Letting Banks Fail: It Worked for Iceland

#Money

Thu, Jan 30th, 2014 21:00 by capnasty NEWS

According to the Financial Post, during the financial crisis of 2008, Iceland opted to let its big banks fail rather than provide them with stimulus. The result, while "Iceland’s efforts to resurrect its economy have been far from smooth," the unemployment rate is heading towards an incredibly low 2% (4% right now) from 9.3% back in 2010. This part is particularly telling:

The island’s sudden economic meltdown in October 2008 made international headlines as a debt-fueled banking boom ended in a matter of weeks when funding markets froze. Policy makers overseeing the $14 billion economy refused to back the banks, which subsequently defaulted on $85 billion. The government’s decision to protect state finances left it with the means to continue social support programs that shielded Icelanders from penury during the worst financial crisis in six decades.

Of creditor claims against the banks, Gunnlaugsson says “this is not public debt and never will be.” He says his main goal while in office is “to rebuild the Icelandic welfare state.”

Though bank creditors, many of them hedge funds, are still trying to recoup their money, Iceland’s approach has won praise from the International Monetary Fund and from numerous economists, including Nobel Laureate Paul Krugman.

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