The Icelandic Success Story

Emotionally, I love Iceland’s financial policies since the crash of 2008:


Iceland went after the people who caused the crisis — the bankers who created and sold the junk products — and tried to shield the general population.

But what Iceland did is not just emotionally satisfying. Iceland is recovering, while the rest of the Western world — which bailed out the bankers and left the general population to pay for the bankers’ excess — is not.

Bloomberg reports:

Few countries blew up more spectacularly than Iceland in the 2008 financial crisis. The local stock market plunged 90 percent; unemployment rose ninefold; inflation shot to more than 18 percent; the country’s biggest banks all failed.

This was no post-Lehman Brothers recession: It was a depression.

Since then, Iceland has turned in a pretty impressive performance. It has repaid International Monetary Fund rescue loans ahead of schedule. Growth this year will be about 2.5 percent, better than most developed economies. Unemployment has fallen by half. In February, Fitch Ratings restored the country’s investment-grade status, approvingly citing its “unorthodox crisis policy response.”

So what exactly did Iceland do?

First, they create an aid package for homeowners:

To homeowners with negative equity, the country offered write-offs that would wipe out debt above 110 percent of the property value. The government also provided means-tested subsidies to reduce mortgage-interest expenses: Those with lower earnings, less home equity and children were granted the most generous support.

Then, they redenominated foreign currency debt into devalued krone, effectively giving creditors a big haircut:

In June 2010, the nation’s Supreme Court gave debtors another break: Bank loans that were indexed to foreign currencies were declared illegal. Because the Icelandic krona plunged 80 percent during the crisis, the cost of repaying foreign debt more than doubled. The ruling let consumers repay the banks as if the loans were in krona.

These policies helped consumers erase debt equal to 13 percent of Iceland’s $14 billion economy. Now, consumers have money to spend on other things. It is no accident that the IMF, which granted Iceland loans without imposing its usual austerity strictures, says the recovery is driven by domestic demand.

What this meant is that unsustainable junk was liquidated. While I am no fan of nationalised banks and believe that eventually they should be sold off, there were no quick and easy bailouts that allowed the financial sector to continue with the same unsustainable bubble-based folly they practiced before the crisis (as has happened throughout the rest of the Western world).  

And best of all, Iceland prosecuted the people who caused the crisis, providing a real disincentive (as opposed to more bailouts and bonuses):

Iceland’s special prosecutor has said it may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest banks, face criminal charges.

Larus Welding, the former CEO of Glitnir Bank hf, once Iceland’s second biggest, was indicted in December for granting illegal loans and is now waiting to stand trial. The former CEO of Landsbanki Islands hf, Sigurjon Arnason, has endured stints of solitary confinement as his criminal investigation continues.

That compares with the U.S., where no top bank executives have faced criminal prosecution for their roles in the subprime mortgage meltdown. The Securities and Exchange Commission said last year it had sanctioned 39 senior officers for conduct related to the housing market meltdown.

Iceland’s approach is very much akin to what I have been advocating — write down the unsustainable debt, liquidate the junk corporations and banks that failed, disincentivise the behaviour that caused the crisis, and provide help to the ordinary individuals in the real economy (as opposed to phoney “stimulus” cash to campaign donors and big finance).

And Iceland has snapped out of its depression. The rest of the West, where banks continue to behave exactly as they did prior to the crisis, not so much.

101 thoughts on “The Icelandic Success Story

  1. I think NATO needs to depose the leaders of Iceland. They are persecuting the Bankers.

    Populist democracy is like a rabid dog.

    The IMF needs to go in and appoint a Technocrat to manage the repayment of interest and capital given to Icelanders, who freely contracted with the Banks.

    If they don’t, no money for Icelanders. People should pay their debts.

    OK I am being sarcastic, but seriously, is their a risk premium for Icelanders? Will this extra cost harm them long term?

    • Well that’s interesting, I tried watching “Ancient Code” and got the message “CONTENT UNAVAILABLE – The video is not authorized for your location (US)”. Glad no one is trying to keep people in the dark.

    • John this article

       is pivotal to a world wide movement to prevent the bailing out/transfer of taxpayer wealth.  From my experience, the shit that was covered up to keep the ball rolling must be investigated. A lot of approval is not on email, but may have been signed off, if the company had appropriate forms of approval (Which I doubt).  So many deals had the Manager give approval which may have circumvented company controls. Very hard to prosecute.  Only idiots would have wrote emails implicating.   

      That is why I gave up on Audit as I felt the Auditors were not tough enough, and many Managers preferred cursory reporting to keep the client happy.  Getting next years Audit was the name of the game.  I learnt early on that old boys networks, nods and informal understandings is what drives business.  Statutory accounts. Earnings per share.  Waste of time.  Buy sell shares based  on momentum, technical analysis.  Blue Chip public darlings.

      The regulatory capture and the bamboozling of politicians to bail out the big banks was the greatest fraud in history.

  2. Iceland is a great example of how smaller is MUCH better. The only thing more dys-functional than a group is a larger one.

    The deal is that everybody knows what’s going on. People fiend ignorance as simply another way to get something for nothing…and it generally works like a charm.

      • I am a fan of anybody who understand what’s going on.

        Absolute simplicity IS absolute Truth. The larger the group, the higher the level of complexity, the further you move from from the Truth.

        It’s that simple.

    • Something that is ignored in the rush to damn Socialism is that the most prosperous countries in the world are largely socialist. But there’s an equally important point: they are small in population. Overall virtually all of the most prosperous countries on the planet share the characteristic of small size. It may be that it is that characteristic, not the specific economic system that really the deciding factor.

  3. Pingback: How Iceland healed their economy | Durable Faith

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    • Let’s see, in the USA there have been 3 major central-bank/fractional-reserve financial schemes, over the last 250 years. (bank of the united states; second bank of the united states; federal reserve bank)

      The first two scams lasted much less than one human lifetime, and were destroyed by the people/voters who realized they were being “had”, after just a little experience with this monster.

      Then, women got the vote, and got into government power positions. The most recent emergence of the bankster fraud has persisted for 100 years, and is only getting worse, and is destroying that country.

      Yes, great argument for getting more women into political power. We all know they never use the violent power of the state wrongly, on the small scale (“domestic violence” claims, “spousal rape”, “date rape”, “celebrity/athlete rape” claims. How wonderful it will be when those same women have the reigns of violent power on the large scale.

  5. The only problem is that the debt forgiveness/liquidation did not go far enough, especially in terms of household debt, which is still unsustainably high! Need a round two – what about Steve Keen’s QE for the people? Small grants for individuals which must be used to pay off debts if the individual is in debt (but every single resident gets the same grant).

  6. Pingback: The Icelandic Success Story | My Blog

  7. Individual persons can not be held responsible for the debts they did not contract and that includes government debt. Banks and governments must pay the price of their own foolishness and criminal behavior and not burden those who have not been party to the contract .

    • Steven: Except that I would use the word “should” (to differentiate “right” from the “might” of governments and banks), I applaud your comments! You illustrate beautifully the deadly danger of government with its cronies: FORCE. As Obama’s most influential mentor, US Communist Saul Alinski, put it, “Everything we do, we do for POWER”.

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  10. Here in the UK we you have fat cats running a country that use every fiddle to fleece the public of more money, i positive they must learn this when there at public school, on how to shaft every hardworking member of the public on a daily basis, we all know us the public haven`t got a chance and now with the new the west cost mainline tender fiasco, if some one me this could happen, i would not believe them???. Millions of pounds of taxpayers money waisted again i sure you see the pattern, its just another way to waste more money on highly paid public school consultants who are associated to politicians, and so the cycle goes on and its the tax payer who foots the bill again and again. What options do we have all the parties are only interested in there own well being and think of the members of the public as only extra sources of income. Sad but true

    • I watched the movie about Margaret Thatcher, played by Merryl Streep. MT had principles and although the medicine was harsh, the patient was sick.

      Speaking of people being shafted. I saw on our Main Stream Media morning show, that the Money section was promoting Gold as an investment. This is a top for Gold. someone high up is pushing this on the public to buy Gold.

      I am selling Gold.

      • MT and RR ushered in the era of mass financialisation of the Western economies beginning ~1980. Although they did ring-out the high inflation of the seventies [actually Paul Volcker did by raising FF interest rate >2000bps], they also did a great deal to enrich the wealthy at the expense of the middle classes [through target inflation, off-shoring of jobs, further shifting the tax burden from property to labor, doctrine of constant war, de-democratization of the political process, so on and so forth].

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  14. One can learn a lot about various fads and fantasies from these blogs! RR & MT “won” the cold war (not to overlook the heroic USSR and captive nation dissidents), but it was ignored in the movie because of Hollywood’s bias. The negatives cited by “impermanence” above never, to my attentive knowledge, happened in the US. Did they in Britain?

    What WOULD be useful is a study to determine if and how the spectacularly successful actions taken by Iceland’s government could be replicated in US, UK, etc.

    • [A possible correction: the movie probably was from the UK.]

      Attaboys to Buddy Rojak for reminding that Thatcher had to fight unions (government cronies) to save the British economy.

      A revival of “Right to Work” law has popped up in a former union-Democrat Party controlled state. Tomorrow the Governor (one of 30 Republican governors of the 50 states) will sign a bill making Michigan the 24th RTW state* (passed by a legislature with Republican control of both houses, one of a majority of such states) to allow workers to opt out of union membership without being forced to pay dues. Right to Work is simply a protection of the individual worker against union coercion. It is opposed with the only argument possible — that unions should have the power/money of ALL workers in order to represent them against employers.

      There is much US history** on this issue, including Pres. Eisenhower’s unique (and successful) direct TV appeal to citizens to contact their congressional representatives to allow states to enact RTW laws. Anything comparable in other nations?

      * No doubt a mixture of cause & effect, but there is a near-100% correlation of RTW states having better employment, wages, growth than non-RTW.

      ** Employees of PRIVATE companies, including US plants of foreign automakers, have increasingly voted to have NO union, causing union-Democratic Party leadership to (UNsuccessfully) attempt to pass federal “check off” legislation DENYING workers a SECRET ballot. The great majority of union membership, money and political power is now in PUBLIC employee unions, where the employers (the PEOPLE) are represented by elected officials (POLITICIANS) in enterprises having no market competition and little financial constraints on meeting payrolls or retirement obligations. This has bankrupted two formerly prosperous states and several local governments. While only partly caused by unions, federal government pay and benefits are about TWICE those of comparable private jobs.

      More big government, anyone??

      • Dec. 11 UPDATE: I tuned in to MSNBC, the 101% Democratic TV channel, just in time to catch their headline, “Governor signs anti-union* bill”. Obama appeared in Michigan to chant the old mantras of “Right to work for less*” and anti-labor (not anti-labor union) oppression. So I am assuming that the Michigan Right To Work bill is now law.

        A Teachers Union sickout “strike” caused schools to close, a great lesson for the kids and a reminder that political power, not public service, is priority for public employee unions. Does anyone remember that labor LAWS (force of law) were enacted for “collective bargaining” on wages, workday hours,, workplace safety, etc., NOT to empower labor bosses to influence the product, e.g., public school curricula, or collect dues to buy partisan politics. [RTW simply denies unions the power to FORCE workers to pay dues, whether or not they want to join and have political contributions deducted from their paychecks].

        * Yes, it’s anti-union all right, if one believes that unions, like Marxist/Fascist/theocratic government, must have absolute power over individuals. As to “less” (wages) and other benefits to workers, here is the 2001-2010 record of private-sector employment in RTW states (now 24 of 50) vs. non-RTW states: inflation-adjusted compensation +12.5% vs. +3.1%; private-sector jobs +2.4% vs. -3.4%.

        • Most of the health and safety businesses i.e. Safety nets vests harnesses hat scaffolding education programmes testing audit etc etc are owned by people involved in the union movement.

          They are parasites who feed off the blood of workers and the businesses they slowly suffocate.

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  20. Seems to me that this article left out two very important details in this miracle “cure”:

    1. the Iceland government nationalized (seized) the private savings of the people in order to help finance the “cure”;
    2. government spending was a big part part of the problem…see anything about government being taken to the wood shed in this article for its role or its seizing of private savings?

    Be very wary about simple solutions such as putting all the bankers in jail. It is window dressing to the real problems being solved.

    • I did talk about the problem of nationalisation. Eventually, it is better that the banks are back in private hands (tragedy of the commons). But nationalisation in the short term is much better than bailouts.

      Also where did I say anything about putting all bankers in jail? Only culpable bankers should be jailed.

  21. Pingback: We have a big exit in Iceland – DeCode Genetics | Startup Iceland

  22. Debt isn’t just a financial obligation, it is also a moral one. Debtors should not be let off, they have made their beds and they should lie in them. Wealth and poverty are relative, why should the wise who lived within their means and forwent riotous living have to pay for the reckless and feckless? In Iceland, a community so small that everyone is related to everyone else, then perhaps it is a family matter, and debt might be forgiven, but in a large country like the USA or UK, then there is no reason why the prudent should not gain relative to spendthrift.

    • Well said, James! Another way to make the case for bottom-up vs. top-down government, individual liberty vs. tyranny, minimal government vs. socialism.

    • This comment is completely wrong. I don’t mean “inaccurate”; I mean “wrong”, immoral.

      The respect of debt is a common mistake, especially among English common-law fanatics.
      Rather than contract-law and respect for debt, the proper morals come from the Almighty, and are recorded in the scriptures. They’re much older than any of your modern ideas, and those countries who practice them most closely, flourish. The others die.

      The Torah (the directions from on high) hold debt in very low regard, and require its forgiveness on a regular basis. Once you consider such a system, dynamically, you’ll note that there would be much less debt, overall, and lending would constrain itself mostly to those who are poor and in need. Genuine lending is either a form of quasi-charity, or else it is done among those very close to you, and represents common-wealth. (For example, it is common for family members to lend to one another; and the money only ever comes back if the borrower prospers.) To agree with you then, James, in an upright country there would be many fewer people who were able to “make their beds and lie in them”, regarding debt in the first place.

      Lending at interest to your own neighbours and countrymen is a crime (a sin) in and of itself. But, “fractional reserve” lending (uneven weights and measures) is a further crime that is liable to get you lynched, in an upright society.

      Having respect for debt is a mental/emotional problem. And, the first step to healing is to admit that you have the problem.

      Warm regards,

    • Japanisation is totally crazy and totally failed but they were only acting on American advice at the time (after all, Japan is very much a US colony). Rooseveltian Resolve and all that.

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  27. The Icelandic solution was the right one for a small country whose banks’ debts would have overwhelmed the public balance sheet. Ireland should have done the same (was prevented by an EU leadership worried about the UK and German banking systems). However, if the US had done the same it would have been disastrous for the world economy. The US’s domestic mortgage market problems nearly brought down the global investment banking system. You really can’t export domestic risk on that scale and then walk away from it leaving others to pick up the tab.

    • So, bank debts haven’t overwhelmed the public balance sheet in the US? What do you think that quantitative easing is, other than transfer of bank debts, by the trillions, onto the Federal Reserve and/or Fannie Mae / Freddie Mac, and thus the government, and thus ultimately the taxpayer (and saver, via inflation)?

  28. Breaking news (new to me at least): Michael Barone column: “Polling shows that voters say they will blame Republicans more than Democrats if we go over the fiscal cliff.”

    That removes any uncertainty:

    1. Democrats are in control.

    2. Current Democrat leadership has consistently demonstrated that they care only about POWER, not the people, the middle class, the poor, not anybody but themselves and their cronies.

    We will “go over the cliff”!

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