Business likes to privatise the profits and socialise the losses. All over the globe we the tax payer recently got stuck with a bill for trillions of dollars to bail out banks that were “too big to fail”.
Or were they? One country went against the trend. Iceland. You may recall that Iceland was foolishly exposed and very hard hit by the financial crisis. When the house of cards came down Icelands debtors put pressure on the government to follow the script, and bail them out with public money. But the people of Iceland (causing an international incident in the process) stood up and said no.
What happened next? Iceland let its banks go under:
… 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.
It was a risky decision and it was a bumpy ride:
… The crisis almost sank the country. The krona lost 58 percent of its value by the end of November 2008, inflation spiked to 19 percent in January 2009 and GDP contracted by 7 percent that year. Prime Minister Geir H. Haarde resigned after nationwide protests.
But is has proved to be the right move in the long run:
With the economy projected to grow 3 percent this year, Iceland’s decision to let the banks fail is looking smart — and may prove to be a model for others.
“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. …
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. …
Today, Iceland is recovering. The three new banks had combined profit of $309 million in the first nine months of 2010. GDP grew for the first time in two years in the third quarter, by 1.2 percent, inflation is down to 1.8 percent and the cost of insuring government debt has tumbled 80 percent. Stores in Reykjavik were filled with Christmas shoppers in early December, and bank branches were crowded with customers.
The article quoted spends a lot of time comparing Iceland with the Irish experience. Ireland was also over exposed and indebted, but chose to bail out its banks:
Ireland, which rescued its financial institutions, is on the way to shrinking for a fourth consecutive year.
Banks are not too big to fail at all. And since we seem to have decided not to fix the world’s fundamental financial problems, greed will soon lead us down the same old path to the next implosion. Let’s all remember Iceland when the banks come to us again with their hands out.