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Top Economists: Iceland Did It Right … And Everyone Else Is Doing It Wrong
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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The problem is you end up with the same bankers either way. They just start new banks in the Iceland scenario or profit from the taxpayers in the Japna scenario. Either way, they continue to perpetuate the same economic model.
Not if we RICO all the banksters and their ho politicians. Let's git it on. If the Icelanders can stand the pain, piece of cake for Americans, right.
EMULATION NOW!!
One other benefit of not bailing out the banks would be the subsequent hangings. Bondholders would have been merciless in their pursuit of bank managers who lost their money. This is what fueled support for the stock market investigations in the 1930s, the results of which lead to fundamental reform under Glass-Steagal. No pain, no gain.
Let us not forgot that the Icelandic recovery only took place because the president of Iceland, Ólafur Ragnar Grímsson refused to sign off on the bill passed by the politicians to pass the losses on to the public. He forced the government to call a referendum twice!!! And both times, the Icelanders, thinking sensibly, voted overwhelmingly (+90%) not to use their money to bailout bond holders.
Note also that this is consistent with Austrian economic view of the business cycle where when the bubble burst, one must reckonise the losses and liquidate the debt, which most of the clowns (i.e. Stiglitz and Krugman) quoted above refused to previously acknowledge.
And TPTB that attempted to scare Icelandic voters by telling them they would starve in the dark cold of the North Atlantic, isolated and cut off from the world economically with tariffs on their products and embargoes of oil and manufactured goods if they did not bailout mostly Dutch and British bond holders, they went so far as to claim that the nations thus defaulted upon could look at this as an act of war and that seizures of fishing vessels and such were possible unless they volunteer to become debt slaves. What happened to all those dire claims? The people might have suffered a one off bruising for a couple of years but having taken that they are now back and happier as well as more prosperous than ever. Iceland is functional which it would not have been had they gone down the other path.
By the way, Iceland was also an EU and eurozone candidate nation and the threats that they would be denied entry if they did not honor the banksters theft were not subtle, they were right up front about it. The no vote all but killed accession to both, though officially they are still a candidate. The alternative would have been, and this was pushed by parliament, agree to repay the billions in Icesave debts to Holland and GB and join the eurozone the following year, then throw the nation on the largess of the ECB and eurozone taxpayers when they could not pay, now known as the PIIGS model. Had they done that I suppose it would be PIIIGS, or PIIGSI, but the people also knew that they would be spitted and roasted in the process.
It was a good article even if it was a bit hard to get past "Krugman is right."
The US is following Japan’s failed backward-looking economic policy of: (1) multiple taxpayer bailouts of insolvent banks; (2) Quantitative Easing by the central bank; and (3) a zero interest rate policy (ZIRP). Since 1990, Japan’s stock market is down 75%, Tokyo real estate is down 80%, Japanese GDP growth is anemic—averaging just 0.8% per year—and Japan has a national debt-to-GDP of 225%. Japanese youth are completely demoralized, cutting back on studying in school, because when they graduate, they cannot find full-time career oriented jobs—so why bother.
Since December 2007, when the last recession started, US GDP growth averages just over 1% per year, US national debt-to-GDP is 141% (including the $6 trillion dollars that the US government is on the hook for Fannie Mae and Freddie Mac debt), and US real estate is down about 33%. Continuing Japan’s failed backward-looking economic policy assures the US has a terrible economy to look forward to for the next 17 years, AT LEAST. The US desperately needs new leadership. Kick the banksters to the curb.
This could be true. Ironic as well since "this was the problem the Chairman was trying to solve."
Doubly ironic, since it was Benocide himself who advised Japan.
Results don't matter, apparently.
Yeah, first of all, the cat's out of the bag - Krugman is capable only of fooling someone who is uninformed altogether. So to keep him in the discourse is a waste of time. He's an obvious statist shill and frankly an idiot. Spend about two hours poking around on Mises.org and you will "get it." Better still, just read "Economics in One Lesson" by Hazlitt and you'll be on your way.
Secondy, consider the Iceland aftermath. Do they still have a fiat currency? Yes. Is that currency pegged to anything? Yes, to the CAD. Ok, the CAD is the USD, and the USD is the One World currency. So, guess what. FED inlfation = Iceland inflation. So the Great Eye is still very much in control.
So don't wish for an Iceland solution, wish for a 1776 solution!
OK, let's start small with maybe a tea party and throw all the banksters into the ocean with some Earl Grey, then the 1776 solution!. Have to start somewhere.
Emulation now!
Nobody needs to be thrown in the ocean. Simply outlaw fiat money, that's all. Simple.
And don't forget to Seize Mars while you're at it. SPOT ON!
I'd like to welcome Krugman and Stiglitz to the right side...smaller govt, private accountability, realism, creative destruction. If only they could apply it broadly!
What is really interesting about this article is that a poster on ZH (GW) has something positive to say about Paul Krugman.
GW quoting Barry Ritholtz, sorta like Superman quoting Clark Kent.
What has Iceland done right? Preserved it's integrity and gone to the root of the problem, it protected the taxpayers over a dozen or so uber wealthy bankers, and came out the other side rebuilding prosperity with dignity and at least some justice.
But that is NOT what the US and eurozone are trying to do, their goal is to concentrate vast new power and wealth at the expense of liberty and peoples rights, as well as entrenching fascist central government and planning in a very few cornor offices on Wall Street and The City of London, as well as Frankfurt. And that they ARE doing right.
Excellent article. Construstive. We need more of the same here.
Good points - great article. Thank you!!
Counter point: As the EU nations, Japan, and the US begin to go down this same road (as they eventually will) there are $700 Trillion in derivatives with all kind of counter party risk that will blow up. There is also a $200 Trillion gap between revenue (taxes) and promises (Social Security, Medicare, militarization, etc) in the US alone...
I agree that this is the right road, but if you think it is a few years of pain and a quick recovery (like Iceland) you are seriously mistaken. An entire generation or two will feel the pain of 30 years of Baby Boomer policy decisions.
Oh get off the baby boomer accusations, this crap has been going on for 30 yrs and the boomers were still in their formative years. Read it out man, it was the elitists banksters of the "greatest generation" that started this crap and most of them went to harvord.
Abel- You corrected the Iceland fits all theory.
The money center banks have trapped the US; like they have done to many govts the last 400 years. If the Fed didnt bail the shitheads out, the worlds reserve currency issuing country would have siezed up. Thats Jim Sinclair talkin; not me.
Russia, Argentina let alone Iceland. If Mr. Krugman says something- consider it like Goldman advising its muppet clients of a "wise move."
It is evident that the banks were bailed out by the taxpayers in all of the countries in which the control of the politicians rested firmly in the hands of the banking interests. It's not like the taxpayers had a choice - their chosen representatives worked for the other team.
IceLanders actually showed up to the government offices and demanded they not bailout the banks...They rioted and threatened to take down the government. The US citizen hasn't done that....there in lies the difference and the problem.
Well, once you have your quota of beluga whales and Idol is over for the season, what else is there to do, they had the time to do some constructive protesting.
That’s the salient point here. Icelandic citizens had a choice. The rest of us serfs in J.P. Morgan’s society don’t!
http://mises.org/document/6137/Deep-Freeze-Icelands-Economic-Collapse
Better to go to Phillipp Bagus than Paul Krugman on what went wrong with Iceland. This is typical Krugman inconsistency. He will go on and on about how the banks should have taken losses and not be bailed out by the government, but give the spooky pseudo-economic ghost story of a "deflationary spiral". Banks writing down loses is DEFLATIONARY. Krugman thinks this levered deflationary process can be placated by government spending. The government can't even spend that quickly.
Iceland did the most moronic thing any country has done in awhile: it guaranteed the deposits of other currencies. Icelandic banks opened accounts in British Pounds, Euros, Dollars and gave 100% deposit insurance to all of them. The government or Icelandic central bank didn't choose to let the bank eat the losses, they had no choice. They couldn't create pounds or euros or dollars. They had a bank run and those depositholders (not just bondholders) took the haircuts. The lesson as always is that deposit insurance neither stems a bank run nor is safe from a government default on the backstop.
How did depositholders eat a loss if their deposits were guaranteed, regardless of the currency in the account? I could see how it might have gotten expensive for the government to pay claims against the insurance if they had to chase after other currencies to restore a given account. And did the insurance arrest the bank run or not?
No. The "insurance" caused the bank run because it caused a massive carry trade in currencies that the Icelandic government couldn't make good on. When they realized the Icelandic central bank couldn't actually create pounds or euros or dollars, the banks AND deposit holders lost their money in the bank run. The point is the government made a guarantee that couldn't be kept. The capital controls made it worse because it prevented anyone did have other currencies in Iceland to not be able to take the money out of the country.
It's not as simple as "Iceland stuck it to the banks". Iceland also stuck it to deposit holders. The largest depository banks hold the same threat against the other western governments. "bail us out or the people are going to wake tomorrow with no money in their checking accounts".
This is also why the Euro deposit insurance idea will not work. It's just creating another attempt at an automatic bailout authority.
I would agree "the big Anglo Saxon banks" still appear to be "big Anglo Saxon banks." who took it to who again?
Tycoon Socialism — Time to Bring it to an End
Agreed. Perhaps if governments didn’t backstop everyone’s losses above FDIC then in a free market depositors would demand transparency and responsibility from their banks.
If Unkle Sugar didn’t backstop all of this insanity, then perhaps there wouldn’t be so much of it.
Key quote above re what Iceland upheld in the worst moments of the crisis:
« ... the safeguarding of a welfare system that shielded the unemployed from penury ... »
In fact, uncomfortably for the many ZH commenters who rail against 'socialism' as if that were the same as 'fascism' ... the socialised government welfare arrangements for the most vulnerable in Iceland were actually INCREASED, as pointed out in an early ZH article:
« On Nov 3rd 2011, the IMF issued the verdict on its 3-year adjustment program for Iceland. The IMF’s verdict was that its “program for Iceland was a success” due to 4 factors:
1. the decision not to make taxpayers liable for bank losses.
2. the decision not to tighten fiscal policy during the first year of the IMF program.
3. preservation and even strengthening of Iceland’s welfare state during the crisis.
4. prudent use of capital controls. The IMF said: "capital controls were necessary and are now seen as useful addition to policy toolkit".
http://www.zerohedge.com/news/jpmorgan-estimates-immediate-losses-greek-...
Good points, we have what 320 million more people and 200 more colleges than Iceland. We don't have anybody to figure this out?
God Bless America, RICO all banksters and their ho politicians and IMPEACH the liar, Eric Holder.
Opinion on ZH is probably more diverse than you give credit for. There is a large contingent of Ron-Paul-libertarian types; that is for certain. But there are many here who do not fit that mold. I do not oppose all social welfare, for example, but I do oppose printing money and / or taxing other's labor to provide for social welfare. If you want social welfare, the best model, is to finance it with the exploitation of a common resource... oil, natural gas. Global markets would control what the government could charge. The profits would be for social welfare. More profits = more social welfare. Inefficient practices, corrupt government = less social welfare. Then maybe the poor folk would actually be opposed to government corruption rather than in favor of it.
You're right, it's working well in Saudia Arabia and Mexico and Argentina and Greece.
Social welfare payments are a form of pump priming, where payment is made in the Keynesian sense of giving money away to create effective demand. That was one part of the Icelandic experiment.
The lesson here is not economic or financial - it is psychological.
The Icelandic President did not listen to the great collapse and catastrophic repurcussions Oratorio that has hypnotised and paralysed the Eurozone.
Can't speak for the EZ BgFB...but the fix was in here in the good old USA. The problem is that the USA was...and STILL IS...engaged in a total "global war on terror"...which meant "doing an Iceland" simply wasn't AND STILL ISN'T in the cards. The irony...nay...HILARITY of it all is that the banks of Wall Street are TOTALLY incompetent. "Did they promise to spend the money wisely" Mr Treasury Secretary? I'm sorry...WTF is Facebook and "the hacker collective" again? Anywho stay long US equities...stay long the resource plays...stay long tech stocks...stay long healthcare. Stay long transports. Stay long utilities. Did I miss anything? Oh, yeah...the friggin banks! I'm not sure on that one...the more money you give them the more worthless they seem to become. Eh, phuck it. Buy GE and JPM. Live big America! Live big!
Try and get icelands story told in detail on the MSM? Doubtful.
And that tells you a lot.
If it does get a minute it gets passed off .... its radical message lost to the many.
Except us lucky few.
Yeah, but isn't this story just a plant to get people to buy stocks and sell bonds /sarc/?
it's almost as if ...they're not journalists
I dated a girl from Iceland once. She was hot. And that's as far as I'll go with Iceland...and hopefully (if you're lucky) everyone else as well. No...I think a better...vein...is to ask the far simpler question of "what's this war about and who are we fighting for again?" I'm still waiting for the right "war fighter movie" from Hollywood actually. The script I've been working on has guy's armed with a Proxy Fight in their pocket and a Takeover on their mind. Surprisingly Hollywood has no interest in the script. "We want our war movies about war son!" they keep telling me. Eh, what can I do? What can I say? Tell them "it's about winning"? Friggin artists...always with their heads in the clouds.
i think your first problem is 'waiting for hollywood' to do something...?!?!?!?!
if i post the above comment to facebook to i get black bagged
good times... good times
my biggest concern is a long, protracted, drawn-out pressure cooker scenario
a correction, even if it opened the door for some serious NWO dirt (imagine triggering a major event or WW3 in the middle east a la Iran/Israel during the correction ... people will beg for tyranny dude), would be preferable
now all signs point to this, the math is there, the logistical vectors are there, and it is a perfect storm of all the underlying dynamics - the question is are we running on a real economy or is the economy effectively swapped out for an algo hologram running on a hypercomputer in the basement of $GS
well time of course will tell
I feel it imperative to again stress that the enemy are Incrementalists
Look at Europe, look at how the EU came into being (I could offer NATO et al. as well right, but lets skip that for now) – it is also compelling to consider that every major source, including the Engineers Themselves, are floating a collapse. Certainly the fiat FRS dollar is a ponzi instrument and the derivatives bubble, however large ($4Q EconomicDeathstar conservative) is unsustainable IF its coupled to reality.
What if you could keep the world running Indefinitely on life support though, slowing draining everything, aggregating power and capital (while carrying out a eugenics operation and generally transforming humanity into a batter, or an thx-1138 style biological android)
The onset of transhumanism etc.
Hmm
Always nice to read your posts George
Without the political will and systems to stop the banks from being bailed out…
ICELAND CURED CANCER!
(BANK-b.s.DEBT Cancer)
Patient cured, hospital burned down to control MRSA.
Nature never lies. That why humans were invented... for comic relief.
They had it all and couldn't handle the Present.
Man, you are one deep thinker. The comedy is magnificient. Are you mensa?
"...the enemy are Incrementalists."
Absolutly correct; the slow boil is what will impovrish all (except the 0.0001%). I'm living in a pot (country) that is struggling to service excessive sovreign debt. This frog hopes Iceland's expamle is executed quickly.
There is a real economy fully functioning at the foundation of the holographic, "synthetic" one. It is just incapable of sustaining the synthetic economy. Once the synthetic economy dies, it will revert. But the consequences will be huge.
I agree with the "pressure cooker," "Long Emergency" prognostication. It will go on because TPTB can do that.
Ron Paul 2012 Whig
Next time "start with the free toaster" and go from there. I here Mayor Real Estate Speculator actually has the design for one over a hundred stories high...with a fantastic view of Staten Island apparently! The roof is apparently a fully functional gigantic spring loaded mechanism "ready for two huge slices." unfortunately no one can the BREAD that comes in a sixty foot by forty foot frigginn SLICE.