View Poll Results: Does the article present realistic alternative bankruptcy options

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  • Pull the plug, bankrupt the USA

    3 37.50%
  • Bankruptcy is not an alternative in the USA

    1 12.50%
  • Too big to bankrupt

    3 37.50%
  • Banking in Iceland does not relate to banking in USA

    4 50.00%
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Thread: Why Iceland Should Be in the News, But Is Not

  1. #11
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    Re: Why Iceland Should Be in the News, But Is Not

    Quote Originally Posted by haymarket View Post
    As a self admitted Libertarian it is understandable you would want to distance your self from that complete failure of libertarian thought and practices.
    No Haymarket, I'm pointing out that there was significant moral hazard and bad incentives placed in the Icelandic financial system by the government. I'm willing to moderate my views in some situations. I'm not desperate to distance myself or Libertarianism from anything. I arrive to conclusions based on how I see things.

    Quote Originally Posted by haymarket View Post
    This is part and parcel with libertarians. They advocate for something and when they only get 90% of what they wanted, they are ready to say that if it fails it is not their fault because it was not done their way.
    Government intervention doesn't work like a sliding scale. Some interventions do more harm than others. Creating a massive moral hazard in the financial system is probably going to create more long term harm than a couple of emission standards.

    Quote Originally Posted by haymarket View Post
    It is akin to somebody going to Eurpoe and seeing some highways with unlimited automobile speeds. They come back to the USA and begin to advocate for the same thing. The government decides that there is merit in the concept and builds a highway with a 95 MPH speed limit. The number of accidents and loss of life soars far beyond a normal expressway and soon fingers at pointing at the advocate who wanted a unlimited highway. What does he say

    "don't blame me. It wasn't my idea. I wanted unlimited speeds and you put in 95 MPH."
    This is a poor analogy because going faster just does more of the same thing. You have to be going at least 95 to get to 105. In Iceland, it doesn't matter what else the government did. They could have implemented flat taxes, privatized most government services, and legalized prostitution. This does nothing to change the fact that the government created a huge moral hazard and disincentivized more responsible borrowing. That is what caused the crises. Not free markets.

    Quote Originally Posted by haymarket View Post
    The libertarian fails to understand that in the real world, there are no virgin pure ideas put into political action. And they like it that way since it always gives them a way out of responsibility for lousy ideas like Iceland experienced under the libertarian experiment a few years ago.
    Whether all of my ideas will be implemented or not is irrelevant. Yes, some reforms only work if put into practice alongside other reforms. That does not change what happened.
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  2. #12
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    Re: Why Iceland Should Be in the News, But Is Not

    Quote Originally Posted by Kandahar View Post
    First of all, ANY bankruptcy procedure (whether there is a taxpayer bailout or not) inherently creates a moral hazard, because it lets the debtor bank off the hook for some of the risks they acquired. There is no way to avoid this.
    I agree, but there are varying levels of moral hazard. Bankruptcy guarantees less of a return than a bailout or backing mortgages.

    Quote Originally Posted by Kandahar View Post
    Furthermore, banks WILL be bailed out as long as the government in question can afford to do so, because our financial system is too interconnected. One big bank failure can create a domino effect, as seen with Lehman Brothers. Financial institutions need to be regulated so that they don't put the taxpayers in the position of needing to bail them out in the first place.
    The problem with the bailouts is that it initially forced other banks to clean up Lehman Brother's mess. Government bailouts may work in the short-run, but when you raise the moral standard you raise the riskiness of investments and create a more unstable financial system. Iceland could not afford a bailout, but the economy is starting to improve, albeit slowly.
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  3. #13
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    Re: Why Iceland Should Be in the News, But Is Not

    Quote Originally Posted by DrunkenAsparagus View Post
    I agree, but there are varying levels of moral hazard. Bankruptcy guarantees less of a return than a bailout or backing mortgages.
    It depends how the bailout is done. If the bank's creditors (rather than its shareholders) are bailed out, there is much less moral hazard. IMO the way it should generally be done is that when a bank goes bankrupt, it is automatically nationalized, its shareholders lose everything, its entire Board of Directors and management are fired, and its creditors take a small haircut (the exact amount would depend on the probability of contagion and whether its creditors are other banks or average people). The public picks up the tab for the rest. We also need to separate commercial banks from investment banks; if the latter want to behave like casinos, that's fine...as long as they only do it with their investors' money rather than their depositors' money.

    These changes should allow the preservation of the financial system while eliminating most of the moral hazard, because the people who would be taking the risks would lose just as much as they would if they had been allowed to fail.

    The problem with the bailouts is that it initially forced other banks to clean up Lehman Brother's mess. Government bailouts may work in the short-run, but when you raise the moral standard you raise the riskiness of investments and create a more unstable financial system.
    I agree that government bailouts would create instability if the regulatory environment is not also changed. It needs to be changed so that banks can't easily put taxpayers in this position in the first place.

    Iceland could not afford a bailout, but the economy is starting to improve, albeit slowly.
    Iceland has the advantage of being a tiny, isolated economy which can do what it wants without widespread contagion across the global financial system. Most countries do not have that luxury.
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  4. #14
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    Re: Why Iceland Should Be in the News, But Is Not

    Quote Originally Posted by Kandahar View Post
    It depends how the bailout is done. If the bank's creditors (rather than its shareholders) are bailed out, there is much less moral hazard. IMO the way it should generally be done is that when a bank goes bankrupt, it is automatically nationalized, its shareholders lose everything, its entire Board of Directors and management are fired, and its creditors take a small haircut (the exact amount would depend on the probability of contagion and whether its creditors are other banks or average people). The public picks up the tab for the rest. We also need to separate commercial banks from investment banks; if the latter want to behave like casinos, that's fine...as long as they only do it with their investors' money rather than their depositors' money.

    These changes should allow the preservation of the financial system while eliminating most of the moral hazard, because the people who would be taking the risks would lose just as much as they would if they had been allowed to fail.

    This would certainly be an improvement over the current system. This is not what happened in the US or in Iceland. However, borrowers would be less careful as well.

    Quote Originally Posted by Kandahar View Post
    I agree that government bailouts would create instability if the regulatory environment is not also changed. It needs to be changed so that banks can't easily put taxpayers in this position in the first place.

    The banks need to know that they won't get off when they do stupid things. They may still do stupid things, but there would be far less of it.

    Quote Originally Posted by Kandahar View Post
    Iceland has the advantage of being a tiny, isolated economy which can do what it wants without widespread contagion across the global financial system. Most countries do not have that luxury.
    That does not change the fact that Iceland's economy was nearly wiped out by the financial crash. GDP went down by 40%. It received almost no help besides a small IMF fund. Things are not great now, but Iceland allowed the bad investments in their economy to be cleared.
    "Doubleplusungood"

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