Top Economists: Iceland Did It Right … And Everyone Else Is
Doing It Wrong
Iceland Shows the Way
August 25, 2012 "Information
prize winning economist Joe Stiglitz
Iceland did was right. It would have been wrong to burden
future generations with the mistakes of the financial
prize winning economist Paul Krugman
[Iceland's recovery] demonstrated was the … case for letting
creditors of private banks gone wild eat the losses.
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.
Letting the banks go bust – instead of
perpetually bailing them out – is the right way to go.
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.
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
Iceland refused to protect creditors in its
banks, which failed in 2008
after their debts bloated to 10 times the size of the
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.
decision not to make taxpayers liable for bank losses was
right, economists say.
words, as IMF
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
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.
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
noted last year:
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.
are now much much better for it than the countries like the
US and Ireland who did not.
pointed out February 2011:
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
wouldn’t upset the financial system,” says Van der Knaap,
who has advised Iceland’s bank resolution committees.
Pall Arnason, 44, Iceland’s minister of economic affairs,
says the decision to make debt holders share the pain saved
the country’s future.
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
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.”
Iceland’s prosecution of white collar fraud
played a big part in its recovery:
Europe have thwarted white collar fraud investigations
... let alone prosecutions.] On the other hand, Iceland has
fraudster bank heads (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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