A Novel Approach

Oh, look- Krugman was right again:

Iceland holds some key lessons for nations trying to survive bailouts after the island’s approach to its rescue led to a “surprisingly” strong recovery, the International Monetary Fund’s mission chief to the country said.

Iceland’s commitment to its program, a decision to push losses on to bondholders instead of taxpayers and the safeguarding of a welfare system that shielded the unemployed from penury helped propel the nation from collapse toward recovery, according to the Washington-based fund.

“Iceland has made significant achievements since the crisis,” Daria V. Zakharova, IMF mission chief to the island, said in an interview. “We have a very positive outlook on growth, especially for this year and next year because it appears to us that the growth is broad based.”

Iceland refused to protect creditors in its banks, which failed in 2008 after their debts bloated to 10 times the size of the economy. The island’s subsequent decision to shield itself from a capital outflow by restricting currency movements allowed the government to ward off a speculative attack, cauterizing the economy’s hemorrhaging. That helped the authorities focus on supporting households and businesses.

“The fact that Iceland managed to preserve the social welfare system in the face of a very sizeable fiscal consolidation is one of the major achievements under the program and of the Icelandic government,” Zakharova said. The program benefited from “strong implementation, reflecting ownership on the part of the authorities,” she said.

It turns out that not starving your population is good economic policy!

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46 replies
  1. 1
    Svensker says:

    It turns out that not starving your population is good economic policy!

    Yes, but it also turns out that letting the risk-takers absorb the results of their risk-taking is good economic policy, too. We did neither.

  2. 2
    Ben Franklin says:

    Privatize the losses? Genius.

  3. 3
    dr. bloor says:

    This is where expressions like “No shit, Sherlock” come from.

  4. 4
    cathyx says:

    Their 1% must be very weak politically. The should have donated more more to their politicians when they had the chance.

  5. 5
    jwb says:

    Hoocoodanode, indeed.

  6. 6
    TK421 says:

    Now let’s all vote for a candidate who will actually follow this policy.

    http://www.jillstein.org/

  7. 7
    Walker says:

    @cathyx:

    Their 1% were all citizens of England looking for an offshore haven. That is why they were able to do this.

  8. 8
    catclub says:

    @cathyx: The population of Iceland is about 320,000 — less than New Orleans. The smaller the country — other things being equal — the less the inequality between top and bottom.

    I am always amazed at how small some ‘significant’ nations are.

  9. 9
    Baud says:

    @TK421:

    I think you actually have to win an election to implement policy.

  10. 10
    MattF says:

    Another policy that works is devaluation– which is also a ‘bond-holders take a loss’ strategy, and which, by a weird coincidence, is also opposed by bankers. Unfortunately, devaluation isn’t an option for Euroland.

  11. 11
    cathyx says:

    With global warming, it might not be a bad place to relocate to in the near future.

  12. 12
    Publius39 says:

    @TK421:

    LOL. That was a cute link you just posted.

  13. 13
    WereBear says:

    “Iceland” been my response to a lot of the economic whining I hear. Best case scenario is they stop flapping their lips for a few seconds as a thought bounces through their skull. Worst case is they reflexively call them communists.

  14. 14

    I wish to note one thing: Yes, Krugman was right about this. So was everyone with the slightest knowledge of economics. I agree he’s a brilliant economist, but only right wing ideologues think austerity is good in a recession. We’re just having difficulties because right wing ideologues A) control the EU central bank and B) have control of the sizable ‘I’ve lost my shit because a black man is president’ demographic in the US.

  15. 15
    burnspbesq says:

    @TK421:

    If you choose to piss your vote away, that’s your affair.

  16. 16
    👽 Martin says:

    There’s two ways of looking at Iceland though. Indeed, they deserve great kudos for handling this as they have. OTOH, their GDP is $14B. That puts their economic output on par with Taco Bell.

    Now, if Taco Bell went under and stiffed their creditors, no big deal. But the economic issues in the US and Europe are at least 100x larger. As goes the old saying: When you owe the bank a million dollars, the bank owns you. But when you owe the bank a billion dollars, you own the bank.

    The US and Europe just can’t take the same approach as Iceland. That’s not to say they shouldn’t take a more Icelandic approach, but their crisis and ours (or even Spain’s for that matter) are too different in scale to be terribly comparable.

    But this is very good news for Iceland. Glad to see they chose the right pill.

  17. 17
    Thor Heyerdahl says:

    @TK421: Who? Maybe look at the way other countries have gone about increasing green party influence and actually do it via legislators.

  18. 18

    @👽 Martin:
    Yeah, the lesson here is not how to treat your banks, it’s how to treat your people.

  19. 19
    JustAnotherBob says:

    @burnspbesq:

    If you choose to piss your vote away, that’s your affair.

    Naw. It means that we have to find one more vote to defeat the great white hope.

    Thanks (not) for not helping, TK….

  20. 20
    jonas says:

    @cathyx: Not only that, they actually prosecuted the former prime minister for his role in the economic collapse. IIRC, he was acquitted on the most serious charges of corruption, convicted on some lesser counts of covering up some stuff, but the idea of politicians not being effectively granted immunity by their successors for monumental fuckups that nearly sink your country is really an thing of beauty to behold.

    Good for Iceland.

  21. 21
    👽 Martin says:

    @TK421:

    Now let’s all vote for a candidate who will actually follow this policy…

    ..and ensure a Romney victory so that the absolute opposite happens.

    Brilliant strategy.

  22. 22
    Mnemosyne says:

    @JustAnotherBob:

    It’s amazing to me how Republicans can write editorials about how any conservative vote that goes to a third party or isn’t cast clearly contributes to an Obama victory, but people on the left just can’t seem to make the same connection when it comes to withholding their vote from Democrats.

  23. 23
    JGabriel says:

    __
    __
    Ben Franklin:

    Privatize the losses? Genius.

    Privatize private losses? Those … [sputter, sputter] … COMMMIES!

    .

  24. 24
    LanceThruster says:

    Weren’t those the type of cavalry-to-the-rescue approaches Mitt Romney’s company used? Didn’t St. Ronnie say the most welcomed words you’d ever hear were, “I’m from Bain Capital. We’re here to help.”?

  25. 25
    Violet says:

    Interesting how Iceland’s women were the ones to clean up the mess, and not just the Prime Minister but in the banking system.

  26. 26
    JGabriel says:

    __
    __
    cathyx:

    Their 1% must be very weak politically.

    Iceland has a population of 319,000 — about 4% the size of NYC. Their 1% totals about 3190 people. When your group is small enough in sheer numbers to stick in a large auditorium and set it aflame, I guess it tends to make you a little more cautious.

    .

  27. 27
    mechwarrior online says:

    @JGabriel:

    It’s not just that. Historically when the poor were too pushed upon in Europe they lopped off heads, and burned castles to the ground. There is actual reason for them to fear and for the 1% to play ball.

    In America if you starve people and dodge taxes just contribute to a socially progressive cause and all is forgiven. And if you don’t want to do that the worst you have to worry about is some drum circles.

  28. 28
    👽 Martin says:

    @JGabriel: Actually, their 1% weren’t even Icelandic. The banking shit was imported from the rest of Europe. The cost to creditors wasn’t going to be borne by any Icelandic citizens to speak of. It literally as a choice between helping Iceland residents or a few billionaires from Germany and the UK. That ones really easy.

  29. 29
    Maude says:

    @👽 Martin:
    Easy if they aren’t US Republicans. The Repubs are out to hurt poor and middle class. Because, shut up, that’s why.

  30. 30
    jonas says:

    Iceland did the right things, policy-wise, but was also in a fortunate position to be able to do so. It’s a tiny economy by European standards — much smaller than even Greece or Portugal — so it could afford to tell its creditors “Sorry, you lose. Have some pickled herring”. Nobody’s economy is going to implode if they have to write off their stake in an Icelandic bank, or if the Icelandic krona is devalued. To wit, Iceland had it’s own currency, which it could devalue and therewith effectively finance the restructuring of its economy. Lastly, while Iceland’s private financial sector had run amok, it’s government hadn’t become completely paralyzed with corruption and its balance sheets weren’t completely fabricated bullshit, as in the case of Greece. The government could still pay its bills and continue to support the welfare programs it was committed to. Iceland’s ability to borrow on international markets was never seriously compromised.

    Austerity alone isn’t going to get Greece or Italy back on their feet, to be sure. But opponents of ECB/German policy need to admit that Iceland is a unique case and that — pace Atrios — Greece or Italy can’t simply tell the ECB and the rest of the EU to go fuck themselves. There’s far, far more at stake.

  31. 31
    JGabriel says:

    __
    __
    👽 Martin:

    The US and Europe just can’t take the same approach as Iceland. That’s not to say they shouldn’t take a more Icelandic approach, but their crisis and ours (or even Spain’s for that matter) are too different in scale to be terribly comparable.

    I think Europe’s problem is less a matter of scale than policy. Europe put multiple countries on a single currency in a weak confederation — the problems they’re experiencing combine some of the worst aspects of a gold standard with problems the US experienced in the period of confederation between the Revolutionary War and adoption of the current US Constitution.

    The US, on the other hand, may have a huge difference in scale with Iceland, but one argue that a process much like Iceland’s — say nationalizing the largest failing banks, emptying out the shareholders, breaking up those banks into smaller institutions with separate commercial and investment mandates, and reconstituting them as private entities once the economy recovered — would have been a much better solution than TARP.

    .

  32. 32
    JGabriel says:

    __
    __
    👽 Martin:

    It literally as a choice between helping Iceland residents or a few billionaires from Germany and the UK. That ones really easy.

    Yes, true. That too.

    .

  33. 33
    blingee says:

    Of course wrong way Cole doesn’t get that Kthugs whole agenda is to prove he was right by saying we should have nationalized the banks.

  34. 34
    JGabriel says:

    __
    __
    mechwarrior online:

    @JGabriel: It’s not just that. Historically when the poor were too pushed upon in Europe they lopped off heads, and burned castles to the ground.

    And the Icelandic Njál’s Saga features a family being burned alive in their home by their enemies. I kind of chose that “throwing the rich in an auditorium and setting it aflame with them in it” with that motif in mind.

    .

  35. 35

    If some aspects of the Icelandic process had been used in the US, you could then, with surety, assert that the system was broken.

  36. 36
    Jamie says:

    That can’t be right. If I can’t have my foot-bath for under $10 (6.50 after taxes I don’t pay), what good is government?

  37. 37
    Yutsano says:

    @Violet: Not just any women either; a lesbyterian Prime Minister no less. Teh ghey agenda advances nicely! :)

  38. 38
    Mjaum says:

    It has to be pointed out that the 1% did buy at least one politician. The prime minister. He was convicted, although the more serious charges did not stick. Shame, that.

  39. 39
    Villago Delenda Est says:

    Three words:

    FUCK THE RENTIERS!

    All you need to know.

  40. 40
    Violet says:

    @Yutsano: Yeah, the Prime Minister is a lesbian, but check the link–a whole bunch of women stepped in to clean up the mess in the banking system. Kind of interesting.

  41. 41
    JGabriel says:

    __
    __
    The Guardian via Violet:

    Not everyone in Iceland has bought into the idea that women will revolutionise capitalism. “Women would like to think it’s their turn now, but it won’t be – there will be a bit of fuss for a while but men will keep the real power at the top,” said a local taxi driver in his sixties. “I’m not giving you my name, though, because my wife speaks English and she would kill me if she read that.”

    [Chortles]

    Dude. I think you just told us all we need to know about why Iceland’s women will be keeping power now that they’ve got it: because they’ll kill you if you try to take it back.

    .

  42. 42
    Peter says:

    Perhaps while you’re crawling out of that double-dip recession you got yourself into, you’d like to take the time to learn the Economics Mantra:

    Paul Krugman is always right.

    I will listen to Paul Krugman.

    I will not ignore Paul Krugman’s recommendations.

    Paul Krugman is god.

    And if this ever happens again, Paul Krugman will personally rip your lungs out!

    Economics out.

  43. 43
    AHH onna Droid says:

    @Peter: Some spoo for the gentleman? It’s lightly killed.

  44. 44
    Stephen says:

    @👽 Martin:

    finally someone with a brain gets it! a compromised approach would be better to a full blown bail out with austerity!

    thank you!

  45. 45
    russell says:

    it would make me laugh my ass off if iceland ends up ruling the world.

    oldest written constitution in the world, IIRC. plus, they believe in elves, and the women are fabulous.

    i welcome my new viking overlords.

  46. 46
    someguy says:

    Krugman’s right. Defaulting on bonds is the way to go. It’s a gamble when you invest money, and the folks that gambled on getting a windfall profit from government bonds should be treated like the gamblers they are – house always wins, kids. Tough luck.

    Fuck austerity. Let’s just default on the government’s bonds. Problem solved.

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