Yves here. Correlation is not causation. However, as this post makes clear, Iceland had a vastly worse bubble than the US did and prosecuting the executives of banks that went bust was an important component of its post-crisis recovery program. Iceland is on the mend and unemployment has fallen considerably. And the contrast between Iceland’s results versus those of Ireland, which also had an outsided banking system that went bust, are striking (although Ireland was crippled by a traitor, the head of its central bank, who effectively sold out his country to increase his odds of garnering a more important post in the EU. There was no reason not to let the Irish banks go bust, but the government was pressured to backstop them, which meant dumping costs on taxpayers. Why were Irish citizens victimized this way? The likely reason was blowback to Germany. Hypo Bank, which was not exactly the most solid institution, bought Irish “specialist” lender Depfa. Hypo was nationalized by Germany. Sticking Irish taxpayer with the cost of the entire unguaranteed banking sector was a way of getting them to pay for part of the cost of the Hypo rescue. And who helped push this toxic arrangement over the line? Timothy Geithner).
If nothing else, the Iceland example challenges the hypothesis that busting the top bankers will undermine confidence in the system. Anyone who remembers September 2008 to March 2009 will recall that confidence in financial institutions was so deservedly low that it could hardly go lower.
And please, spare us any talk of how hard it would be to prosecute bank executives. Plenty of people have set forth legal theories with supporting evidence, including Charles Ferguson in his book Predator Nation and yours truly in this blog.
By Kenneth Thomas. Originally published at Angry Bear
Remember Iceland? During the high-flying early 2000s, its three main banks went berserk, paying high interest rates to international investors that accumulated deposits equal to more than 100% of the country’s gross domestic product (GDP) and making loans equal to 980% of GDP. When the collapse came, Iceland took a route not taken by Ireland, Spain, and other EU countries: Rather than bail out the banks, the government simply let them go bankrupt. The value of the krona fell by about half, the country was embroiled in disputes with the Netherlands and the United Kingdom over paying off Dutch and British depositors, and it had to take an International Monetary Fund (IMF) loan just to stay afloat.
When we last checked in, there were indictments and criminal investigations of the officers of all three banks, and Icelandic banks were forced to forgive all mortgage debt in excess of 110% of a home’s value. Iceland’s 2012 unemployment rate was 6.0% compared to Ireland’s 14.7%. But that was two years ago; what’s happening now?
In December 2013, four top officials of the country’s formerly largest bank, Kaupthing, were sentenced to jail terms ranging from five and a half years for its chief executive to three years for one of the majority owners. While their cases are currently under appeal, they were indicted this July for further fraud charges. Various bank and government officials have had final convictions as determined by the Supreme Court of Iceland; Wikipedia has a handy rundown on where numerous cases stand, all based on Icelandic-language sources so I cannot read them myself.
Homeowners are still in difficulty in Iceland, however. This is because mortgages in Iceland are usually indexed to the inflation rate; that is, the amount of principal is increased by the rate of inflation. Iceland’s inflation rate was 5.2% in 2012 and 3.9% in 2013, while Ireland’s inflation was 1.7% in 2012 and a near-deflation 0.5% in 2013. That is a pretty hefty load for Icelandic homeowners. The current conservative government has instituted a new round of mortgage relief, but there are a lot of devils in the details. Almost half of the “relief” comes in the form of people being allowed to use their retirement savings (which are tax-advantaged like U.S. individual retirement accounts) to pay down their debt. Yeah, it’s great to pay your mortgage with pre-tax dollars, but it’s still your own money you’re paying, which will no longer be available for retirement. The IMF has raised doubts about the plan’s overall effect on government finances, too.
As I mentioned in my last post, unemployment in Iceland stood at 4.4% in July, versus 11.5% in Ireland (navigate to Labour Force Statistics, then Short-term Statistics, Short-term Labour Market Statistics, then Harmonised Unemployment Rates). And, as I also mentioned in the post, Ireland’s unemployment rate has been artificially lowered due to net emigration from the country.
While Iceland suffered a great deal from the crisis and is by no means out of the woods, it looks like the country made the right call by not bailing out the banks. The economy is growing and unemployment is down to less than half of its peak crisis level. As Paul Krugman has emphasized, having your own currency to devalue helps as well, although it substantially raised inflation and mortgage balances. Iceland was dealt a bad hand by its bankers, but it’s making at least some of them pay for that, which is more than we can say in the United States.