Chakrabortty - Gov Subs the Free Market Solution
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.