Why Iceland President's Left-Wing Critique Is Right

You wouldn't expect much from an article that starts with this deadly lead sentence: "The president of Iceland sits in his study drinking tea from an immaculate china set." 

But Adam Taylor's Business Insider interview with Ólafur Ragnar Grímsson (Iceland's consitutionally weak president) is a pretty good lesson in why the tiny island nation is recovering while the rest of Europe is falling apart: 

A key example of this approach is Iceland's refusal to pump money into failed banks. The decision was controversial at the time, but now looks increasingly wise. "I have never understood the argument — why a private bank or financial fund is somehow better for the well being and future of the economy than the industrial sector, the IT sector, the creative sector, or the manufacturing sector".

There is, of course, another aspect. A tricky situation arose when the U.K. and Holland demanded money for their citizens' depleted Icesave accounts, and Iceland refused. The incident sparked a major diplomatic scuffle, with Iceland refusing to pay out and the U.K. even using "anti-terrorism legislation" against the state.

Grímsson affects modesty in describing his position, but in fact he's overstating the élites' contribution to the recovery. At the height of the crisis, Iceland tried to make all the same Bernankeist mistakes as the other western countries, but it was unable to do so thanks to its marginal position in the global economy. As described by yours truly in this Reason classic:

Iceland’s central bank tried desperately to control the króna’s collapse before giving up. Nevertheless, [Iris] Erlingsdottir is right: The “grownups”—a center-left coalition led by Social Democrat Johanna Sigurdardottir—are back in charge and have done their best to double down on the bad policies of the past, including reducing fish quotas when local fishermen most need to be producing and selling. The government is also, in the face of strong popular opposition, moving toward E.U. membership, which has worked out so beautifully for other troubled European economies.

So what’s causing the recovery? The plain-sight answer is the one nobody will consider. Iceland is coming back specifically because its banks went out of business. That happened in spite of strenuous public efforts, but the removal of the tiny nation’s colossally bloated financial sector turns out not to have eliminated all that much value. 

It bears repeating that banks are not creators of wealth. They are places where you store the surplus value generated by productive enterprise. In very narrow circumstances that surplus value can be loaned out at a profit, but a financial sector is the icing, not the cake. This should be common sense, but apparently it is wisdom so rare it can only be learned in countries small and remote enough to avoid the deadly medicine of the global financial markets. 

Taylor and the president couch their discussion in anti-privatization, pro-regulation good-governmentese, but the reality is that it was withdrawing from the international system of wise-man management that saved the country's economy: 

Ólafur [says] that his problem isn't Europe, but the European and American banking system. He says Iceland's lesson is that "If you want your economy to excel in the 21st century [...] a big banking sector, even a very successful banking sector, is bad news."

"You could even argue that the bigger the banking sector is, the worse the news is for your economy," he adds, later blaming the huge growth of Iceland's banking sector on the prevailing European banking philosophy and incompetent rating agencies.

More Reason coverage of banking

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  • ||

    Government officials claim it will cost $78 million to demolish the Astrodome. Fuckers have no shame.

    http://bit.ly/J7BYI9

  • Pro Libertate||

    Don't we have a whole arm of government capable of blowing stuff up?

  • thirtyandseven||

    Yeah, but congress won't authorize that unless there's enough brown people inside.

    Course, we could always just tell Barack that polls show a majority of Americans support the action, and he'll have the military blow it up whether congress damn well wants to or not.

  • ||

    Obama would only blow it up if it was in a swing state, and had mostly Republicans inside, and a focus group said that the votes gained in swing states outnumbered the votes lost from the public outrage.

  • ||

    Have a Yemani sweet 16, or a Yemani wedding hosted there...

  • Spoonman.||

    And the water-carriers still said that a government-financed Dynamos stadium was a good idea, because suddenly it would make people want to live in the East End.

  • Brett L||

    This from the people who built the Light Fail from Enron Field to Rice Village. Houston has the government it deserves.

  • Spoonman.||

    It doesn't really go by either of those places...

  • Brett L||

    I swear it went all the way to Rice Village from two blocks from the stadium. I haven't been back but once since it was finished and I may have staggered through a lot more of downtown than I thought.

  • Spoonman.||

    It's on the other side of Rice University from Rice Village. Guess you had a good night.

  • Brett L||

    Pretty sure I was drowning myself in that bar in center field while the 'Stros lost.

  • ||

    Hell, its not even as useful as that. The walk from the light rail to the village is very long (made close that walk many a times at Rice) and it's not that close on the other end to the baseball stadium. It's a giant wasteful bag of crap and the new one will be too.

  • ||

    While I oppose spending government money on stadiums I'm going to get much more use out of the Dynamo stadium than the other ones and it cost the city far less. Hell according to them it cost a fraction of the Astrodome's demolishion cost.

  • GW||

    And the county STILL owes thirty million bucks on a stadium they're going to blow up? Only in America.

  • Paul.||

    In Seattle we're still paying off an $82 million debt... let me say again, an $82 million debt on a dome that we demolished over ten years ago.

    And these people want me to trust them with my healthcare.

  • ||

    "Seattle and King County will pay off the bonds used to build and repair the Kingdome in 2016, sixteen years after its demolition."

    It would be funny if it wasn't MY FUCKING MONEY.

  • Pro Libertate||

    Your first error was thinking it was ever your money.

  • Paul.||

    That which is not taken is given.

  • ||

    But everyone knows opposing taxation means you don't care if poor people starve. I don't see what Stadium boondoggles have to do with you not wanting to fork over 45% plus of your earnings to the government.

    Fariness! Justice! Economic Justice Fairness!

  • Paul.||

    Fariness! Justice! Economic Justice Fairness!

    You forgot "social justice", the new buzzword amongst our more erudite libertarians.

  • mad libertarian guy||

    Erudite isn't the first word that comes to mind when thinking of the Bleeding Heart "Libertarians."

  • ||

  • ||

    Fuck you mayor McGinn. Nobody even likes sports.

    $60 car tabs, $ an hour street parking, closing a city revenue gap with parking ticket issuance, so the city can get enough money to fund a fucking sports arena.

  • Paul.||

    And more bike lanes! Don't forget the bike lanes!!1!

  • Paul.||

    You know what else would be funny if it weren't your and my money? It's not gonna be paid off in 2016. They'll pull the money for their new, sure-to-be-within-budget alaska way tunnel, AKA Nickels' Folly, AKA The Big Dig II, The Big Dig comes to Washington.

  • ||

    I'm in terror of how long the Alaskan Way tunnel construction is going to go on. 99 makes my life vastly easier, and they've already fucked it up.

  • Pro Libertate||

    A tunnel to Alaska? That's not it, right?

  • Paul.||

    I live in West Seattle. I'm getting tired of changing my route home every 4.5 days. And this thing is supposed to go on until something like 2085...

  • Brett L||

    Can't they just sell that and Six Flags to Joel Osteen?

  • ||

    Wasn't it one of the 7 modern wonders? I'm sure glad they decided to build that fucking eyesore "Minute Maid Park" for the shitty Astros. And then a brand new shitty stadium for the Texans.

    What a fantastic city.

  • o3||

    re-impose strict glass-steagall restrictions to wit:

    "The term Glass-Steagall Act, however, is most often used to refer to four provisions of the Banking Act of 1933 that limited commercial bank securities activities and affiliations between commercial banks and securities firms."
    >search wiki please

  • Old Mexican||

    Re: O3,

    re-impose strict glass-steagall restrictions[...]


    Considering that Canada did not pass anything like it during the 30s yet her banks were in a much better shape much earlier than those in America - sure, why not GS?

    Yep, we certainly need Glass-Steagall, if at least to give tranquility to the nostalgics locked up in many a psychiatric ward with clear access to the Internet - right, O3?

  • o3||

    like the 08 crash happened sometime bet 1933 to 1997 eh? >rush wouldnt even try that on teh radios

  • #||

    I love how everyone blames this one the repeal of glass steagle without actually explaining how it was relevant. Or even explain away the fact that most of the institutions that failed or got in trouble were not effected by its repeal (ie countrywide, lehman, etc).

  • Soc Indv Sparky||

    Why Iceland President's Left-Wing Critique Is Right

    I see what you did there.

  • Bill||

    Sadly, all the MSM will get out of it is what the Icelandic gov.'t says. So they will report that Iceland got out of trouble due to smart politicians and bureaucrats and no one will be any wiser.

  • Rrabbit||

    Makes sense - other countries bailed out their banks, but the banks then put that money into government bonds, rather than lend it out to any actual investors.

  • Pro Libertate||

    To be fair, nothing grows like government.

  • Paul.||

    Cancer does.

  • Paul.||

    But to be fair there's a treatment for cancer.

  • Pro Libertate||

    Good point. They should invest in government and cancer.

  • Randian||

    They should invest in government and cancer.

    FTFY.

  • rts||

    "If you want your economy to excel in the 21st century [...] a big banking sector, even a very successful banking sector, is bad news."

    I dunno... Canada is doing OK and we have a pretty big (and largely successful) banking sector.

  • ||

    Us Canadians are all hopped up on oil.

    Plus we've always had some, plus a lot of the basics, wood/mining/hydro [dams and BC bud]/fresh water...

    Also the Canadian Housing and Mortgage corp does what it should: keeps people out of homes they cannot afford instead of gaming the system to get them in.

  • ||

    I thought Canada's primary export was hockey fights?

  • Kuze||

    It looks as though the CMHC is close to tapping out its 600 billion limit hence the tightening of the lending rules. Banks are becoming averse to lending to anything that isn't CMHC insured and there's a burgeoning subprime market.

    http://bit.ly/HLmnhq

  • Aresen||

    Actually, CMHC is what makes it possible for banks to lend 90% of the purchase price instead of 75% that they would be otherwise restricted to under the Bank Act.

    And the Federal Government had to throw in big chunks of money to keep CMHC afloat after the housing busts in Western Canada in the early 1980s and the Toronto in 1990.

  • ||

    It bears repeating that banks are not creators of wealth. They are places where you store the surplus value generated by productive enterprise.

    That's as economically ignorant as saying, "It bears repeating that fruit stands by the roadside are not creators of wealth. They are places where you store the surplus value generated by productive enterprise in the orchard."

    Moving money, or goods and services, from those with a low current need for them to those with a high current need and the ability to pay for it, generates value and wealth.

    Now, bailing out failed banks or fruit stands -- not so much so.

    Basic economics -- how does it work?

  • Randian||

    prote, the point is that there are a lot of Cargo Cultists who think that strong banks are a necessary component of a strong economy, rather than a "symptom" or a reflection of how strong the underlying economy is. In other words, like the article said, banks are the "icing", not the cake.

  • ||

    Yes, banks are just one more industry, neither better or worse than, say, hot dog vendors or roof repair companies, though in some countries, like the Cayman Islands or Switzerland, banks are more the cake than the icing.

    That does not excuse the economically ignorant view Cavanaugh was peddling, though, which was the point of my rebuttal.

  • Obese American||

    Iceland is doing "well" by screwing over depositors in its banks. If I could walk away from my obligations, I'd be doing better too.

  • robc||

    Iceland isnt screwing them over, the banks are.

    It is Iceland's responsibility to guarantee the banks.

  • robc||

    It isnt

    typing hard.

  • sarcasmic||

    To be fair, government pretty much tells banks how to run their business.
    There are good business practices that are forbidden, and poor business practices that are mandated.
    So it's not really the banker's fault that they're going out of business, since they're only doing what the bureaucrats tell them to do.

  • Rrabbit||

    Not the banks, but certain deposits. Iceland had signed international treaties on deposit guarantees. For example, the EFTA Surveillance Authority decided that under EEA treaties, Iceland is obliged to guarantee at least the first 20,000 Euro per account. This dispute now has gone to the EFTA Court.

  • Old Mexican||

    Re: Obese American,

    Iceland is doing "well" by screwing over depositors in its banks.


    Instead of screwing over the taxpayers, the barbarians!

  • Drake||

    You can walk away from your obligations, it's called "Bankruptcy." It does carry serious consequences, like nobody ever loaning you money again.

  • Paul.||

    If I could walk away from my obligations, I'd be doing better too.

    President Obama has a school loan program built just for you.

  • KPres||

    "Iceland is doing "well" by screwing over depositors in its banks."

    Hows that?

    Putting your money in a bank is an investment that carries risk. That risk is the reason you get paid interest.

    Nobody got screwed over, their investments went sour.

    When government bails out a bank, they're screwing over taxpayers, because taxpayers never agreed to take on that risk and never saw a dime in interest for their troubles.

  • Trespassers W||

    Deposit insurance, dude.

  • Jerryskids||

    If you want your economy to excel in the 21st century [...] a big banking sector, even a very successful banking sector, is bad news. You could even argue that the bigger the banking sector is, the worse the news is for your economy

    Did he just say what I think he said?

    The problem isn't just that the government pumps money into some businesses and not others - it pumps money into businesses that the marketplace has determined are bad businesses. Punishing success and rewarding failure.

    How much better would the auto bailouts have been for the auto industry if they had given the money to Ford instead of GM and Chrysler?

    Iceland chose the correct response in telling failing banks "You suck - go find a real job."

  • fried wylie||

    Let them eat icing.

  • Paul.||

    :)

  • fried wylie||

    including reducing fish quotas when local fishermen most need to be producing and selling

    What's the livelihood of men compared to the wellbeing of Mother Gaia?

    Otherwise, why would the Obama administration be shoving uneconomical wind and solar down our throats?

  • fried wylie||

    *...be flushing our money down the toilet trying to shove...

  • Paul.||

    You were right the first time, he's shoving wind down our throats...

  • Old Mexican||

    It bears repeating that banks are not creators of wealth.


    The money-printers would like to differ. So would their enablers in government and among the economics-clueless - like Shrikey-shrieky.

  • PantsFan||

    Don't they want to join the Canadian Dollar?

  • Proprietist||

    "In very narrow circumstances that surplus value can be loaned out at a profit, but a financial sector is the icing, not the cake."

    If the economy is a cake, government is the fat kid licking the batter.

    Regardless of actual importance, the only parts of the economy the government will "fix" will be the parts that fill their bipartisan pockets.

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