Will Greece Pull an Iceland … And Tell the Banks to Pound Sand?

Iceland Told the Banks to Pound Sand … And Thereby Saved Its Economy

Iceland told the banks to pound sand. And Iceland’s economy is doing much better than virtually all of the countries which have let the banks push them around.

Barry Ritholtz noted in May:

Rather than bailout the banks — Iceland could not have done so even if they wanted to — they guaranteed deposits (the way our FDIC does), and let the normal capitalistic process of failure run its course.

They are now much much better for it than the countries like the US and Ireland who did not.

Bloomberg pointed out in February:

Unlike other nations, including the U.S. and Ireland, which injected billions of dollars of capital into their financial institutions to keep them afloat, Iceland placed its biggest lenders in receivership. It chose not to protect creditors of the country’s banks, whose assets had ballooned to $209 billion, 11 times gross domestic product.

***

“Iceland did the right thing by making sure its payment systems continued to function while creditors, not the taxpayers, shouldered the losses of banks,” says Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York. “Ireland’s done all the wrong things, on the other hand. That’s probably the worst model.”

Ireland guaranteed all the liabilities of its banks when they ran into trouble and has been injecting capital — 46 billion euros ($64 billion) so far — to prop them up. That brought the country to the brink of ruin, forcing it to accept a rescue package from the European Union in December.

***

Countries with larger banking systems can follow Iceland’s example, says Adriaan van der Knaap, a managing director at UBS AG.

“It wouldn’t upset the financial system,” says Van der Knaap, who has advised Iceland’s bank resolution committees.

***

Arni Pall Arnason, 44, Iceland’s minister of economic affairs, says the decision to make debt holders share the pain saved the country’s future.

“If we’d guaranteed all the banks’ liabilities, we’d be in the same situation as Ireland,” says Arnason, whose Social Democratic Alliance was a junior coalition partner in the Haarde government.

***

“In the beginning, banks and other financial institutions in Europe were telling us, ‘Never again will we lend to you,’” Einarsdottir says. “Then it was 10 years, then 5. Now they say they might soon be ready to lend again.”

Even the IMF praises Iceland’s strategy:

As the first country to experience the full force of the global economic crisis, Iceland is now held up as an example by some of how to overcome deep economic dislocation without undoing the social fabric.

Greece Faces the Same Choice

As Robert Reich notes, the same choice – telling the foreign banks to pound sand or caving in – is now faced by Greece:

Greek Prime Minister George Papandreou decided in favor of democracy yesterday when he announced a national referendum on the draconian budget cuts Europe and the IMF are demanding from Greece in return for bailing it out.

(Or, more accurately, the cuts Europe and the IMF are demanding for bailing out big European banks that have lent Greece lots of money and stand to lose big if Greece defaults on those loans – not to mention Wall Street banks that will also suffer because of their intertwined financial connections with European banks.)

***

We’ve been here before, remember? Here in the United States, at the end of 2008 and start of 2009. Wall Street had made lots of bad loans, and the question we faced then was whether to bail out the Street.

The difference is, we didn’t hold a referendum. Instead, the Bush administration told Congress the nation risked “economic Armageddon” if it didn’t immediately authorize a giant bailout of the Street – with no strings attached. [Our comment: Indeed, Paulson threatened martial law if the bailouts weren't approved.] Of course Congress hastily agreed. Hank Paulson, Ben Bernanke, and Tim Geithner (as head of the New York Fed) then doled out the money. And the Obama administration (with Geithner installed as Treasury Secretary) gave out more.

So instead of allowing the Street to live with the consequences of its negligence, we bailed it out – and allowed the Main Streets of America to suffer the consequences.

If Americans had been consulted about the bank bailout, I doubt it would have happened the way it did. [Our comment: Polls showedthat Americans were overwhelmingly against the bailouts.  And see this.]  At the very least, strict conditions would have been placed on the banks in return for the money. The banks would have had to eat the losses of the predatory mortgages they sold, and help homeowners reduce those mortgages. They’d be required to improve the capitalization of small banks in communities across the country. They’d be forced to accept stringent new regulations, including resurrection of Glass-Steagall. [And see this, this and this.]

But Americans weren’t really consulted. It was an inside job.

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  • http://johnboanerges.blogspot.com John Redman

    From today’s LWC:

    ‘Repeal’ of Glass-Steagall Irrelevant to Financial Crisis

    by Thomas E. Woods, Jr.
    Taki’s Magazine

    Recently by Thomas E. Woods, Jr.: Truth & Charity

    Although we’ve heard a great deal about how “deregulation” caused the financial crisis, specific cases of repealed legislation that would have prevented it are few and far between. The one some progressives seem to have settled on is the “repeal” of the Glass-Steagall Act of 1933, which separated commercial from investment banking. The “repeal” involved only one provision of the Act, the one preventing the same holding company from controlling both a commercial bank and an investment bank.

    I’ll try to write more on this when I have time (for now, I’ll note that I cover the subject in Rollback, my book from earlier this year). When we recall that stand-alone institutions, both commercial and investment, also failed during the crisis, and that all of them acquired mortgage-backed securities (which they had always been allowed to do, by the way), the Glass-Steagall “repeal” looks more and more like a red herring that appeals to people whose belief system requires them to find some way a Fed-fueled bubble could have been stopped had the right regulatory structure been in place.

    (The problem with those who point to Glass-Steagall is not that they’re radical. It’s that they’re not nearly radical enough. They think the system as is, shot through with moral hazard at every level, and presided over by a market-defying central bank, is of its nature stable and without fault; we just need a few regulations.)

    Because Glass-Steagall was passed during the Depression, it is assumed that it was addressing a pressing need of the time. In fact, the lack of government-enforced division between commercial and investment banking had precisely zero to do with bank problems during the Great Depression. The 9,000 bank failures during the early 1930s had far more to do with the damage done by government regulation – namely, the unit-banking laws that made it difficult for banks to diversify their portfolios (by limiting them to a single office and making branching illegal) – than with a lack of regulation. These were small banks, not the behemoths for which Glass-Steagall would have been relevant. Canada had none of these stifling regulations, and had zero bank failures. (Incidentally, Canada also avoided all the post-Civil War bank panics that struck the U.S., even though Canada did not have a central bank until 1934 – yet again, reality refuses to conform to the where-would-we-be-without-our-wise-overlords comic-book version of events.)

    The Glass-Steagall-did-it crowd is the same crowd that likes to claim Canada avoided the worst of the U.S. crisis because it was so much better regulated. But they can’t have it both ways – Canada did not have a Glass-Steagall law! (For the real story on what happened in Canada, click here.)

    For a little more on this, see Bill Woolsey. Again, I’ll try to revisit this soon.

    Reprinted with permission from TomWoods.com.

    November 2, 2011

    Thomas E. Woods, Jr. [send him mail; visit his website], a senior fellow of the Ludwig von Mises Institute, is the author of eleven books, most recently Rollback: Repealing Big Government Before the Coming Fiscal Collapse and Nullification: How to Resist Federal Tyranny in the 21st Century, as well as the New York Times bestsellers Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse and The Politically Incorrect Guide to American History. He is also the editor of five other books, including the just-released Back on the Road to Serfdom.

    Copyright © 2011 Thomas Woods

  • http://johnboanerges.blogspot.com John Redman

    OOOOPS! I meant LRC not LWC. Sorry.

  • pat isbell

    i have never been more angry at a republican president as i was when”W” let paulson convince him , against his instincts, that the taxpayer should bail out his “buddies” on wall street. id much rather see the banks fail than the country fail!!!

    • stringy

      Its an interesting theory and obviously hard to say what the outcome would have been. However I don’t think that the banks would be able to fail without the country failing too.

  • Debbie Leitner

    Deb, please make me a copy

    Thx ira

  • getreal

    Dear Greece, Ireland, Portugal, Spain, England, USSA, and everyone else. Pull an Iceland. Let the banksters go to hell where they belong.

    First, the “money” the banksters lent was fiat, fake, fraud, fiction, fantasy, fractional-reserve toilet-paper created out of nothing at zero cost to them… so they did not lend anything of value in the first place (or if you claim the fiat had value-of-sorts (trade value), all the trade value that was lent was stolen from others by diluting the value of all other fiat in existence). Second (and because they did not produce anything to earn the fiat they lent), it was they the banksters who ignored risk and lent recklessly, and therefore deserve to lose. Third, it is obvious inherent craven criminality to lend to governments because this indebts people who are not yet able to vote and who are not yet even born. All those loans to governments (via government bonds) are inherently null and void because otherwise they would impose hardship and obligations on people who had no choice in the matter, and who receive little or no personal benefit (and often considerable harm) from the spending financed by that lending.

    Yes, world. Flush the banksters down the toilet along with the rest of the crap.

    • Mrk

      Amen Brother ! You should run for President. I’d vote for ya. Right after Ron Paul. Bravo !!

  • http://www.couponsusie.org daveseasilver

    John,
    I tried to click
    (For the real story on what happened in Canada, click here.) and no link. Please give me a clue on where to discover what Canada did differently.

  • AlphaDave

    I think Greece is different than Iceland. In Iceland, the banks were indebted. In Greece, the nation is indebted. Yes, Greece can also tell the private and public bondholders to “go stick it”, but they would surely be booted out of the EU and would be left trying to finance their lavish public benefits selling Drachma-denominated bonds.

  • Don Jaime

    Finally, I saw that conclusion in writing that I have believed since the panic days of 2008. That conclusion in the last line of the article is: “It was an inside job.” The American people were right. The politicians were wrong. There is other evidence not in the article it was an inside job.

  • llantar

    This PIIGS problem all gets interesting when you bring in Iceland. (Did you hear Portugal, yesterday, demand that the U.S. lend them the money to pay their debts?) Iceland defied the manipulative banking and statist policies to convince their citizens that they must pay the tab so the banks and sovereigns don’t lose money and Icelanders become economic slaves to these bankers. Iceland fits the mold of a more boom bust capitalist free market system, unlike the U.S. and Europe (run by incorrigible central banks).
    Yes, Greece is different than Iceland – they are in extremely socialistic, never really pay any taxes to their govt (national pastime), feel entitled, have become extreme socialist (many, in fact, outright communists) who don’t want to pay for what they feel they deserve and are and have been serial defaulters (like Argentina). Iceland (hard workers) doesn’t have that type of history of defaults and let the markets figure it out (which worked out well for them). Originally, the bankers told them they would never lend to them again (and as Americans have found out recently, after a bankruptcy, they will have credit again within 12 months) but lately they have been saying it would only be 10 years, then the bankers said 5 years and now they are getting ready to lend to them (Icelanders) again. Greeks, on the other hand, retire from govt service at 55 and expect entitlements. The greeks need to learn to produce more for less (Austrian economics), aka, save more by themselves instead of borrowing from the world for their expansive socialistic policies.
    Argentina is similar to Greece (although not entirely). Argentina was the most powerful and wealthy country in the early 1900′s, full of natural resources, now look at them – socialism and money printing defeated them. The currency collapsed in 2000-2001 and the consequent deflation (washout) brought all prices back into reality (vs central bank stealth default by inflation) such as real estate and farms and tangible assets and they have recovered (until there next default – they are serial defaulters as well). Rhodesia, now known as Zimbabwe, suffered a complete currency collapse because Mugabi, an absolute idiot, didn’t understand economics. The govt took property from the white productive Boers (who had made Rhodesia the breadbasket of Africa) and transfered their lands to tribesman that had no knowledge of what to do with the land. It now takes a trillion zimbabwean dollars to buy a roll of toilet paper. They need to change to a capitalistic society once again.
    So, it appears to me, socialism (misery spread widely) really needs to be completely destroyed through default, and not stealth default (inflation) to get back on track quickly. If investors (which includes banks that are told to buy bonds by their crony socialist leaders such as what we have in Europe) are taught that their is risk even in sovereigns, this all could dealth with quickly but this will all drag on for 5-10 more years because of how the banks want to enslave citizens. Private and public banks must be allowed to go under and face the consequences of their investment decisions. Rogoff and Reinhardt have proved that debt to GDP over 120% will never be repaid. A country can either be manipulated by their leaders and world bankers into paying for their leaders socialistic policies (its citizens bear much responsibility as well) and becoming debt slaves for many decades or they can simply say no, we don’t believe we can pay these back, the govt acted recklessly and you “sophisticated investors” who are so smart should have run your software programs and cut us off from money which has been created out of thin air in a fractional reserve system (or, in the least, made us pay a real interest rate) in a fractional reserve system. You, the bankers specialize in knowing who is a good credit and who isn’t and the rest of the world, especially the responsible countries, will not assist in paying this off, making our citizens debt slaves. I say, please let Greece go and default and let the citizens, socialists, communists, bankers and sovereigns learn their lessons. Default and deflation isn’t as bad as you think. In a few years, it is over. What the bankers want is the credit default swaps to pay off, but they didn’t pay attention to the counter parties which a sophisticated investor must do, so let the free market rein and you take you losses or occupy wall street will be occupy the White House!

  • john edward

    AGREE-AGREE-AGREE !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!-AGREE

  • Anna

    Global Debt Crisis

    The greatest private fraud of human history.
    Who are the great fraudsters who are becoming the murderers of the human kind? How does the economy “illness” threaten Democracy and the freedom of people?

    http://eamb-ydrohoos.blogspot.com/2012/01/global-debt-crisis.html
    ———————————
    By knowing what happened in indebted Greece, where loan sharks created “bubbles” and the current inhuman debt, one can understand the inhuman plan in total …understand where this plan started just to bring all states at the same end …understand how this type of plans are established…

    Authored by PANAGIOTIS TRAIANOU

 

 

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