Iceland’s Lessons on How to Fix a Bank Crisis

By Delusional Economics, who is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

I’m slowly working my way through the material that’s coming out of World Economic Forum in Davos. I tend not to take too much attention of what is said at this particular conference as, in my opinion, it tends to be full of self-serving tripe in the most part.

I did, however, notice a small interview with Icelandic President, Olafur Ragnar Grimsson, which was quite interesting.

There are two  reasons why this is such an interesting interview.

Firstly, Mr Grimsson raises some very good points about the effect a large financial services industry on the rest of the economy. He also asks the important question as to why exactly a private bank should be treated differently from any other private enterprise even if has some strategic importance and why exactly national citizens should suffer due to poor business practices. In that regard, Iceland, much like Sweden, has become a model of what should be done after a banking crisis. In short, the aim of the game is to save the banks, but not the bankers.

There is, however, one small problem with Mr Grimsson’s points. He appears to be doing some fairly large historical revisionism in the account of what actually happened. The Icelandic government was not ‘wise’ in it’s implementation of a non-orthodox approach at all. It actually attempted to keep some of the banking system alive, including giving them money along with ‘un-lawful’ loans and part of the IMF program that came later was used save a number of building societies.

It is correct to state that Iceland didn’t bail out its three large banks that collapsed in October 2008, but this was simply because at 900% of GDP it was absolutely impossible. The Government did initially attempt to save Glitnir, but it became apparent very quickly that the central bank did not have the foreign reserves available to keep the banking system alive.

In the end Iceland did become a lesson for the rest of the world in how to best manage the crisis, but the initial response certainly wasn’t planned and certainly wasn’t due to the wisdom of the government. If you are interested in reading some future information I recommend you start here and here.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Zapster

    If you are interested in reading some future information <–is it possible you intended "further" information?

    Iceland has been a fascinating natural experiment. So deeply in trouble they literally had no choice but to do the right things–I wonder if the next global crash will have a similar effect on a larger chunk of the planet? I have hopes.. ;)

  2. LAS

    He ends by saying that the financial industry in Iceland might have drawn too much talent and energy into shoring up their bankrupt systems. Now that once bound talent is liberated to develop innovations for other business, innovations and public needs as it is now.

    Maybe liberation of bound “talent” could mitigate the so called cost to the economy of a bank prosecution or two in the USA???

      1. sd

        Iceland’s housing bubble is very much re-inflating and credit is once again loosening up in ways that are not healthy.

        In short, Icelanders want their party punch bowl back.

        The Independence party that pushed through the neoliberal policies that lead to the financial crisis is once again regaining power and will in all likelihood win the majority of seats in the elections this spring. The all too likely new Prime Minister is known as David Oddsson’s puppet.

    1. Dr. Pitchfork

      I’ve been reading the “Ireland’s Example Is a Myth” articles and most of them are by Icelanders who want to point out that the GOVT tried really hard to save the banks and wanted to save the banks, but couldn’t. I didn’t know that misconception was even out there. I thought everyone knew that it was only after some really nice riots and agitation that the politicians got wise and/or were voted out.

      That seems to be the big point of contention — the intentions of the Icelandic govt, plus the fact that some smaller building societies were in fact bailed out at some point.

      Still, the major argument — that by NOT bailing out the banks, Iceland survived, maintained its sovereignty and for the moment is doing OK — still stands.

    2. Bev

      Thanks for the link. I am reading it now. I knew something was up when the IMF was partnered with the remaining banks and public utilities were being sold off for loan repayments.

      Dear Iceland, Please look at the following which I believe would serve all very well–money that is not debt:

      “Over time, whoever controls the money system,
      controls the nation.”

      – Stephen Zarlenga, Director

      The American Monetary Institute is a publicly supported charity founded in 1996. The real outcomes in society – whether there will be general economic justice or corrupt financial privileges for the few – are usually determined by the structure of a society’s monetary system.

      AMI’s Evaluation of “Modern Monetary Theory” (MMT)

      by AMI Research, with Steven Walsh; and assistance by Stephen Zarlenga

      Modern Monetary Theory (MMT) is a theory developed by a group of economists over the past 25 years or so. In the current crisis it has been receiving some wider attention from the prevailing economic community and politicians looking for a new direction.

      The American Monetary Institute (AMI) is sometimes asked about MMT and whether it fits in with monetary reform. We assess anything to do with monetary matters carefully.

      At the outset AMI enjoys a good, cordial relationship with some of the leading MMT economists, and we certainly wish to build on this relationship. But one thing we can’t compromise on is facts. MMT, like much of modern economic thinking, builds upon some erroneous assumptions and a definition of money that is not neutral and works to the detriment of the 99%. In addition MMT has its own specific problems between its claims and the facts which have bearing on the validity of MMT.


      MMT mis-defines money as debt

      Poor methodology and misuse of terms leads MMT to mis-define money as debt; e.g., Wray says: “Fiat money will be defined as … nothing more than a debt.”7

      But money and debt are two different things, that’s why we have different words for them. We pay our debts with money.

      If money is defined as a debt, it artificially places an unnecessary burden of debt on the whole of society. It turns the positive real net worth of all we produce into a financial negative instead of positive. In effect, it artificially places financial claims on all of our achievements and progress, thus denying us full benefit and enjoyment of all we create.

      While most money in the U.S. mis-designed system is really debt, put into circulation by banks when they make loans, it is a huge error to then define the “nature” of money as debt. That mistake would render it impossible to redesign the system in a just and sustainable way.

      The AMI considers the concept and definition of money as the most critical factor in determining whether a society’s money system functions in a just and sustainable way.

      How money is defined determines who controls the money system, and whoever controls the money system will dominate the whole society. For instance:

      • If money is defined as wealth (e.g., commodities like gold and silver by weight), as Adam Smith did, then the wealthy will control not only their own wealth, but the money system and thus the whole society as well.

      • If money is defined as credit or debt, as MMT and most economists now do, those who dominate credit (the banks) will control society’s monetary mechanism – and we know from experience they will misuse it to create bubbles, until the whole system crashes.

      • If money is defined as an abstract legal power of society, as the Constitution does, then the money system is placed under our constitutional system of checks and balances to work justly and sustainably for the whole society, not for only a privileged part of it.

      The AMI uses the following concept of money:

      Money’s essence (apart from whatever is used to signify it) is an abstract social power, embodied in law, as an unconditional means of payment.

  3. The Dork of Cork.


    That article does not seem to ring through…….

    “The voters disagree and only get a say because the president is keen on making everybody forget that he is a bankster collaborator who was in the pocket of the banks right up to the crash”

    Judging by this visit of Milton Friedman back in 1987~ he had a deep skepticism of monetarism from the very start.

    Black propaganda can be a very sophisticated beast.

    And as for

    “Not answering Alistair Darling’s phone call (he was the UK’s Chancellor of the Exchequer or finance minister at the time). They literally put him on hold, then told him to call later and hung up.”

    Fucking A.

    The New Labour government was the most deeply banker infested government in the modern British era.

    If “we” (whoever we are in this sad other western Atlantic isle) only has those liathroidi………..

    The Icelanders may not much brains since they brought too many Gaelic women up north but their Cod war adventures of the 60s prove that those men have a excess amount of balls.

    1. RBHoughton

      “The New Labour government was the most deeply banker infested government in the modern British era.”

      It is my belief that the UK Treasury has been a private banking lobbyist at least since demonetisation forty years ago. That 12% of GDP that the City claims to generate over-rules the producers of the other 88% all the time.

      In our economic system, the hand that gives is above the hand that receives.

  4. The Dork of Cork.

    Fantastic attack on Friedman …………6.30

    Cutting to the very quick me thinks as it pissed off Friedman just a little bit

    Friedman responds – Declaring he spent just 7 days and possibly 7 nights in Chile.

    Friedman also responds with the quantity theory of money stating its much like Newtons scientific laws of Gravity.

    The fact that Newtons laws do not describe the motion of the heavenly bodies with extreme accuracy seems to be lost on him.
    His declarations seem very unscientific – a universe of perfect orbs……
    Its almost pre Copernican.

    There is a deep common sense held within the Icelandic wild irrationality me thinks.

    Possibly born out of being mad enough to travel that far to a land of ice & fire and yet conservative enough to withstand the various famines , explosions and ecosystem collapses in that inhospitable lonely but beautiful place.

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