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Posts Tagged ‘Iceland’

Iceland is a tiny little country with just 338,000 people (about the population of Santa Ana, CA), but that doesn’t mean it can’t teach us lessons about public policy.

I wrote about the nation’s approach to fisheries in 2016, and explained that the property rights-based system is the best way of protecting fish stocks from over-harvesting.

And in 2013, I wrote about how modest spending restraint was helping to solve fiscal problems created by the financial crisis.

Today, I want to further explore Iceland’s fiscal policy, largely because of this remarkable chart that accompanied a Bloomberg report on the country’s budget strategy.

As you can see, debt skyrocketed during the financial crisis and has since plummeted at a very rapid rate.

This shows debt reduction is possible. Indeed, there can be huge reductions in a very short period of time.

So there may be hope for nations that are in the midst of fiscal crisis (such as Greece), nations that are about to suffer fiscal crisis (Italy is a prime candidate), and nations that will suffer a crisis if there isn’t reform (most developed nations, including the United States).

But what are the specific policy lessons?

Here are some excerpts from the accompanying article, which basically tells us that the government is focused on spending restraint.

Iceland will continue to reduce public debt and sustain a budget surplus even as it lowers taxes in the next five years, Finance Minister Bjarni Benediktsson said. The plan is part of a financial road map… The balancing act between austerity and the proposed fiscal concessions means less room for the government to…step up other spending… “We will need to impose certain measures of restriction,” Benediktsson said. The government may have to seek cost savings of as much as 5 billion kronur ($42 million), he said. …The financial plan projects a decrease in taxes as well as the Treasury’s debt levels and interest burden. It also expects the bank tax to be lowered in four steps.

But the article didn’t tell us why Iceland’s debt fell so quickly.

So I dug into the IMF’s World Economic Outlook database and crunched some numbers. I specifically wanted to find out why debt fell, both before and after the 2008 crisis.

And I focused on three sets of numbers.

  • Annual inflation rate
  • Annual growth of government spending burden
  • Annual increase in nominal gross domestic product

Here are those numbers, both for the years leading up to the 2008 crisis, as well as what happened starting in 2009.

For both the 2001-07 period and 2009-19 period, Iceland followed my Golden Rule. Government spending (the orange bars) grew slower than the economy (the grey bars).

So it shouldn’t be a surprise that debt fell during both eras.

But debt fell much faster starting in 2009 for the simple reason that the gap between spending growth and GDP growth was very significant over the past 10 years. This is the reason for the big reduction in debt.

And this spending restraint also generated some data that’s even more important – the burden of government spending has dropped from more than 48 percent of economic output in 2009 to less than 41 percent of GDP this year.

During the 2001-2007 period, by contrast, Iceland only barely satisfied the Golden Rule. Indeed, one could argue that spending was growing much too fast since the economy was in an unsustainable boom (Ireland was similarly profligate during the same period).

P.S. I recently shared an excellent IMF study showing three examples of big debt reductions in the pre-World War I era.

P.P.S. Unsurprisingly, the OECD has been pushing for higher taxes in Iceland.

P.P.P.S. If you want to read about all of Iceland’s pro-market economic, Prof. Hannes Gissurarson has a must-read article in Econ Journal Watch.

P.P.P.P.S. Voters in Iceland had an opportunity to vote on bank bailouts and 93 percent said no.

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I’ve previously argued that private property rights are a vital component of a pro-environment agenda.

Interestingly, the Washington Post sort of agrees. At least with regards to fisheries. In a recent editorial, it acknowledged that the current communal system doesn’t work.

The world’s fisheries, which feed billions of people, are in serious decline. The authors of a study released Monday in the Proceedings of the National Academy of Sciences examined 4,713 fisheries, accounting for 78 percent of the world’s annual catch, and found that only a third were in decent biological shape.

The editorial then points out that there’s an incentive to over-harvest because the oceans are communal property, which creates a “tragedy-of-the-commons” scenario.

…while the fishing industry as a whole has an interest in sustaining the fisheries that provide it profits and feed the world, individual fishermen have an incentive to take as much as they can as quickly as they can. Over time, they degrade the fisheries on which they rely, but if they want to stay in business, they have little choice.

And the editorial concludes that giving fishermen the property right to a “catch share” would create better incentives.

…governments have extremely effective policy options to eliminate this tragedy of the commons. …governments must give fishermen a stake in the overall health of their fisheries. …require fishermen to hold rights to catch a certain amount of seafood in a certain fishery, which allows governments to manage the total haul and reduces the frenzied competition to scoop up as much as possible as quickly as possible. Ideally, these “catch shares” could be bought and sold so that rights would end up with those who could fish most efficiently.

Some of the language in the editorial rubs me the wrong way, such as “require fishermen” and “allows governments to manage,” but the bottom line is that the new system would be much more akin to a genuine market based on property rights.

To understand, consider the following example. Imagine there’s a communally owned pasture and a bunch of sheep owners. Would there be any incentive for the individual shepherds to properly conserve and manage the pasture? Not really, because any grass that wasn’t eaten by their sheep would be eaten by another shepherd’s sheep. So you wind up with a system where all the shepherds have an incentive to have their sheep consume as much grass as possible as quickly as possible.

That doesn’t end well.

But what if the pasture was divided up so that each shepherd had a plot of land, along with the right to buy and sell that land? With that system, the incentive to practice good husbandry would radically change.

And that’s basically what happens when you create a property rights-based fisheries system.

And the Washington Post believes this kind of approach could be enormously beneficial.

If applied globally, modern management plans could rehabilitate the median fishery in less than a decade. By 2050, nearly every fishery on the planet would be healthy. The resulting benefits would be astonishing. Relative to business as usual, the refreshed catch would grow by an annual 16 million metric tons, and seafood stocks would rise by 619 million metric tons. Fishermen would see an annual $53 billion rise in profit, a jump of 64 percent. The world’s fisheries could feed more people, and the fishing industry could boom, too.

Wow, this is so effusive that it sounds like me describing the benefits of a flat tax.

But just like I rely on real-world evidence for my praise of the flat tax, there’s also real-world evidence for successful fisheries based on property rights.

Consider, for instance, the experience of New Zealand.

By the early 1980s, with dwindling inshore stocks and too many boats, the New Zealand fishing industry and the government realised that a new fisheries management system was needed. Measures such as moratoriums and controlled fisheries failed to work. The common warning that ‘too many boats are chasing too few fish’ was rephrased by one fisherman as, ‘too many boats chasing no fish’. Radical thinking emerged. …In October 1986, after two years of consultation and planning, the Quota Management System was introduced, with widespread industry support. …Under the quota system a sustainable total catch or harvest of fish was set. Individuals or companies were allocated the right to catch certain quantities of particular species. Quotas became like other forms of property – they could be leased, bought, sold or transferred.

And how has this system worked?

It’s been a big success.

New Zealand’s Quota Management System has been viewed internationally as successful. This is particularly in comparison with many of the world’s fisheries… New Zealand has (so far) largely avoided the significant stock collapses that have occurred in fisheries overseas. In the early 2000s the Ministry of Fisheries had records on the status of 60–70% of stocks. Of these, about 80% were at or near target levels for sustainable harvest, and the total allowable catch for some fish had even increased.

The Economist, meanwhile, has written about Iceland’s system.

Central to its policy are the individual transferable quotas given to each fishing boat for each species on the basis of her average catch of that fish over a three-year period. …Subject to certain conditions, quotas can be traded among boats. Bycatch must not be discarded. Instead it must be landed and recorded as part of that boat’s quota. If she has exhausted her quota, she must buy one from another boat… All quota changes, catches and landings are posted on the internet, enabling everybody to see what is going on. The idea is to let fishermen be guided by the market. …Iceland no longer suffers from overcapacity, and the catch per boat is increasing. …Iceland offers lessons for other countries. The essential elements of its policies are to give fishermen rights that offer a reasonable expectation of profitable long-term fishing by encouraging the conservation of stocks. The system is clear, open and fairly simple, and it is well policed. It thus enjoys the respect of fishermen.

And the contrast to the command-and-control system used by the European Union is dramatic.

This contrasts with the common fisheries policy of the EU… For years, the union has simultaneously discouraged and promoted fishing, even as stocks have declined. Overfishing has intensified and the overcapacity of the fleet a few years ago rose to the point where the number of boats was almost twice the number needed for a sustainable harvest. The EU has offered inducements to those who gave up fishing even as it provided subsidies… The EU’s fisheries policy has long been notorious for its destructiveness, epitomised by the practice it either mandates or encourages of chucking back dead fish that are not big enough or not valuable enough, or just the wrong sort. …No wonder the EU’s stocks are 88% overfished, as the European Commission itself now admits. …No minister is present to represent the taxpayer, the consumer or the environment, let alone the fish.

The key, everywhere in the world, is a system of property rights.

Europe could surely learn from Iceland, but how widely could Iceland’s policies be copied? …The solution for Europe, and for other places, lies in a policy with Icelandic features: transferable quotas for all commercial species… Property rights are nearly always crucial in this. The tragedy of the sea is the tragedy of the commons, which is that anyone with access to a common resource has an interest in over-exploiting it because if he does not, someone else will. …Most fish…live fairly close to land, which is where they can, if the political determination exists, be assigned to the ownership of people with an interest in both exploiting and preserving them for a very long time, if not eternity. That this is so has been shown by Christopher Costello, an economist at the University of California, Santa Barbara, and his colleagues, in a study of over 11,000 fisheries. In the 121 with ownership-share systems, he reported in Science last September, the rates of collapse were significantly lower than in the others.

Having “rates of collapse” suggests that the property rights-based systems don’t always work perfectly. But that fact that those rates are “significantly lower” also indicates that they are far more effective than communal fisheries in preserving fish stocks.

P.S. There’s a worrisome analogy between communal fisheries and the welfare state since both involve a tragedy of the commons. In the case of the welfare state, when too many people decide to rely on the “communal property” of government for their existence, this creates a “tipping point” because productive people at some point are either unable or unwilling to continue pulling the wagon.

P.P.S. This is a lesson that the Pilgrims learned very quickly.

P.P.P.S. Unfortunately, larger societies have a tendency to develop “goldfish governments.”

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Folks on the left sometimes act as if the Nordic nations somehow prove that big government isn’t an impediment to prosperity.

As I’ve pointed out before, they obviously don’t spend much time looking at the data.

So let’s give them a reminder. Here are the rankings from Economic Freedom of the World. I’ve inserted red arrows to draw attention to the Nordic nations. As you can see, every single one of them is in the top quartile, meaning that they aren’t big-government jurisdictions by world standards.

Moreover, Finland ranks above the United States. Denmark is higher than Estonia, which is often cited a free-market success story. And all of them rank ahead of Slovakia, which also is known for pro-growth reforms.

To be sure, this doesn’t mean the Nordic nations are libertarian paradises. Far from it.

Government is far too big in those countries, just as it is far too big in the United States, Switzerland, New Zealand, Canada, and other nations in the top quartile.

Which is tragic since the burden of government spending in North America and Western Europe used to be just a fraction of current levels – even in nations such as Sweden.

The way I’ve described the Nordic nations is that they have bloated and costly welfare states but compensate for that bad policy by being very free market in other policy areas.

But you don’t need to believe me. Nima Sanandaji has just written an excellent new monograph for the Institute of Economic Affairs in London. Entitled Scandinavian Unexceptionalism: Culture, Markets and the Failure of Third-Way Socialism, Nima’s work explains how the Nordic nations became rich during an era of small government and free markets, how they then veered in the wrong direction, but are now trying to restore more economic freedom.

Here are some key excerpts, starting with some much-needed economic history.

Scandinavia’s success story predated the welfare state. …As late as 1960, tax revenues in the Nordic nations ranged between 25 per cent of GDP in Denmark to 32 per cent in Norway – similar to other developed countries. …Scandinavia’s more equal societies also developed well before the welfare states expanded. Income inequality reduced dramatically during the last three decades of the 19th century and during the first half of the 20th century. Indeed, most of the shift towards greater equality happened before the introduction of a large public sector and high taxes. …The phenomenal national income growth in the Nordic nations occurred before the rise of large welfare states. The rise in living standards was made possible when cultures based on social cohesion, high levels of trust and strong work ethics were combined with free markets and low taxes….the Nordic success story reinforces the idea that business-friendly and small-government-oriented policies can promote growth.

Here’s a chart from the book showing remarkable growth for Sweden and Denmark in the pre-welfare state era.

Nima has extra details about his home country of Sweden.

In the hundred years following the market liberalisation of the late 19th century and the onset of industrialisation, Sweden experienced phenomenal economic growth (Maddison 1982). Famous Swedish companies such as IKEA, Volvo, Tetra Pak, H&M, Ericsson and Alfa Laval were all founded during this period, and were aided by business-friendly economic policies and low taxes.

Unfortunately, Nordic nations veered to the left in the late 1960s and early 1970s. And, not surprisingly, that’s when growth began to deteriorate.

The third-way radical social democratic era in Scandinavia, much admired by the left, only lasted from the early 1970s to the early 1990s. The rate of business formation during the third-way era was dreadful.
Again, he has additional details about Sweden.
Sweden’s wealth creation slowed down following the transition to a high tax burden and a large public sector. …As late as 1975 Sweden was ranked as the 4th richest nation in the world according to OECD measures….the policy shift that occurred dramatically slowed down the growth rate. Sweden dropped to 13th place in the mid 1990s. …It is interesting that the left rarely discusses this calamitous Swedish growth performance from 1970 to 2000.

The good news is that Nordic nations have begun to shift back toward market-oriented policies. Some of them have reduced the burden of government spending. All of them have lowered tax rates, particularly on business and investment income. And there have even been some welfare reforms.

…there has been a tentative return to free markets. In education in Sweden, parental choice has been promoted. There has also been reform to pensions systems, sickness benefits and labour market regulations

But there’s no question that the welfare state and its concomitant tax burden are still the biggest problem in the region. Which  is why it is critical that Nordic nations maintain pro-market policies on regulation, trade, monetary policy, rule of law and property rights.

Scandinavian countries have compensated for a large public sector by increasing economic liberty in other areas. During recent decades, Nordic nations have implemented major market liberalisations to compensate for the growth-inhibiting effects of taxes and labour market policies.

Let’s close with what I consider to be the strongest evidence from Nima’s publication. He shows that Scandinavians who emigrated to America are considerably richer than their counterparts who stayed put.

Median incomes of Scandinavian descendants are 20 per cent higher than average US incomes. It is true that poverty rates in Scandinavian countries are lower than in the US. However, the poverty rate among descendants of Nordic immigrants in the US today is half the average poverty rate of Americans – this has been a consistent finding for decades. In fact, Scandinavian Americans have lower poverty rates than Scandinavian citizens who have not emigrated. …the median household income in the United States is $51,914. This can be compared with a median household income of $61,920 for Danish Americans, $59,379 for Finnish-Americans, $60,935 for Norwegian Americans and $61,549 for Swedish Americans. There is also a group identifying themselves simply as ‘Scandinavian Americans’ in the US Census. The median household income for this group is even higher at $66,219. …Danish Americans have a contribution to GDP per capita 37 per cent higher than Danes still living in Denmark; Swedish Americans contribute 39 percent more to GDP per capita than Swedes living in Sweden; and Finnish Americans contribute 47 per cent more than Finns living in Finland.

In other words, when you do apples to apples comparisons, either of peoples or nations, you find that smaller government and free markets lead to more prosperity.

That’s the real lesson from the Nordic nations.

P.S. Just in case readers think I’m being too favorable to the Nordic nations, rest assured that I’m very critical of the bad policies in these nations.

Just look at what I’ve written, for instance, about Sweden’s healthcare system or Denmark’s dependency problem.

But I will give praise when any nation, from any part of the world, takes steps in the right direction.

And I do distinguish between the big-government/free-market systems you find in Nordic nations and the big-government/crony-intervention systems you find in countries like France and Greece.

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Being a glass-half-full kind of guy, I look for kernels of good news when examining economic policy around the world. I once even managed to find something to praise about French tax policy. And I can assure you that’s not a very easy task.

I particularly try to find something positive to highlight when I’m a visitor. While in the Faroe Islands two days ago, for instance, I wrote about that jurisdiction’s new system of personal retirement accounts.

And now that I’m in Iceland, I want to focus on spending restraint.

As you can see from this chart, lawmakers in this island nation have done a reasonably good job of satisfying Mitchell Golden Rule over the past couple of years. Nominal economic output has been growing by 6.1 percent annually, while government spending has risen by an average of 2.8 percent per year.

Iceland Spending Restraint

If Iceland continues to enjoy this level of growth and can maintain this modest degree of fiscal discipline, the burden of government spending will soon drop below 40 percent of GDP.

As I’ve noted before, fiscal progress can occur very rapidly if spending is curtailed. Consider what’s happened, for example, over the past two years in America. Total federal spending didn’t grow in 2011 or 2012, and that de facto two-year spending freeze has led to a big reduction in the size of the public sector relative to GDP.

And because policymakers addressed the underlying disease of excessive spending, it’s no surprise that the symptom of red ink became much less of a problem with the deficit falling by almost 50 percent in those two years.

And nations such as New Zealand and Canada also have enjoyed quick benefits when limiting the growth of government.

Now let’s take a glass-half-empty look at Icelandic fiscal policy.

First, Iceland isn’t really moving in the right direction. Policy makers are merely undoing the damage that occurred in the latter part of last decade. As recently as 2006, the burden of government spending was less than 42 percent of GDP. So the current period of fiscal discipline is like going on a diet after spending several years at an all-you-can-eat dessert shop.

Second, three years of spending restraint could be a statistical blip rather than a long-run trend, especially since the 2014 numbers from the IMF are an estimate and the 2012 and 2013 numbers aren’t even finalized.

What Iceland needs is some sort of Swiss-style spending cap to impose long-run limits on the growth of government spending. As you can see from this second chart, Switzerland’s “debt brake” has produced more than ten years of spending restraint. Government generally has been growing slower than the private sector, which means that burden of government spending has been falling in Switzerland while other European nations are moving in the wrong direction.

Swiss Debt Brake

By the way, it’s not just Iceland that would benefit from this type of spending cap. I explained last year that America would never have experienced trillion-dollar deficits if we had something similar to the Swiss debt brake.

Though it’s important not to overstate the benefits of this policy. A Swiss-type spending cap presumably wouldn’t have stopped the Fed’s easy-money policy. Nor would it have prevented Fannie-Mae and Freddie Mac from subsidizing a housing bubble. So we presumably still would have suffered a financial crisis.

But that’s not an argument against a spending cap. We lock our doors and latch our windows even though we realize that determined crooks can still break in. But at least we want to make our homes a less inviting target. Likewise, a spending cap doesn’t preclude all bad policies. But at least it makes it harder for politicians to increase spending.

The ultimate challenge, of course, is figuring out how to convince politicians to tie their own hands. The academic research suggests that spending caps need to be well designed if we want to limit the greed of the political class.

Iceland has made some progress, but Switzerland at this point is a better role model because the debt brake has been very durable.

P.S. If we’re going to copy Switzerland, we also should take a close look at their tax laws. Switzerland has the best ranking in the Tax Oppression Index, while the United States languishes in the bottom half of nations measured.

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Are there any fact checkers at the New York Times?

Since they’ve allowed some glaring mistakes by Paul Krugman (see here and here), I guess the answer is no.

But some mistakes are worse than others.

Consider a recent column by David Stuckler of Oxford and Sanjay Basu of Stanford. Entitled “How Austerity Kills,” it argues that budget cuts are causing needless deaths.

Here’s an excerpt that caught my eye.

Countries that slashed health and social protection budgets, like Greece, Italy and Spain, have seen starkly worse health outcomes than nations like Germany, Iceland and Sweden, which maintained their social safety nets and opted for stimulus over austerity.

The reason this grabbed my attention is that it was only 10 days ago that I posted some data from Professor Gurdgiev in Ireland showing that Sweden and Germany were among the tiny group of European nations that actually had reduced the burden of government spending.

Greece, Italy, and Spain, by contrast, are among those that increased the size of the public sector. So the argument presented in the New York Times is completely wrong. Indeed, it’s 100 percent wrong because Iceland (which Professor Gurdgiev didn’t measure since it’s not in the European Union) also has smaller government today than it did in the pre-crisis period.

But that’s just part of the problem with the Stuckler-Basu column. They want us to believe that “slashed” budgets and inadequate spending have caused “worse health outcomes” in nations such as Greece, Italy, and Spain, particularly when compared to Germany, Iceland, and Spain.

But if government spending is the key to good health, how do they explain away this OECD data, which shows that government is actually bigger in the three supposed “austerity” nations than it is in the three so-called “stimulus” countries.

NYT Austerity-Stimulus

Once again, Stuckler and Basu got caught with their pants down, making an argument that is contrary to easily retrievable facts.

But I guess this is business-as-usual at the New York Times. After all, this is the newspaper that’s been caught over and over again engaging in sloppy and/or inaccurate journalism.

Oh, and if you want to know why the Stuckler-Basu column is wrong about whether smaller government causes higher death rates, just click here.

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I like to think I despise politicians more than 99.9 percent of the population. Even in my kindest moments, I see them as occasionally well-intentioned souls who are easily corrupted. Most of the time, they are a plague on society, as this cartoon illustrates.

So you might think I’m in favor of throwing them in prison on the slightest pretext. That’s surely an appealing thought, but one of the main traits of libertarianism is a belief in the rule of law. Arbitrary arrests, trumped-up charges, and unjustified imprisonments should not exist in a civilized society (though I’m ashamed to admit that such things are happening with increasing frequency in the United States).

I raise this topic because of a story I saw in the EU Observer. The former Prime Minister of Iceland is on trial, but as far as I can tell, his only crime is to have been in charge when that nation’s financial bubble expanded and popped. Here are some details from the story.

Iceland’s former Prime Minister Geir Haarde on Monday (5 March) became the world’s first leader to be put on trial on charges of negligence over the 2008 financial crisis. Haarde, who was a premier from 2006 to 2009, is being accused of “gross negligence” in failing to prevent the collapse of Iceland’s top three banks – Glitnir, Kaupthing and Landsbanki – all heavily involved in risky investments on the US real estate market. One of the main architects of Iceland’s transformation from a fishing nation into a financial services hub, Haarde is also accused of failing to control the country’s fast-growing banks and of having withheld information indicating the country was heading for financial disaster. He faces a sentence of up to two years in prison if found guilty. “None of us realised at the time that there was something fishy within the banking system itself, as now appears to have been the case,” Haarde told the Reykjavik court on Monday. He denied all charges and said that “only in hindsight is it evident that not everything was as it should have been.”

So what crime did he commit? If economic mismanagement and/or bad timing are crimes, can we make a citizen’s arrest of Obama? Of the entire Congress (other than Ron Paul and a small handful of compatriots)?

It is a good idea to hold politicians accountable for their actions, of course, but isn’t that what elections are for?

The bottom line is that politicians are despicable creatures and part of me wants to throw most of them in jail for the things they do to reduce freedom and undermine prosperity, but after-the-fact trials are not right unless real evidence exists of a law actually being broken.

So this is one of those cases where I’m conflicted. My emotions lead me one way, but I can’t overcome my belief in the rule of law. I don’t know if Iceland uses jury trials, but I’d be a not-guilty vote unless somebody showed evidence of genuine criminal behavior on the part of the former Prime Minister.

If you enjoy pondering this type of moral dilemma, here are some previous posts dealing with rather thorny topics:

o Vigilante justice

o Brutal tax collection tactics

o Child molestation

o Sharia law

o Healthcare

o Incest

o Speed traps

o Jury nullification, and

o Vigilante justice (again).

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An incredible 93 percent of voters in Iceland voted against financing British and Dutch bank bailouts. The politicians in England and the Netherlands argued that they were bailing out local subsidiaries of an Icelandic bank, so Iceland’s taxpayers should pick up the tab, but those branches was operating under the rules of the European Economic Area. More important, as Hannes Gissurason explains in the Wall Street Journal, endless bailouts encourage reckless behavior. It’s time someone took a stand, so give a cheer  for Iceland’s voters(they don’t deserve three cheers since it is easy to reject bailouts for foreign depositors and this is far from the right way to reduce government guarantees):

Icelanders sent a resounding message to the rest of the world: We are not paying the debts of reckless financiers. While we are few and powerless, we refuse to be bullied by our European neighbors. Some 93% said “No” to a recent deal negotiated by their government with its British and Dutch counterparts; only 7% voted for it. The deal concerned the so-called Icesave accounts that an Icelandic bank, Landsbanki, operated from 2006 in the U.K. and later also in the Netherlands. When the Landsbanki collapsed in October 2008, the British and the Dutch governments rushed in to pay depositors in their respective countries the amount insured under EEA (European Economic Area) regulations. They then demanded reimbursement from the Icelandic government, which reluctantly agreed to pay, against the wish of the great majority of Icelanders. The Icelanders argued that there was no legally binding government guarantee of the deposits. The Icelandic government had fully complied with EEA regulations and set up a Depositors’ and Investors’ Guarantee Fund. If the resources of that fund were not sufficient to meet its obligations (which was almost certainly the case), then the Icelandic government was not legally bound to step in with additional resources. Thus the British and the Dutch governments had no authority to create new obligations on the part of the Icelandic government by paying their nations’ depositors. …The Icelandic government was forced to sign the deal by not-so-veiled threats of financial isolation and by the use of the IMF as a bounty collector, as the Icelanders put it, for the British and the Dutch: The IMF refused, in effect, to render any assistance to the beleaguered Icelanders unless they signed the deal. …There is however a more general point: If you reward recklessness, you will fill the world with reckless people. Why should any government accept the “Too Big to Fail” argument about banks? Why should depositors be able to shift the risk they take over to the public? In the case of Icesave, the British and Dutch governments chose to bail out their fellow countrymen for their own reasons, with an eye toward stemming a panic within their own banking system. This they were free to do, but it wasn’t done to benefit Iceland or its banks, and Icelanders are right to question whether they should have to pay for decisions made in Amsterdam and London. This in turn raises the broader question implicated in all the bailouts around the world during the panic that started in 2008: Should taxpayers have to cover the losses of reckless bankers, and their customers, while not sharing but indirectly in their possible profits? For their part, the Icelanders have answered: No.

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