Mishkin On Iceland: "Nothing Is F*#&ed Here Dude"

Now that even Le Big Mac has hightailed it out of Reykjavik, the locals, forever deprived of $0.99 cheeseburgers and anything resembling a stable currency (a good advance look at what the U.S. can look forward to, although at least California makes some happy, Prozacked cows now and then), are at least owed some levity (even if it as their expense). And when one looks for matters dealing with jocularity (and/or gross, flagrant incompetence), one really needs to look no further than the Federal Reserve. In this case, former Fed director Fred Mishkin will suffice, who in May 2006 penned a report titled "Financial Stability In Iceland."

Some pearls of wisdom from Mishkin's extensive understanding of the (soon to be bankrupt) Icelandic economy:

  • Fiscal imbalances are not a problem in Iceland: quite the opposite, with Iceland having an excellent fiscal position with low government net debt (less that 10% of GDP) and a fully funded pension system (with assets amounting to more than 120% of GDP).
  • Monetary policy has also been successful in keeping inflation low and near the inflation target, particularly when housing prices are excluded from the inflation measure, as is the case in the United States and the eurozone.
  • Research on multiple equilibria suggests that self-fulfilling prophecies are unlikely to occur when fundamentals are strong, as they are in Iceland.
  • The analysis in our study suggests that although Iceland's economy does have some imbalances that will eventually be reversed, financial fragility is currently not a problem, and the likelihood of a financial meltdown is low.
  • Iceland is an advanced country with high-quality institutions. GDP per capita (adjusted for PPP) ranks fifth highest in the world; longevity is the highest for females and second highest for males; unemployment is almost non-existent and way below the natural rate; net government debt is almost nil, labor force participation among older workers the highest in the world, and of women the highest in the OECD (almost 80%, compared with 56% on average in the OECD).
  • Noteworthy among Iceland's country rankings for quality of institutions is that Iceland ranks fifth in economic freedom, firs in terms of the lowest corruption, seventh in terms of competitiveness, first in the percentage of population connected to the Internet (ADSL or ISDN), and the first in terms of
    freedom of the press, compared with number 113 for Turkey and 59 for Thailand [and 666th for America].

And of course:

  • These rankings are of course sometimes arbitrary, but they clearly illustrate that Iceland is a well run, advanced Nordic country that has little in common with emerging market countries, a fact important to recognize when we start discussing financial stability in the next section.

All this and so much more make up (no pun intended) this laborious, extensive and magnificent piece, which the US taxpayer was promptly invoiced for, and which was 100%, completely and thoroughly wrong. Good thing McDonald's is finally learning the lesson of what it means to make the mistake of believing that the Fed may be right, even once in a while.


Mishkin Iceland -