
Let banks fail: Iceland’s plan looks to be working - jpatokal
http://business.financialpost.com/2014/01/27/let-banks-fail-icelands-plan-looks-to-be-working/
======
relate
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:

    
    
       * Regular loans
       * Checking accounts
       * Credit cards
       * e.t.c.
    

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.

~~~
mathattack
The damage was pretty big anyway, no? The currency lost half it's value and
never recovered, right?

~~~
tim333
An interesting point is there is a difference between damage to paper
valuations and damage to the real economy. In Iceland's case there may have
been a big paper impact where before the crash your currency was worth so many
dollars and after many fewer but in the real world people had the same houses
and cars and kept their jobs and so on. In Ireland on the other hand people
lost their jobs and houses, topped themselves, emigrated and so on. At the end
of the day real wealth and human well being are what counts and the financial
system is only a tool to achieve that.

~~~
stonemetal
If the value of their paychecks was cut in half, then didn't that have a
impact on their "real wealth and human well being"?

~~~
arjunnarayan
Because the value of most of the things you needed to buy (mostly other
people's labors in food service, etc.) was cut in half too. Of course this
doesn't count imports (which became twice as expensive in real terms) but
that's a hit that can actually be survived.

------
dschiptsov
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.)

So, nothing to see here.

~~~
peteretep

        > 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".

You can start with:
[http://en.wikipedia.org/wiki/2008–11_Icelandic_financial_cri...](http://en.wikipedia.org/wiki/2008–11_Icelandic_financial_crisis)

~~~
peteretep
A simple analogy for you:

You are Engla, the mother of little Johnny. One day, at Johnny's school shows
up a little girl called Bjork. Bjork seems to come from a nice family, and you
like her Mom, Icelandi.

One day Johnny comes home from school and says Bjork is running some kind of
saving scheme, and can he put his pocket money in it? You remember some of the
older kids at school doing something similar one time, so you say sure,
because besides, Icelandi seems like a nice lady, and you're sure she's got
her eye on it.

Johnny gives a bit of his pocket money to Bjork every month, and Bjork's
little saving scheme seems to be going really well. Bjork seems a little
better dressed these days, and Icelandi is driving a new car. Icelandi is
always prattling on at the PTA about how clever little Bjork is.

One day, Johnny comes home in tears. Apparently Bjork showed up at school and
said she'd lost track of her accounts, and she no longer had any money to give
him. You ring up Icelandi, furious, and ask her to refund little Johnny's
money.

"No no", says she, "I think you'll find it's all on Bjork, and not my
responsibility". You note she still has her shiny car. Later that day, you
find out Icelandi completely refunded Thor, Bjork's little brother, for all
the money he had lost, but every other child at school also lost all their
money.

Icelandi is hailed on the internet as some kind of popular hero.

~~~
ItendToDisagree
I think you're missing part of the story... That part where Ameri's
sons/daughters (well only the most privileged ones) went to the Casino on
everyone else's dime by obfuscating credit derivatives (Default Swaps) and
crashed the entire system.

Seems sort of relevant to an analogy about international finance around this
time since the economies are so interconnected.

~~~
JackFr
Not relevant -- in fact obfuscates the issue.

Very American though to insist that the banking crisis was at its heart an
American crisis.

~~~
ItendToDisagree
You're implying that financial markets are not international and that a huge
crisis in one will not cause great strife in another?

The crisis was not 'American' in any way, it was international, as is finance.
If one group monkeys with the system it causes issues everywhere (even worse
if it is a concerted effort by multiple groups). This is especially true if
'trust' in the system is shot to hell which is what derivatives are built and
traded upon.

~~~
JackFr
I am _not_ implying that financial markets are not international. Quite the
contrary -- you'll note the parent comment referred to Iceland and the UK --
international.

The parent comment offered a simplifying model, that explained fairly clearly
that the government Iceland treated classes of bank creditors(i.e. depositors)
differently, and thus it was not fully correct to say either that they were
bailed out, or they were let to fail. It all depended on where you sat.

Your comment offered no further elucidation, no further relevant information
and strained the analogy past the breaking point.

Credit is built on trust (credo = I believe); derivatives are built on
contracts.

~~~
ItendToDisagree
Whoa Nelly! That analogy was strained past the breaking point long before I
pointed the funny stick at it... That was more or less the point to be honest.
Attempting to discuss international finance with a schoolyard analogy seems
ridiculously oversimplified in the extreme. (also I like the name "Ameri" for
a genderless parent. Sue me!) :)

It sounded like you were attempting to imply that there was ignorance of
finance being international (or so it seemed... I could be wrong there) and I
was pointing out that was not true.

Also contracts and trust are not opposing ideas nor do they address the same
aspect of a thing. I'd venture to say that the entire market is (at least to
some extent) based on 'trust' that it is not being heavily gamed and
information is not being outright falsified.

Edited: For clarity!

~~~
JackFr
It might be I just needed some coffee ...

~~~
ItendToDisagree
Don't we all friend? Don't we all? :)

------
RayVR
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.

------
joe_the_user
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.

[http://en.wikipedia.org/wiki/2008%E2%80%9311_Icelandic_finan...](http://en.wikipedia.org/wiki/2008%E2%80%9311_Icelandic_financial_crisis)

~~~
venus
> 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.

~~~
Lazare
Ireland is actually the exception; they were the only country to do that.

The consensus of mainstream economics at the time was "holy shit are you
fucking nuts?", and I don't think it looks any _more_ sane with the benefit of
time.

~~~
sentenza
Actually, not quite. Spain hasn't nationalized the debt directly but instead,
since the beginning of the crisis, is continuously pumping money into banks
that should have gone under. It is ruinous to Spain's public finances, but we
don't hear so much about it, since the relative size of that particular
debacle is smaller than the Irish "public finances suicide by banking".

~~~
omegant
The spanish banks more exposed to the construction bubble bust were the
"cajas". They are not for profit saving banks, and not private, they are
controlled by politicians and unions. They have saved them because they had
huge holes created giving high risk loans to the friends of the political
parties heads. Une big example is Bankia (previously caja madrid), the
president of bankia was a friend of Aznar and certainly underqualified. His
last big hole was the sale of a prefered stock emission to small savers and
old people(no big financial entiy bought those), to save the caja from
default. They made people think that they were saving products, they've lost
90% of the invested quantity. There are other cases of billions of € in
credits to construction companies that were unable to repay, the high manager
in charge of the operation joining thd board afterwards... Private banks like
santander or BBV are not that exposed to the construction bubble, they are not
the ones that need a bailout. It's a big shame..

------
Mikeb85
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.

~~~
jordanb
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.

~~~
burntsushi
> Problem is, that was exactly what drove policy in the United States between
> 1929 and 1933.

I don't understand how people think that the policy during 1929-1933 was "do
nothing" when the following things occurred during that time period: Smoot-
Hawley Tariff Act, Glass-Steagall Act, the Federal Home Loan Bank Act, the
Emergency Relief and Construction Act, the Reconstruction Finance Corporation,
the Hoover Dam(!), and more.

Despite Hoover stating that he wanted less government intervention, that isn't
actually what happened. Basically, the notion that "we did nothing" during
1929-1933 (as you've suggested) is a giant misconception that really needs to
die.

You can read more about it here:
[http://en.wikipedia.org/wiki/Herbert_Hoover#Great_Depression](http://en.wikipedia.org/wiki/Herbert_Hoover#Great_Depression)

N.B. I don't claim that these policies were effective. Just that "nothing" is
far from the truth.

~~~
jordanb
The Glass-Steagall Act, at least, what people mean when they say "Glass-
Steagall" was passed in 1933 and signed by FDR.[0]

You are correct, of course that Hoover didn't "fiddle while Rome burned" but
fiscal policy was largely non-interventionist and monetary policy tight until
the Emergency Banking Act of 1933[1] which was the "severe government
intervention" I mentioned in the OP.

[0]
[http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legislat...](http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legislation)

[1]
[http://en.wikipedia.org/wiki/Emergency_Banking_Act](http://en.wikipedia.org/wiki/Emergency_Banking_Act)

------
onion2k
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.

~~~
marcosdumay
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.

~~~
rhino369
Practically, that's not really all that different from what the United States
did, but instead of a drawn out process they did it in quickfire sales. The
government forced the bankrupt banks to sell themselves to the non-bankrupt
banks for virtually nothing. And it loaned and took stock (which is partial
nationalization) in the non-bankrupt banks so those banks could pay the debts
of the newly acquired failed banks.

The government basically forcibly reorganized the banking system in a matter
of weeks.

The only difference is stockholders from the failed banks only lost 98-99% of
their investment instead of 100%. A small price to pay for a quick solution to
the largest financial crisis in 80 years.

------
throwaway_yy2Di
Any comments on the capital controls that are a key component of this?

Iceland banned Bitcoin too, for the same reason:

[https://en.wikipedia.org/wiki/Legal_status_of_Bitcoin#Icelan...](https://en.wikipedia.org/wiki/Legal_status_of_Bitcoin#Iceland)

~~~
randomafrican
There's no other way to prevent capital flight, right ?

------
Symmetry
To quote the inestimable Scott Sumner:

 _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](http://www.themoneyillusion.com/?p=14895)

------
acd
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.

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://www.quora.com/Economics/Why-is-there-a-divergence-
between-median-family-income-and-GDP-per-capita-Where-does-the-balance-money-
go) [http://lanekenworthy.net/2008/09/03/slow-income-growth-
for-m...](http://lanekenworthy.net/2008/09/03/slow-income-growth-for-middle-
america/)

------
nixy
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.

------
pasbesoin
Reducing to the extreme, I think the current banking/finance crisis can be
reduced to the aphorism:

 _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
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.

------
veganarchocap
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.

------
debt
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.

------
axilmar
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.

------
mrfusion
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.

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erazor42
One does not simply compare a 320k people country with a 50+ millions one.

