Wednesday, December 8, 2010

Lessons from Iceland: let the banks go bust

In past posts, we detailed the bursting bubble in Iceland, but it looks as if they are on the road to recovery:

Like Ireland and Greece, Iceland has taken a large dose of austerity measures to rebuild its economy. Unlike Ireland and Greece, however, Iceland allowed private banks to fail, and its currency, the krona, has declined by about 46 percent against the dollar since the start of 2008. ...

Iceland’s experience, he said, offered a lesson for the euro zone as it grappled with its own crisis: “This is the proper process. If you go through a bubble economy and you need to correct it, the answer is not to convert private debt into public debt. Rather it is to restructure the debt to the level of the assets.”

1 comment:

  1. I saw that this post referenced moral hazard. What hidden actions are you referencing in the case of Iceland? I would think the Icelandish (?) public knows more about the previously hidden banking habits/actions now more than ever. How does Moral Hazard apply here?

    Also, wouldn't the act of the Fed bailing out allow smaller governments to not bailout their national banks? For example, since the US was the focal point of the world economy, if we failed, would other have survived?