cant allow the gov or the banks to go under or they starve. we are past the point of no return.....

Marco's picture

Guess again ...

Iceland has a tax base of 42% of GDP and government budget is over 50% of GDP ... the US has a tax base of 22% of GDP and a government budget of 39% of GDP (both including social security). Big government is an overblown problem in the US, it is in fact a diversion ... all the effort talking about big government avoids talking about how to fix government in realistic ways.

TPTB like the ideological purity games ... you'd all rather let a complete collapse come than compromise and work together with your most obvious allies, the progressives (Kucinich's writing on Syria would have fit right in on the ZH front page).

24KGOLD FOIL HAT's picture

Hannah 14:21

Sadly I think you are right.  Marxism works in Scandanavia cuz there isnt more losers than winners.  US has a large % of residents that cant compete with the average [or above] jobholders.  The % of incompetents employed by govt and on govt benefits has reached critical mass.  US has so many thugs and so little morality that all it takes is a crisis to tip US into Marxism.

Marxists plan is to overload the US with debt ala Cloward, Piven, Ayles.  When there is a big collapse, Latin gangs and new black panthers will sweep the suburbs and dare us to stop them. They have that rage for revenge against us.

Suburban American princesses [of both sexes] shy away from machetes, clubs and guns!  They have the cities now.  They will take the suburbs.  They dont need rural America to control the US.  They know that the cops are only after-the-fact report takers.  Maybe not by places like the Empire State Bldg.  But cops in the suburbs are few and far between when the thugs attack.  Search news reports- its already started.  They shot a girl in St. Louis for her phone.

AnAnonymous's picture

Your contempt for negroes is showing...

Huh, wrong person. Cant work for 'Americans'

Savyindallas's picture

Go into an inner city and start addressing locals as "negroes" and see how that goes over. You'll be very popular.

TheFourthStooge-ing's picture

AnAnonymous, the Chinpokomon Master of hypocricy, said:

Your contempt for negroes is showing...

Yours is showing even more, Little Bigot Man:

Logics of lowest level. Even understood by negroes, so to tell how lowest level it is...

Wok calling the cooking marmit black, in accordance with the eternal nature of your hypocritizenism.

24KGOLD FOIL HAT's picture

AnAn 16:05-

Give credit where credit is due.  Look at the crime stats.  Of course not all are thugs.  Even Jesse Jackson says he's scared when walking down a street in the hood and he hears footsteps behind him.. 

Do you invest when probabilities are 90% against you?  Would you live where crime by one group against another is 10 to 1?  That is now everywhere but rural America.  They say if it aint fair [ house and 2 new cars and vacay twice a year for all] then burn it or tax it to oblivion.

Dont let PC mesmerize you.  You haveto walk American streetes to know.  What country are you in?

BKbroiler's picture

Marxists plan is to overload the US with debt ala Cloward, Piven, Ayles.  When there is a big collapse, Latin gangs and new black panthers will sweep the suburbs and dare us to stop them. They have that rage for revenge against us.

Congratulations, you managed to write the single dumbest paragraph I've ever read.

Omen IV's picture

there is always time to reverse course even today !

the key reason Iceland made this decision to let the banks go under as well as the bond holders was not mentioned in the article

the Premier of Iceland decided to have a referendum of the PEOPLE - the people decided directly not the politicians not to support the banks, revalue the currency and walk away from the debts even when threatened with sanctions by the Netherlands and the UK

if Paulson et al were not the decision makers and the USA citizens made the decision in a referendum they would have tanked the banks

the USA is a control fraud - only reason we have a debt problem and a jobs problem



sgt_doom's picture

Iceland, like the other Scandinavian countries, is a Socialist Democracy -- check your facts, douchey.

Griffin's picture

Iceland is not a Socialist democracy, its is currently ruled by a coalitions of Social democrats and Left green, but if you look at history you will find that the Independence party who is a right wing party has been dominating Icelandic politics.

The current goverment took over after the old Independence/Social democrat govt was run out of parliament by a large group of very angry people.

Icelanders have always supported capitalism, and it worked out quite well for a while despite all the corruption.

At some point something in the system broke, capitalism went into hyper drive, a origy of privatization and deregulation, and when it all started to fall apart the idiots tried to create a fusion of this fucked up capitalism and socialism. Privatize the good times and socialize the bad.

That did not go so well for them.





BKbroiler's picture

check your facts, douchey...  Despite the label "socialist" Iceland has a direct democracy that is way more effective than ours, their citizens got to vote against the bailout and won:

Icelanders have rejected the latest government-approved plan to repay the £3bn owed to Britain and the Netherlands from the crash of the country's banking system in 2008

Ghordius's picture

Iceland is a republic based on parliamentarism based on democratic elections, where the biggest voter block can be described as "social democrats" and where popular referenda can be set up per act of parliament.

Damn, the more I read this kind of comments based on the fact that the two US parties are just called like two principles of rule the more I get the impression that this is really a big civic education issue.

AnAnonymous's picture


The capacity of 'Americans' to mix everything.

Republic is democracy, socialism can be hinged around direct democracy etc...

TheFourthStooge-ing's picture


The capacity of Chinese citizenism citizens to mix everything.

Dog is delicacy, umbilical cord can be sauteed around with monkey bladder in ginger sauce etc...

akak's picture

And now the reason for all the enforced abortions in China is revealed.

Fetus broth is a delicacy for high party officials, so ....

Monk's picture

From 2008:

"The party's over for Iceland, the island that tried to buy the world"

and 2005:

"Iceland won’t stay this cheap forever"


Joebloinvestor's picture

Apply this to the US government agencies.

Show ONE FUCKING EXAMPLE of a US government agency that can be used as a "model" of efficiency.

Any branch will do.


Diogenes's picture

Am I the only one who remembers the pictures of mobs of Icelandic voters surrounding the house of parliament, literally with torches and pitchforks, threatening to kill the politicians if they bailed out the banks?

AnAnonymous's picture

Ummm, your TV set was broken, turned black into white.

Civilized people do not behave the way you depict.

Signed: an American

akak's picture

Ummm, your flush toilet is an abomination, turning good nightsoil into waste.

Uncivilized people do not refrain from publicly shitting on the roadsides.

Signed: a Chinese Citizenism citizen.

jwoop66's picture

chinese citizens definitely have the best citizenism. 

TheFourthStooge-ing's picture

Ummm, I think I'll go wok the dog now.

Signed: AnAnonymous

akak's picture

Question: If a turd falls from a deaf Chinaman on a Chinese roadside, and nobody else is around to hear the "splat", does it make a sound?

TheFourthStooge-ing's picture

No, it doesn't make a sound, but it still contributes to the Chinese citizenism new world odor.

Stockmonger's picture

Krugman takes positions on all sides of the fence.  He was a staunch bailout defender, loved TARP, considers default on bank debt unthinkable, etc.  He usually attributes Iceland's success to currency devaluation.  This is what makes him an archtypical economist.  Which Krugman was right?

Tortuga's picture

Bof of'em, depending on whether or not one is .01% or 99.99%er. Gotta go watch Idol after I go get me some beer and pretzels on my govment cc or I could just call for a delivery on my govment cell phone. Decisions, Decisions. Circus anyone? It worked for Caesar.


Chief KnocAHoma's picture

The one true law that applies to everyone EXCEPT the banks is survival of the fittest. Natural law.

My business was crushed by the recent unpleasantness and assets were transfered back to bank balance sheets. So they took my shit, and bailout money, and were given fantasy accounting rules.

Someone please explain to me how that is a naturally functioning economy. I fully accept the fact that my business was based on some bad assumptions, it sufered, and has contracted significantly. As it should have. I'm a big boy and can take it, but these little bitch banks play like baby girls and whine the minute they feel any pain.

Dareconomics's picture

The key to understanding these bailouts is remembering that they help the bondholders, shareholders and employees of the banks to the detriment of everyone else.

These are the steps of a bank bailout:

  1. A bank's poor lending and investment decisions lead it to go broke.
  2. None of the investors in the market want to be the last man standing on a sinking ship, so a sell-off ensues.
  3. If the sell-off leads to a market panic, then people will get nervous and demand that the government "do something."
  4. The government intervenes with loans, extra capital and liquidity injections. These are all euphemisms for giving the banks taxpayer money.
  5. Once you start intervention, you cannot stop. Hence, the intervention continues indefinitely into the future with permanently low interest rates and cheap, no-questions-asked loans becoming part of life in the banking industry.
  6. The banks become zombies, neither vibrant, ongoing concerns nor failing entities. These zombie banks lead to a zombie economy that generally remains stagnant for years to come à la Japan.

Contrast this scenario with what happened in Iceland. These are the steps to letting the banks fail:

  1. A bank's poor lending and investment decisions lead it to go broke.
  2. None of the investors in the market want to be the last man standing on a sinking ship, so a sell-off ensues.
  3. The government decides to let the banks fail.
  4. The country's currency drops like a stone, markets panic, multiple institutions fail and the country enters a depression.
  5. A cheaper currency combined with the effects of getting the bad debt out of the system begin the cycle of economic growth again.
  6. New banks step in to fill the role of the failed banks.

The first scenario is what is happening in Japan (for years), the US and Europe and the second is the current situation in Iceland. Which do you prefer?