Icelander here - there seem's to be a lot of misconception about what happened in Iceland. We technically let the banks fail, but at no point did my debit card stop working, my online bank go down or my money disappear.
Joe_the_user says we simply nationalized the banks, but that's not true - here's how it was done:
For each bank X (Glitnir, Kaupthing, Landsbanki), there government created their own new X. The following was by force brought into each new X:
This of course created a debt between the new X and the remains of each old X, which took some time to resolve.
On the other hand, a lot of things were left in the falling banks, including international branches, investment accounts (i.e. accounts with interests related to stock performance) and more.
These selective operations of course caused a international controversy (Icesave dispute, e.t.c.), but if the government had let all the banks fail without these transfers - the damage to our economy would have been much greater.
The proper term for what happened is the old banks were put into receivership. This has lasted for a lot longer than is healthy and the husks of the old banks are really poisonous to the economy and the political landscape. Some argue it would have been better to face the catastrophe of a crash than the languishing death spiral that ensued.
I should have put things in a more nuanced fashion.
But the point is that there was no "let the debts fall on the floor, start afresh" action.
And yes, a lot of international stuff was left hanging but as other posters have mentioned, the UK and other central banks stepped in for a lot of consumer-level deposits.
Some portion of speculators were left hanging by the US response to the crisis too. Wow!
My main point is there was many differences in detail but no really fundamental difference between the US response to the crisis and the Icelandic one. Both supported their banks in the main because they had, at least to maintain their existing money-economy.
Part of this is that anyone on Facebook or similar sites is going to see a steady stream of factoids about how Iceland wasn't "fooled by the bankers", I'm responding to such rot.
Also, all the state created entities were eventually returned to private hands, pretty much the same private hands.
Too-big-to-fail banks is a rational compromise. Some Russians might still remember the failure of Sberbank in 90ths which was a disaster for millions of families (it was the only place to have savings account). You probably cannot imagine what a hell it will be if something like AIG or BoA would allow to fail. At least no government or rich elite could survive such kind of event which very probably will trigger a new period of forceful and bloody wealth redistribution (which is what all revolutions is all about). So govt choices to print its way out of being overthrown.
What Iceland did is subtly different. It lets foreign banks to fail, to bear the consequences of their own risky and stupid investments, and refused to tax its own people to cover foreign bankers loses.
Russians do even "better", they just says to its own folks "sorry, your money is gone" (what can you do?). Sometimes they bother to invent excuses for foreign investors, such as "tax returns" or "market cobditions", but that's very uncommon event. Usually your money just gone and people who did it are "clever guys".)
Notice also how gun ownership indirectly restricts a corrupted government from just plainly robbing it's citizens and promt it to invent some more complicated, less efficient, slow schemes.)
AIG failed. A team in London trading CDS broke the company. The only reason why the corpse of AIG was kept alive was because AIG owed Goldman Sachs a lot of money. Taxpayer bail-out funds that went to AIG passed straight through and into the bank account of Goldman Sachs.
I recently saw an ad by AIG. It's actually sickening. This company failed. Their assets should have been taken over by good insurance companies who managed their risks properly and did not engage in speculative instruments.
By rewarding bad actors like AIG, moral hazard has been introduced into the markets. Anybody who says they support free markets and capitalism must surely agree that AIG should have been allowed to fail. Yes, it would have caused chaos but that's why lawyers and bankruptcy courts exists.
With politicians picking the winners and losers, it's no wonder lobbying is such a popular business.
> What Iceland did is subtly different. It lets foreign
> banks to fail, to bear the consequences of their own
> risky and stupid investments, and refused to tax its own
> people to cover foreign bankers loses.
What?
Hundreds of thousands of personal depositors across Europe saw their money go poof in Icelandic banks, and their local governments had to pick up the bill. If you are a tax payer in the UK, for example, you got a gigantic FU from the Icelandic government who said "nah, we're not going to bail out our banks, you guys should instead".
This is pretty misleading. Iceland could let their banks fail for several reasons. First, they were not essential to the global banking system. Second, while Iceland's equity market lost a lot of its market value, it really did not hurt the citizens of Iceland - they invested as most do, in U.S. and Europe with some emerging markets allocation.
As is pointed out, the decision to let the banks in Iceland fail is applauded by many...but this is due to the ridiculous size of Iceland's banking system compared to the rest of its economy. Also, don't forget, the same IMF that says they did the right thing now, said 6 months before the crash that there was no problem with the size of Iceland's banking sector relative to the rest of the economy.
This article seems to selectively reveal information based on a pre-existing belief held by the author.
All the claims about Iceland doing things differently are useless and I am quite sick of hearing them.
Like the US, Iceland provided financial support for its ailing bank system when the crisis appeared. That Iceland officially nationalized banks and the US left the banks officially in private hands is really a trivial detail. Iceland supported their banks and ultimately returned them to the control of their previous owners, the same effective strategy as the US.
And some unsecured creditors lost in Iceland and in the US, depending on the circumstances. Again, a detail, not the main picture, which wasn't really that different than here.
Just stop with the "Iceland's different" baloney, just stop.
> All the claims about Iceland doing things differently are useless
I don't understand your comment. What Iceland did - allow its banks to default on their debts - is completely different from what eg. Ireland did, ie. nationalise the debt.
That it then nationalised the bankrupt banks is a different matter. It nationalised them, sure, after they defaulted on the debt.
I'm far from an expert. In a lot of cases, what you say seems true. The Nationalization angle is BS for sure. But, there are some differences that are important. Foreign depositors did not get bailed out, not by Iceland. That in itself is a big deal. That's a clearer definition at least of what a bailout is. The banks went bust and deposits were lost. Then foreign central banks returned some despots to their own citizens. Iceland paid out its own citizens and some depositors were not guaranteed by anyone.
It's clear for instance that UK public money went to UK depositors. The UK is entitled (though maybe unwise) to do this and it sets up a framework for explicit guarantees. In Ireland's case, god knows who really got bailed out. The EU loaned Ireland money to loan to their banks to pay back depositors who were other banks..etc. There was pressure from Germany as both the source of much of the financing and the destination of much of it (Irish banks owed money to German banks). No one went bankrupt, for a normal definition of the term.
It amounts (in my limited understanding) to a few important difference that leave the system far more robust. (1) there is some transparency. It is knowable who is getting bailed out and where the money is coming from. (2) Some long tail risk is put onto depositors, especially foreign/large depositors so it can be priced in. A Hayekian sort of systemic risk reduction. (3) It appears to have reduced the flow of money from poorer future people to current rich people. (4) It clearly defines depositor bailouts as depositor bailouts. Money goes from the public purse to Ms Gunnarsdotter's. In other bailouts (Ireland) the public was driven to fear that banks would collapse and their savings wiped out unless some unknown quantity of money was put into an unknown funnel from where it would flow (among other places) back into their deposit accounts.
IMO we need to come to a long term setup that is simple enough for a first year economics student to understand and first year finance student to price. A guarantee is fine, if we can set it to an affordable level (say, deposits up to €25k) payable directly from the government to qualifying depositors with potential recovery by a bankruptcy court.
Let's not forget that Iceland's banks were bailed out by foreign governments. All those UK "Icesave" high interest savings accounts were bailed out by the Bank of England.
If Iceland had more than 300,000 people, you can be damn sure the debt wouldn't have been forgiven, and there would be tariffs on cod and aluminium until it was paid back.
> That Iceland officially nationalized banks and the US left the banks officially in private hands is really a trivial detail.
That detail is anything but trivial. It's the difference between giving the assets of a company to creditors during bankrupcy, or just clearing the debts, and keeping the assets as company possessions (and keeping the company owners).
To tell you the truth, I still can not understand how the US (out of all countries, the one where people do not trust the State) accepted that bank bailout.
I agree. This has been happening for years and it drives me mad. There are individuals all over the world worth as much as icelands gdp and there are small towns in china with a greater population
This is how capitalism is supposed to work. If a firm goes bankrupt, just let it fail. Might bring some short term pain, but it creates a healthier economy in the long run.
Bailouts are contrary to the spirit of capitalism.
Problem is, that was exactly what drove policy in the United States between 1929 and 1933.
In the mean time, lending disappeared which caused grave liquidity problems for otherwise solvent firms both in the financial sector and in the "real economy." Those firms failed to meet their obligations producing a chain reaction which continued until severe government intervention put a stop to it years later.
Bernanke and many others were playing off the 1933 script in 2008. Bernanke himself had actually written a book about the Great Depression. I'm not at all happy with what has happened on wall street since 2008 but Bernanke and many others were operating in good faith trying to prevent a catastrophe.
There is really no parallel between the USA (in 2008 or 1929) and Iceland in 2008.
In the case of Iceland, you have a series of hedge funds, basically, domiciled in Iceland but speculating on foreign securities using foreign capital. They had little to do with cod fishing or hot springs or aluminum smelting but when they exploded, the foreign bondholders wagged their fingers at Iceland and said "this is your problem now, you fix it."
Icelanders wisely said "no," they opted not to impoverish themselves to make good the debts of local private hedge funds to the foreign speculators.
That's not really true. Companies regulated under Solvency II will require sufficient capital to survive a 1 in 200 years worst case event. Sort of (but not really), 1 in 200 companies will face death-knell liquidity crisis every year.
The question is, what do we do then? Do we let a company that took 50 years to build up fail? It is so easy to destroy something, and such a pain in the ass to build it.
Maybe the idea instead is to make it such that we only have to bail out a portion of the 1 in 200 companies that fail each year? The portion that should be considered a going concern.
What about General Motors? That is an incredible wealth-generating asset. A blip in the cash-flow statement could have made that into 1-2% of its productive capability, but the US didn't let that go down.
Iceland has a population of 320,000. It's the size of a small city. And all of the banks they let fail dealt primarily with money from outside of their borders - letting those banks fail had not material impact on their economy. If it had been a bank where Icelandic people got their mortgages they'd have bailed it out just like every other nation.
Well, ok. Brazil has a 200 million population, and banks that deal almost exclusively with internal deposits. At the 90's the country faced a very similar problem, and applied almost exactly the same remedy - nationalized the banks, the governemnt paid the depositors, and sold the resulting banks out (the part that differs).
If you care to look, it endend about as well as Iceland, a short term impact, with growth resuming just after it.
Iceland did almost everything right. They stiffed the bank creditors to avoid aggravating the moral hazard problem, just like the textbooks recommend. In the eurozone the bank creditors are being bailed out. They relied of fiscal policy to address S/I and debt issues, and let monetary policy address AD, just as the New Keynesians were recommending in the 1990s. In the eurozone they combined tight money with reckless deficits. And now Iceland is growing fast and the eurozone is stagnating.
If we skip central banks and let the big banks fail we will have real market economy. As it now private banks make new debt money from thin air and are being saved again and again by central banks. The big banks pay them selfes big bonuses during good years, the people pay for this by inflation by the new debt money the central bank creates too save the too big to fail banks.
Given the population size of Iceland policies that work well there might not be instantly replicable on a larger scale. Nevertheless, Iceland is a fantastic place to visit.
Being such a small welfare nation makes Iceland special in many ways. Their political openness and strong traditions of democracy are very interesting to observe, popular examples of which are the Bobby Fischer and Wikileaks stories. Iceland is often considered the world's oldest active democracy, their parliament was founded in 930 A.D.
Also the rugged nature is incredibly fascinating, and while easy to overlook it is one of the most amazing holiday destinations I have ever experienced.
This is weird but it seems very little countries have alot going for them. They have to be efficient I guess.
Estonia is the other one, government and all processes are entirely computerized and PKI is used to control access. Yeah I know it is a tangent - but the other summer I make from the story is that the smaller the government the more tansparent it has to be - there are fewer combinations for government bureaucrats to use to further their own private agendas that may well be to the detriment of the entire country.
Iceland were spot on in letting the market decide the fate of the banks. Here in the UK we claim banks have too much power and point the finger at 'Capitalism'. But Brown bailed out our banks with tax money which artificially empowered and allowed for risks.
Boomerang by Michael Lewis is a pretty book on the Icelandic financial crisis. If you've read the Big Short, then Boomerang is a look at the reverberating effects of the financial crisis of 2008 throughout the third world.
Greece's unemployment is 28% (unofficially over 40% - my estimation) not because of the banks being saved, but because of a bureaucratic economic model that is stuck in the 70s.
One thing to remember about Iceland is that it has a very small population. (About 400,000). So the whole country has about the same population as Miami, FL.
[+] [-] relate|12 years ago|reply
For each bank X (Glitnir, Kaupthing, Landsbanki), there government created their own new X. The following was by force brought into each new X:
This of course created a debt between the new X and the remains of each old X, which took some time to resolve.On the other hand, a lot of things were left in the falling banks, including international branches, investment accounts (i.e. accounts with interests related to stock performance) and more.
These selective operations of course caused a international controversy (Icesave dispute, e.t.c.), but if the government had let all the banks fail without these transfers - the damage to our economy would have been much greater.
[+] [-] Beltiras|12 years ago|reply
[+] [-] joe_the_user|12 years ago|reply
I should have put things in a more nuanced fashion.
But the point is that there was no "let the debts fall on the floor, start afresh" action.
And yes, a lot of international stuff was left hanging but as other posters have mentioned, the UK and other central banks stepped in for a lot of consumer-level deposits.
Some portion of speculators were left hanging by the US response to the crisis too. Wow!
My main point is there was many differences in detail but no really fundamental difference between the US response to the crisis and the Icelandic one. Both supported their banks in the main because they had, at least to maintain their existing money-economy.
Part of this is that anyone on Facebook or similar sites is going to see a steady stream of factoids about how Iceland wasn't "fooled by the bankers", I'm responding to such rot.
Also, all the state created entities were eventually returned to private hands, pretty much the same private hands.
[+] [-] mathattack|12 years ago|reply
[+] [-] valdiorn|12 years ago|reply
[+] [-] dschiptsov|12 years ago|reply
What Iceland did is subtly different. It lets foreign banks to fail, to bear the consequences of their own risky and stupid investments, and refused to tax its own people to cover foreign bankers loses.
Russians do even "better", they just says to its own folks "sorry, your money is gone" (what can you do?). Sometimes they bother to invent excuses for foreign investors, such as "tax returns" or "market cobditions", but that's very uncommon event. Usually your money just gone and people who did it are "clever guys".)
Notice also how gun ownership indirectly restricts a corrupted government from just plainly robbing it's citizens and promt it to invent some more complicated, less efficient, slow schemes.)
So, nothing to see here.
[+] [-] yapcguy|12 years ago|reply
I recently saw an ad by AIG. It's actually sickening. This company failed. Their assets should have been taken over by good insurance companies who managed their risks properly and did not engage in speculative instruments.
By rewarding bad actors like AIG, moral hazard has been introduced into the markets. Anybody who says they support free markets and capitalism must surely agree that AIG should have been allowed to fail. Yes, it would have caused chaos but that's why lawyers and bankruptcy courts exists.
With politicians picking the winners and losers, it's no wonder lobbying is such a popular business.
[+] [-] peteretep|12 years ago|reply
Hundreds of thousands of personal depositors across Europe saw their money go poof in Icelandic banks, and their local governments had to pick up the bill. If you are a tax payer in the UK, for example, you got a gigantic FU from the Icelandic government who said "nah, we're not going to bail out our banks, you guys should instead".
You can start with: http://en.wikipedia.org/wiki/2008–11_Icelandic_financial_cri...
[+] [-] RayVR|12 years ago|reply
As is pointed out, the decision to let the banks in Iceland fail is applauded by many...but this is due to the ridiculous size of Iceland's banking system compared to the rest of its economy. Also, don't forget, the same IMF that says they did the right thing now, said 6 months before the crash that there was no problem with the size of Iceland's banking sector relative to the rest of the economy.
This article seems to selectively reveal information based on a pre-existing belief held by the author.
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] joe_the_user|12 years ago|reply
Like the US, Iceland provided financial support for its ailing bank system when the crisis appeared. That Iceland officially nationalized banks and the US left the banks officially in private hands is really a trivial detail. Iceland supported their banks and ultimately returned them to the control of their previous owners, the same effective strategy as the US.
And some unsecured creditors lost in Iceland and in the US, depending on the circumstances. Again, a detail, not the main picture, which wasn't really that different than here.
Just stop with the "Iceland's different" baloney, just stop.
http://en.wikipedia.org/wiki/2008%E2%80%9311_Icelandic_finan...
[+] [-] venus|12 years ago|reply
I don't understand your comment. What Iceland did - allow its banks to default on their debts - is completely different from what eg. Ireland did, ie. nationalise the debt.
That it then nationalised the bankrupt banks is a different matter. It nationalised them, sure, after they defaulted on the debt.
[+] [-] netcan|12 years ago|reply
It's clear for instance that UK public money went to UK depositors. The UK is entitled (though maybe unwise) to do this and it sets up a framework for explicit guarantees. In Ireland's case, god knows who really got bailed out. The EU loaned Ireland money to loan to their banks to pay back depositors who were other banks..etc. There was pressure from Germany as both the source of much of the financing and the destination of much of it (Irish banks owed money to German banks). No one went bankrupt, for a normal definition of the term.
It amounts (in my limited understanding) to a few important difference that leave the system far more robust. (1) there is some transparency. It is knowable who is getting bailed out and where the money is coming from. (2) Some long tail risk is put onto depositors, especially foreign/large depositors so it can be priced in. A Hayekian sort of systemic risk reduction. (3) It appears to have reduced the flow of money from poorer future people to current rich people. (4) It clearly defines depositor bailouts as depositor bailouts. Money goes from the public purse to Ms Gunnarsdotter's. In other bailouts (Ireland) the public was driven to fear that banks would collapse and their savings wiped out unless some unknown quantity of money was put into an unknown funnel from where it would flow (among other places) back into their deposit accounts.
IMO we need to come to a long term setup that is simple enough for a first year economics student to understand and first year finance student to price. A guarantee is fine, if we can set it to an affordable level (say, deposits up to €25k) payable directly from the government to qualifying depositors with potential recovery by a bankruptcy court.
[+] [-] jcampbell1|12 years ago|reply
If Iceland had more than 300,000 people, you can be damn sure the debt wouldn't have been forgiven, and there would be tariffs on cod and aluminium until it was paid back.
[+] [-] randomafrican|12 years ago|reply
Notice as they keep comparing the Icelandic unemployment rate to the EU average unemployment rate ?
[+] [-] marcosdumay|12 years ago|reply
That detail is anything but trivial. It's the difference between giving the assets of a company to creditors during bankrupcy, or just clearing the debts, and keeping the assets as company possessions (and keeping the company owners).
To tell you the truth, I still can not understand how the US (out of all countries, the one where people do not trust the State) accepted that bank bailout.
[+] [-] jezfromfuture|12 years ago|reply
[+] [-] easytiger|12 years ago|reply
[+] [-] Mikeb85|12 years ago|reply
Bailouts are contrary to the spirit of capitalism.
[+] [-] jordanb|12 years ago|reply
In the mean time, lending disappeared which caused grave liquidity problems for otherwise solvent firms both in the financial sector and in the "real economy." Those firms failed to meet their obligations producing a chain reaction which continued until severe government intervention put a stop to it years later.
Bernanke and many others were playing off the 1933 script in 2008. Bernanke himself had actually written a book about the Great Depression. I'm not at all happy with what has happened on wall street since 2008 but Bernanke and many others were operating in good faith trying to prevent a catastrophe.
There is really no parallel between the USA (in 2008 or 1929) and Iceland in 2008.
In the case of Iceland, you have a series of hedge funds, basically, domiciled in Iceland but speculating on foreign securities using foreign capital. They had little to do with cod fishing or hot springs or aluminum smelting but when they exploded, the foreign bondholders wagged their fingers at Iceland and said "this is your problem now, you fix it."
Icelanders wisely said "no," they opted not to impoverish themselves to make good the debts of local private hedge funds to the foreign speculators.
[+] [-] hessenwolf|12 years ago|reply
The question is, what do we do then? Do we let a company that took 50 years to build up fail? It is so easy to destroy something, and such a pain in the ass to build it.
Maybe the idea instead is to make it such that we only have to bail out a portion of the 1 in 200 companies that fail each year? The portion that should be considered a going concern.
What about General Motors? That is an incredible wealth-generating asset. A blip in the cash-flow statement could have made that into 1-2% of its productive capability, but the US didn't let that go down.
[+] [-] rosser|12 years ago|reply
Someone should explain that to what passes for capitalists nowadays.
[+] [-] onion2k|12 years ago|reply
[+] [-] hugi|12 years ago|reply
[+] [-] marcosdumay|12 years ago|reply
If you care to look, it endend about as well as Iceland, a short term impact, with growth resuming just after it.
[+] [-] throwaway_yy2Di|12 years ago|reply
Iceland banned Bitcoin too, for the same reason:
https://en.wikipedia.org/wiki/Legal_status_of_Bitcoin#Icelan...
[+] [-] randomafrican|12 years ago|reply
[+] [-] Symmetry|12 years ago|reply
Iceland did almost everything right. They stiffed the bank creditors to avoid aggravating the moral hazard problem, just like the textbooks recommend. In the eurozone the bank creditors are being bailed out. They relied of fiscal policy to address S/I and debt issues, and let monetary policy address AD, just as the New Keynesians were recommending in the 1990s. In the eurozone they combined tight money with reckless deficits. And now Iceland is growing fast and the eurozone is stagnating.
http://www.themoneyillusion.com/?p=14895
[+] [-] acd|12 years ago|reply
The middle class is being bleeped since 1975. Checkout the graph on gdp per capita vs median income. http://www.quora.com/Economics/Why-is-there-a-divergence-bet... http://lanekenworthy.net/2008/09/03/slow-income-growth-for-m...
[+] [-] nixy|12 years ago|reply
Being such a small welfare nation makes Iceland special in many ways. Their political openness and strong traditions of democracy are very interesting to observe, popular examples of which are the Bobby Fischer and Wikileaks stories. Iceland is often considered the world's oldest active democracy, their parliament was founded in 930 A.D.
Also the rugged nature is incredibly fascinating, and while easy to overlook it is one of the most amazing holiday destinations I have ever experienced.
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] pasbesoin|12 years ago|reply
Cross me once, shame on you. Cross me twice, shame on me.
And much of the world has let itself descend far too far into the second sentence.
People abused the finance system and related laws and regulation, severely. Those people should not have been given a second chance.
Keep the system. Throw out the bad actors and policy.
Instead, we have set ourselves up to be crossed again, by bad actors that have as a result grown even more powerful.
Kudo to Iceland, for giving theirs the boot -- and in some cases, a jail cell.
[+] [-] perlpimp|12 years ago|reply
Estonia is the other one, government and all processes are entirely computerized and PKI is used to control access. Yeah I know it is a tangent - but the other summer I make from the story is that the smaller the government the more tansparent it has to be - there are fewer combinations for government bureaucrats to use to further their own private agendas that may well be to the detriment of the entire country.
[+] [-] veganarchocap|12 years ago|reply
[+] [-] debt|12 years ago|reply
[+] [-] axilmar|12 years ago|reply
[+] [-] mrfusion|12 years ago|reply
[+] [-] erazor42|12 years ago|reply
[+] [-] unhe|12 years ago|reply
[deleted]