Why Iceland Should Be in the News, But Is Not

Why Iceland Should Be in the News, But Is Not | Truthout

Five years of a pure neo-liberal regime had made Iceland, (population 320 thousand, no army), one of the richest countries in the world. In 2003 all the country’s banks were privatized, and in an effort to attract foreign investors, they offered on-line banking whose minimal costs allowed them to offer relatively high rates of return. The accounts, called IceSave, attracted many English and Dutch small investors. But as investments grew, so did the banks’ foreign debt. In 2003 Iceland’s debt was equal to 200 times its GNP, but in 2007, it was 900 percent. The 2008 world financial crisis was the coup de grace. The three main Icelandic banks, Landbanki, Kapthing and Glitnir, went belly up and were nationalized, while the Kroner lost 85% of its value with respect to the Euro. At the end of the year Iceland declared bankruptcy.


This article would indicate that there is an alternative solution to problems of huge National debt. I notice that huge numbers of jobs were not lost because these financial houses of cards do not create jobs. The stimulus monies pissed away in this country can verify that along with the TARP funds. No jobs created. These financial groups seem to build mountains of money and paper but not jobs. Does that mean we should pull the plug?

Our nation and people will grow, and grow up, after we dismount our high and mighty horse and begin to learn from the little nations on this planet..
end of to be ignored message, particularly by the conservatives.
And, again, "no vote".

DaveFagan said:

Why Iceland Should Be in the News, But Is Not | Truthout

Five years of a pure neo-liberal regime had made Iceland, (population 320 thousand, no army), one of the richest countries in the world. In 2003 all the country’s banks were privatized, and in an effort to attract foreign investors, they offered on-line banking whose minimal costs allowed them to offer relatively high rates of return. The accounts, called IceSave, attracted many English and Dutch small investors. But as investments grew, so did the banks’ foreign debt. In 2003 Iceland’s debt was equal to 200 times its GNP, but in 2007, it was 900 percent. The 2008 world financial crisis was the coup de grace. The three main Icelandic banks, Landbanki, Kapthing and Glitnir, went belly up and were nationalized, while the Kroner lost 85% of its value with respect to the Euro. At the end of the year Iceland declared bankruptcy.


This article would indicate that there is an alternative solution to problems of huge National debt. I notice that huge numbers of jobs were not lost because these financial houses of cards do not create jobs. The stimulus monies pissed away in this country can verify that along with the TARP funds. No jobs created. These financial groups seem to build mountains of money and paper but not jobs. Does that mean we should pull the plug?

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No
It means we should study and learn, with an open mind.
And, the truth is vital for this to be of use.

In total agreement that the failure of the Iceland experiment should be front page news here. Some are trying to get the word out

Iris Erlingsdottir: Libertarian Experiment in Iceland Fails

The article is written by a journalist from Iceland and is titled LIBERTARIAN EXPERIMENT IN ICELAND FAILS.

Obviously many here who subscribe to such randroid nonsense do not want to be associated with this failure.

I like Iceland is a good example of not paying the debt of the banks or bailing them out. Here is a older thread on the subject.



http://www.debatepolitics.com/breaking-news-blogs/106269-iceland-knows-deal-bankers-and-imf.html

haymarket said:

In total agreement that the failure of the Iceland experiment should be front page news here. Some are trying to get the word out

Iris Erlingsdottir: Libertarian Experiment in Iceland Fails

The article is written by a journalist from Iceland and is titled LIBERTARIAN EXPERIMENT IN ICELAND FAILS.

Obviously many here who subscribe to such randroid nonsense do not want to be associated with this failure.

Click to expand...

Iceland was far from a "libertarian experiment." The government explicitly promised to bail out the banks if they failed, as opposed to the US government which merely implicitly said it would, and it backed enough crappy mortgages by competing with private banks as to make Freddie and Fannie look like the Swiss bank. Like the United States, the financial industry and general economy may have been "deregulated" in a few areas, but the government still had more than enough influence to create a massive moral hazard.

DaveFagan said:

Why Iceland Should Be in the News, But Is Not | Truthout

Five years of a pure neo-liberal regime had made Iceland, (population 320 thousand, no army), one of the richest countries in the world. In 2003 all the country’s banks were privatized, and in an effort to attract foreign investors, they offered on-line banking whose minimal costs allowed them to offer relatively high rates of return. The accounts, called IceSave, attracted many English and Dutch small investors. But as investments grew, so did the banks’ foreign debt. In 2003 Iceland’s debt was equal to 200 times its GNP, but in 2007, it was 900 percent. The 2008 world financial crisis was the coup de grace. The three main Icelandic banks, Landbanki, Kapthing and Glitnir, went belly up and were nationalized, while the Kroner lost 85% of its value with respect to the Euro. At the end of the year Iceland declared bankruptcy.


This article would indicate that there is an alternative solution to problems of huge National debt. I notice that huge numbers of jobs were not lost because these financial houses of cards do not create jobs. The stimulus monies pissed away in this country can verify that along with the TARP funds. No jobs created. These financial groups seem to build mountains of money and paper but not jobs. Does that mean we should pull the plug?

Click to expand...

Iceland's solution appears to have worked out relatively well...for Iceland. But I'd be careful about reading too much into Iceland's example. As the article notes, it has a population of 320,000...which is less than even a moderately-sized US city. A country like Iceland can declare bankruptcy without many widespread ramifications on the global financial system, but the same is not true for larger countries like Italy, much less a huge country like the United States.

The lesson to be learned from Iceland is not the one that the article wants to teach: The moral of the story is that banks should be more closely regulated so that they don't take on huge risks in the first place...not that we should withdraw from global finance and stop paying our debts.

DrunkenAsparagus said:

Iceland was far from a "libertarian experiment." The government explicitly promised to bail out the banks if they failed, as opposed to the US government which merely implicitly said it would, and it backed enough crappy mortgages by competing with private banks as to make Freddie and Fannie look like the Swiss bank. Like the United States, the financial industry and general economy may have been "deregulated" in a few areas, but the government still had more than enough influence to create a massive moral hazard.

Click to expand...

As a self admitted Libertarian it is understandable you would want to distance your self from that complete failure of libertarian thought and practices.

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.

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."

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.

DrunkenAsparagus said:

Iceland was far from a "libertarian experiment." The government explicitly promised to bail out the banks if they failed, as opposed to the US government which merely implicitly said it would, and it backed enough crappy mortgages by competing with private banks as to make Freddie and Fannie look like the Swiss bank. Like the United States, the financial industry and general economy may have been "deregulated" in a few areas, but the government still had more than enough influence to create a massive moral hazard.

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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. 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.

Kandahar said:

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. 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.

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I have read that the USA has $142 trillion of unfunded liabilities. Now if the currency loses value to about 120th of its current value we might be able to pay it back. Otherwise, I think bankruptcy is inevitable. I wish common sense and logic did not force those thoughts, but that is where they come from.

haymarket said:

As a self admitted Libertarian it is understandable you would want to distance your self from that complete failure of libertarian thought and practices.

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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.

haymarket said:

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.

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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.

haymarket said:

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."

Click to expand...

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.

haymarket said:

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.

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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.

Kandahar said:

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.

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I agree, but there are varying levels of moral hazard. Bankruptcy guarantees less of a return than a bailout or backing mortgages.

Kandahar said:

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.

Click to expand...

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.

DrunkenAsparagus said:

I agree, but there are varying levels of moral hazard. Bankruptcy guarantees less of a return than a bailout or backing mortgages.

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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.

Click to expand...

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.

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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.

Kandahar said:

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.

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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.

Kandahar said:

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.

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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.

Kandahar said:

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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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.