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Chakrabortty - Gov Subs the Free Market Solution

Iceland broke the rules and got away with it | Aditya Chakrabortty | Comment is free | The Guardian

Reykjavik now serves as a very different kind of parable, of how to minimise the misery of financial collapse by ignoring economic orthodoxy. And in those other broke European economies – from Dublin to Athens to Lisbon – politicians and voters are starting to pay attention. After its three biggest banks – 85% of the country's financial system – failed in the same week, Iceland did two remarkable things. First, it let the banks go under: foreign financiers who had lent to Reykjavik institutions at their own risk didn't get a single krona back. Second, officials imposed capital controls, making it harder for hot-money merchants to pull their cash out of the country.

These policies were not just controversial; they represented a two-fingered salute to the polite society of academics and policy-makers who normally lay down the laws on economic disaster management.

Compare Iceland's policies with those followed by another tiny country in the North Atlantic, which also has a banking industry much bigger than its national economy. When the credit crunch came to Dublin, the government decided to underwrite the entire banking industry – including tens of billions of euros of loans made by foreign investors. That landed the country with a debt worth something like €80,000 for every household – a debt that effectively bankrupted the country.

Dublin was merely following the old free-market tradition that rules governments should never break faith with financiers.

Yet looking at the two countries now, it's hard to say that Ireland has prospered out of being orthodox, or that Iceland has suffered an especially terrible punishment for not sticking to the Way of the Markets.

Indeed, the evidence seems to point the opposite way: Iceland has come through in better condition than anyone in 2008 dared hope.

But, but, but I thought letting the bankrupt go bust is the Free Market way, creative destruction and all that. Or am I being an idiot.

Comments

"Dublin was merely following the old free-market tradition that rules governments should never break faith with financiers."

Break faith? I was not aware that it is the part of the government to guarantee all finacial investments as risk free. Maybe this reminder of risk will sting the management types into fiscal responsibility and thus avoid collapse in the first place.

Chakrabortty is the idiot.

Default and devalue is the economic orthodoxy. Gotta clear the bad from the market and let the right signals shine like beacons - otherwise you end up with the moral hazard Merv King warned about.

Putting other people further into debt to pay for Government and pseudo-nationalised* corporation mistakes is the political orthodoxy. It is a sign that the politicians are unaccountable in a way they remain accountable in Iceland.

As for Dublin, they did what the European Commission instructed them to do. As did Westminster. Guarantee every piece of shit investment and provide liquidity when the markets didn't want to. Ireland also could not devalue because it is not in control of the currency. Ireland's pretend economic orthodoxy was utterly constrained by the politics of being in the EU and having played fast and loose with bank regulation as many developed nations did.

Lee,

I agree. When Northern Rock was tottering over the abyss the people stood outside getting their money were doing the sensible thing. At that time the Government *should* have reminded people about the limited bank guarantee scheme (approaching £32k IIRC but as with many things it was insensibly complicated). Media reckoning was something like it would have covered 97% of the customers completely but the remaining 3% accounted for half of the money on deposit. I remember well one woman getting on the telly who had been worried that her circa £300k deposited with NR was at risk. Such unthinking behaviour with money is potty.


* Can't think of the right term. Banks in particular were encouraged to grow by the Government and the FSA's incompetence made the space to allow it. Imo this was for political propaganda reasons. Record periods of growth. Creating some of the biggest banks in the world. Profits galore reflecting well on the Government. Property prices will always go up, right?

The Guardian is up it's own arse again. It doesn't matter that in reality a free market would require the government not interfere in the collapse of any business including banks; as far as The Guardian is concerned whatever the wrong course of action is must be the one ascribed to the free market.

I guess if it had been called "South Eastern Rock" instead of "Northern Rock" we would have saved ourselves all this bail-out nonsense.

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my question is what will happen to the fish crop of iceland??
will they be able to sell it??
or will foreign countries put a lien on the catch,
making it unsellable

Iceland didn't break the rules, it followed them.

Our dear Grauniad author seems to think this is a heroic rejection of free-market capitalism, or some such nonsense, when in fact it is nothing more than common sense allied to a freely floating exchange rate and minus the millstone of eurozone solidarity hanging around its neck.

debt restructuring has always been a feature of western economics, you merely pay the price of being locked out of the finance markets for a period of time and pay a premium thereafter, options that are not available to the PIG countries as they will be bullied by the rest of the eurozone into suffering for the greater 'good'.

All in all, an interesting article insomuch as it informs us that the PIG countries rather wish they were in Iceland's position, but a towering house of cards as far as the absurb argument built up around it.

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