Let banks fail: Iceland’s plan looks to be working
business.financialpost.com
business.financialpost.com
For each bank X (Glitnir, Kaupthing, Landsbanki), there government created their own new X. The following was by force brought into each new X:
* Regular loans
* Checking accounts
* Credit cards
* e.t.c.
On the other hand, a lot of things were left in the falling banks, including international branches, investment accounts (i.e. accounts with interests related to stock performance) and more.
These selective operations of course caused a international controversy (Icesave dispute, e.t.c.), but if the government had let all the banks fail without these transfers - the damage to our economy would have been much greater.
There was a crash, and the catastrophe was faced by putting the banks into receivership. The alternative was a public bailout, and is only preferable for people who make their incomes by investing in undercapitalized banks.
To pick up the Europe, Iceland would have to lower their national debt, among other things. However, that's not an restriction to join the EU.
If you are referring to the Icesave dispute, then Iceland has been cleared by the EFTA court: http://en.wikipedia.org/wiki/Icesave_dispute#EFTA_Court_clea...
In fact, the ISK/USD has gone from 7.25kr/USD (1981) up to 97.5kr/USD (2001), down to 62.7kr/USD (2005) and is now at 115kr/USD. So yes, half it's value relative to 2005.
However, this probably paint an overly pretty picture, because the currency is essentially fixed by the central bank and protected with restrictive regulations. For example, if I want to buy USD, I have to show the bank an airline ticket and there's a limit to how much I can buy (< 6.000$ )
I should have put things in a more nuanced fashion.
But the point is that there was no "let the debts fall on the floor, start afresh" action.
And yes, a lot of international stuff was left hanging but as other posters have mentioned, the UK and other central banks stepped in for a lot of consumer-level deposits.
Some portion of speculators were left hanging by the US response to the crisis too. Wow!
My main point is there was many differences in detail but no really fundamental difference between the US response to the crisis and the Icelandic one. Both supported their banks in the main because they had, at least to maintain their existing money-economy.
Part of this is that anyone on Facebook or similar sites is going to see a steady stream of factoids about how Iceland wasn't "fooled by the bankers", I'm responding to such rot.
Also, all the state created entities were eventually returned to private hands, pretty much the same private hands.
What Iceland did is subtly different. It lets foreign banks to fail, to bear the consequences of their own risky and stupid investments, and refused to tax its own people to cover foreign bankers loses.
Russians do even "better", they just says to its own folks "sorry, your money is gone" (what can you do?). Sometimes they bother to invent excuses for foreign investors, such as "tax returns" or "market cobditions", but that's very uncommon event. Usually your money just gone and people who did it are "clever guys".)
Notice also how gun ownership indirectly restricts a corrupted government from just plainly robbing it's citizens and promt it to invent some more complicated, less efficient, slow schemes.)
So, nothing to see here.
I recently saw an ad by AIG. It's actually sickening. This company failed. Their assets should have been taken over by good insurance companies who managed their risks properly and did not engage in speculative instruments.
By rewarding bad actors like AIG, moral hazard has been introduced into the markets. Anybody who says they support free markets and capitalism must surely agree that AIG should have been allowed to fail. Yes, it would have caused chaos but that's why lawyers and bankruptcy courts exists.
With politicians picking the winners and losers, it's no wonder lobbying is such a popular business.
GM should have been allowed to go into bankruptcy (given the Feds wanted to kill Buick, the best seller for GM in China) and dig out themselves.
[edit] although Iceland's bank and AIG are totally different scenarios
Also, large insurance companies are incredibly complex, and take a very long time to build up. It would be very silly to let something like that go under for short-sighted reasons.
I agree. AIG shouldn't have been so short-sighted. But since they were, they deserve to fail like every other business who doesn't adequately plan for the future.
Oh wait.
Not when it means keeping the ill-handled, tax payer killing investment company. It failed and we did a massive disservice to the tax payers by keeping it open.
> What Iceland did is subtly different. It lets foreign
> banks to fail, to bear the consequences of their own
> risky and stupid investments, and refused to tax its own
> people to cover foreign bankers loses.
Hundreds of thousands of personal depositors across Europe saw their money go poof in Icelandic banks, and their local governments had to pick up the bill. If you are a tax payer in the UK, for example, you got a gigantic FU from the Icelandic government who said "nah, we're not going to bail out our banks, you guys should instead".
You can start with: http://en.wikipedia.org/wiki/2008–11_Icelandic_financial_cri...
You are Engla, the mother of little Johnny. One day, at Johnny's school shows up a little girl called Bjork. Bjork seems to come from a nice family, and you like her Mom, Icelandi.
One day Johnny comes home from school and says Bjork is running some kind of saving scheme, and can he put his pocket money in it? You remember some of the older kids at school doing something similar one time, so you say sure, because besides, Icelandi seems like a nice lady, and you're sure she's got her eye on it.
Johnny gives a bit of his pocket money to Bjork every month, and Bjork's little saving scheme seems to be going really well. Bjork seems a little better dressed these days, and Icelandi is driving a new car. Icelandi is always prattling on at the PTA about how clever little Bjork is.
One day, Johnny comes home in tears. Apparently Bjork showed up at school and said she'd lost track of her accounts, and she no longer had any money to give him. You ring up Icelandi, furious, and ask her to refund little Johnny's money.
"No no", says she, "I think you'll find it's all on Bjork, and not my responsibility". You note she still has her shiny car. Later that day, you find out Icelandi completely refunded Thor, Bjork's little brother, for all the money he had lost, but every other child at school also lost all their money.
Icelandi is hailed on the internet as some kind of popular hero.
Edit: How is that fair to the kids who weren't involved and now have less money for lunch?
Or perhaps the people investing in the Icelandic banks were not investing? Was this some sort of special investment where you get a better rate than the regional banks without any sort of risk?
When the entire game is rigged, and you're hoping to make a few quid out the side, you're probably going to get totally screwed somewhere, at some point. It totally sucks, I agree, but are you surprised that if someone could insulate themselves they would?
Also there have been consequences for Iceland, particularly in terms of trust, and there won't be a lot of foreign investment in their financial structure anytime soon.
Yes, in fact, that's pretty much it. The infamous Icesave accounts were savings accounts, not investments in the way you'd normally think of them. They were savings accounts that paid higher interest rates than just about anyone else in town (about 6% in the UK), but they still had the equivalent of FDIC protections (for the American readers out there).
The problem is that the Icelandic equivalent to the FDIC had nowhere near enough money to actually pay back all the guaranteed deposits that were lost, so they said, "We'll pay the Icelanders back first and then....hey look! A squirrel!"
The UK and the Netherlands stepped in to cover the losses of their own citizens, but they also took Iceland to the European Court for failing to honor the required guarantees. The importance was somewhat lessened as the assets of the failed Landsbanki bank that had offered these accounts could cover quite a lot of the debt owed to the UK and the Dutch, but yeah, Iceland did sort of screw them. Not that they had much choice, but there you go.
Seems sort of relevant to an analogy about international finance around this time since the economies are so interconnected.
Very American though to insist that the banking crisis was at its heart an American crisis.
The crisis was not 'American' in any way, it was international, as is finance. If one group monkeys with the system it causes issues everywhere (even worse if it is a concerted effort by multiple groups). This is especially true if 'trust' in the system is shot to hell which is what derivatives are built and traded upon.
The parent comment offered a simplifying model, that explained fairly clearly that the government Iceland treated classes of bank creditors(i.e. depositors) differently, and thus it was not fully correct to say either that they were bailed out, or they were let to fail. It all depended on where you sat.
Your comment offered no further elucidation, no further relevant information and strained the analogy past the breaking point.
Credit is built on trust (credo = I believe); derivatives are built on contracts.
It sounded like you were attempting to imply that there was ignorance of finance being international (or so it seemed... I could be wrong there) and I was pointing out that was not true.
Also contracts and trust are not opposing ideas nor do they address the same aspect of a thing. I'd venture to say that the entire market is (at least to some extent) based on 'trust' that it is not being heavily gamed and information is not being outright falsified.
Edited: For clarity!
In real life they were not.
It's important to note that Icelandi didn't refund Thor out of her own (Icelandi's) own pocket. Instead, she took the money to reimburse Thor from what remained of the pool of money that Bjork had collected from everyone.
In effect, Thor was reimbursed in full at everyone else's expense.
If you look at a graph of Iceland's GDP, you can see a gently upwardly-curving trend from 1960 thru today, with a massive, abberrant spike sticking up from the trendline from 2004-2008. That's how Icelandi bought her shiny new car.
But really... If bailing out all the foreign investors with the Icelandic public's money (who by and large didn't court the foreign investors in the first place) is the other option... It seems sort of obvious what a country that cares about, or pretends to care about, it's public at large (rather than just its banking elite and financial industry in general) would do.
Not saying it's 'right' or 'wrong' really, but when people invested large amounts of money overseas (into Iceland from wherever) they were gambling and hoping for a gain they couldn't get at home. Sometimes you get burned when you take risks. Sometimes you don't.
People saved money with Icelandic banks that had opened branches in the UK and the Netherlands. We're not talking about investors - we're talking about depositors, who were supposed to have been protected by a deposit guarantee scheme in the banks' home country.
Iceland protecting their public (at the expense of their financial industry) and actually prosecuting (some) of those at fault seems a damn sight better than just having everyone pay out the nose (which happened anyway) and letting gamblers get off with no risk.
Weren't many of those branches of Icelandic banks seized/nationalized/prevented from repatriating any capital to Iceland all over Europe ?
oh, and as others have mentioned, you also glossed over the fact that Icelandi "repo's all of Bjork's stuff" and effectively "kicks her out of the house".
You then ask these people to forgo everything they have worked for the last ten years in order to pay a debt for some spoiled little bitch they have no contact or control over.
As is pointed out, the decision to let the banks in Iceland fail is applauded by many...but this is due to the ridiculous size of Iceland's banking system compared to the rest of its economy. Also, don't forget, the same IMF that says they did the right thing now, said 6 months before the crash that there was no problem with the size of Iceland's banking sector relative to the rest of the economy.
This article seems to selectively reveal information based on a pre-existing belief held by the author.
Like the US, Iceland provided financial support for its ailing bank system when the crisis appeared. That Iceland officially nationalized banks and the US left the banks officially in private hands is really a trivial detail. Iceland supported their banks and ultimately returned them to the control of their previous owners, the same effective strategy as the US.
And some unsecured creditors lost in Iceland and in the US, depending on the circumstances. Again, a detail, not the main picture, which wasn't really that different than here.
Just stop with the "Iceland's different" baloney, just stop.
http://en.wikipedia.org/wiki/2008%E2%80%9311_Icelandic_finan...
If Iceland had more than 300,000 people, you can be damn sure the debt wouldn't have been forgiven, and there would be tariffs on cod and aluminium until it was paid back.
If you go to a foreign bank for tax, interest or other benefits you are exercising a high degree of financial autonomy, choosing a banking system to be a part of. It's not a default decision by someone who needed somewhere to deposit their £438 per week salary. I really don't think you can make the same argument about guaranteeing deposits in these cases, especially without a (low) cap of £10,000 or so.
The Bank of England bailout transferred money from future middle class workers in the UK to wealthy and upper-middle class people, maybe 2 generations apart. I think it was immoral.
If someone is daft enough to deposit their cash abroad to get higher returns without doing enough due diligence as to where they are depositing their money that's their problem - not mine or any other taxpayers.
The 3rd option is nonsensical. At some point banks will fail. The market works better when the decision maker has skin in the game but there will still be failures and we (nations and individuals including pensioners cannot be shielded from reality completely.
So if a UK scammer tricked your parents or grand parents out of say 50% of their life savings you'd tell them you where stupid and deserved it?
they were supposedly also beholden to the EU depositor protection scheme, if they weren't then most depositors wouldn't have touched icesave.
on the eve of the crisis the Icelandic politicians told the UK that they would pay out to UK depositors, then after the UK had paid out they changed their mind.
no one could have predicted that the day before the collapse the Icelandic parliament would withdraw their promise
As part of the EU scheme I think the intention was for local compensation schemes to pay out to consumers and reclaim from the bank's home countries if the bank failed. Obviously this part didn't happen (and possibly could never have happened) but if the FSCS did not list Icesave I would not have invested.
My due diligence was checking the bank was properly covered by the UK scheme and that I did not have more money in it than was covered by the UK's compensation scheme.
A case can be made that those investing more than the scheme should have lost money (not necessarily just for Icelandic banks but also for the UK banks that were bailed out) or that FSCS should not have committed to compensate but they did so they really did need to pay out.
Did the Icelandic government ever agree to this liability? Was their ability to meet it ever looked in to?
See the EFTA court ruling at http://www.eftacourt.int/uploads/tx_nvcases/16_11_Judgment_E...
I believe it was part of some European agreement for open access to financial markets but I don't know the details. So I think that the answer is probably: Yes.
Edit: I've upvoted a sibling post with the judgment on the case. I haven't read it all but it seems clear to me that the rules were complicated and there were good reasons to believe that Iceland had such a liability.
>Was their ability to meet it ever looked in to?
Obviously not sufficiently. It may be that it was looked into initially when it was small and manageable but no-one said stop when the Icelandic banks grew beyond the ability of their government to rescue. Of course if you withdraw cover you can trigger the bank run that brings down the system. With hindsight you know that you should have stepped in to restrict opening of accounts before the risky position was reached.
Edit2 to add: Agree that FSA were at fault. My post was to explain the extent to which it was not an exotic foreign investment but a normal option available to regular customers and with the normal bank compensation scheme in place.
(I too had an Icesave account at the time, it was a fearful couple weeks)
What's also important to remember is that only retail investors were bailed out. Council's and the like lost everything.
It may have been a £50K limit, the precise number wasn't an issue for me at the time as I wasn't near either figure.
I don't understand your comment. What Iceland did - allow its banks to default on their debts - is completely different from what eg. Ireland did, ie. nationalise the debt.
That it then nationalised the bankrupt banks is a different matter. It nationalised them, sure, after they defaulted on the debt.
Iceland banks didn't collapse, the government nationalized them to prevent their collapse. (Edit: as another poster mentions a portion of the debt was paid down by other states too. Again, that's a detail, not a fundamental difference).
Some foreign-deposit operations did collapse but the bulk of the banks, their shares and national operations, were protected by the state.
"The Financial Supervisory Authority (FME) has acted to "ring-fence" the Icelandic operations of Landsbanki and Glitnir, stating its aim of "continued banking operations for Icelandic families and businesses."[126] NBI (originally known as Nýi Landsbanki) was set up on 9 October with 200 billion krónur in equity and 2,300 billion krónur of assets.[127] Nýi Glitnir was set up on 15 October with 110 billion krónur in equity and 1,200 billion krónur of assets.[128]
Talks with Icelandic pension funds to sell Kaupthing as a going concern broke down on 17 October,[129] and Nýja Kaupþing was set up on 22 October with 75 billion krónur in equity and 700 billion krónur of assets.[130]
The equity in all three new banks was supplied by the Icelandic government, and amounted to 30% of Iceland's GDP...."
http://en.wikipedia.org/wiki/2008%E2%80%9311_Icelandic_finan...
Iceland never claimed any kind of insurance of foreign deposits, so was not in any way obliged to pay them up.
The UK's position (AIUI) was that membership of the European Economic Area means that Iceland can not treat its own citizens' savings differently than those of other EEA member states' citizens. Hence the whole squabbling about repayment and such, which is still ongoing.
> Iceland banks didn't collapse, the government nationalized them to prevent their collapse. (Edit: as another poster mentions a portion of the debt was paid down by other states too. Again, that's a detail, not a fundamental difference).
It is a fundamental difference. When Iceland took over its banks, it basically said: your deposits are insured if you are a tax-payer. Customers living elsewhere, share holders and (non-Icelandic?) bond holders were wiped out; they were owed something one day, zero the next, and it matters little to Icelanders who may have generously picked up the tab -- they didn't. The banks were recapitalized when needed, and a few bank execs got thrown in jail for good measure.
I beg to ask how this is in any way similar to what happened in the US, the UK or Ireland. Or Greece, for that matter.
Also, Bernie Madoff went to jail...
All the devils are here has a nice history of this financial crisis, I thought, and no-one who was involved in the fraud which caused the collapse of AIG, for example, was convicted, though there have been some investigations, AFAIK.
Also Iceland defaulted on its external debt and only protected national interests - the UK and US didn't really do anything similar, they have chosen to inflate their way out of debt instead.
http://www.telegraph.co.uk/finance/financialcrisis/3225213/A...
http://online.wsj.com/news/articles/SB1000142405274870420140...
[Edit: He also describes the right of passage for new bond salesmen - when you bankrupt your first client....]
That's not fraud. It's probably unethical, but businesses selling customers products they know are shit is more or less legal, or at most the subject of a civil action by the purchaser. I mean, look at the software industry. How many software companies sell products that are buggy crap, that they know are buggy crap? And when it comes to investments, that basic dynamic is at the heart of a lot of sales. If I think this investment is a great deal that's going to just go up and up, why would I sell it to you?
I'm willing to entertain the idea that what GS did crossed the line in terms of the standard of ethics people expect of investment professionals, which maybe should be higher than for businesses generally. Maybe we should put such standards in place and make them enforceable,[1] but it wouldn't be fair to throw people in jail for what they did before those standards were in place.
[1] For example, it would be punishable ethical breach for a lawyer to represent a client then take a financial position adverse to the client's interests.
The only thing missing from a fraud case in the "selling shit products" story is "knowingly making false statements", right?
GS knowingly sold AIG junk CDOs days before the collapse
GS didn't sell CDOs to AIG. GS didn't actually sell anything to AIG. GS bought insurance (in the form of credit default swaps) on the CDOs from AIG and apparently sold at least some of those swaps on to other banks for a profit.
If Goldman had done something to accelerate the deterioration of the value of the CDOs (something like insuring a house and then burning it down), then you could probably claim GS was in the wrong. AIG would have known it was insuring subprime mortgage CDOs. There also isn't anything in the article asserting that GS misrepresented the quality of the loans or anything like that.
It's hard to get from that WSJ article to fraud.
http://wheredoesallmymoneygo.com/goldman-sachs-fined-550-mil...
They're potentially using insider information on deals and risk in order to profit; I'm not sure they should even be allowed to bet against their clients, because it gives them all sorts of perverse incentives. But it's a complex area, and I'm no expert in it...
I agree it would be hard for that to end in a fraud conviction, and as you say perhaps more regulation would be required for that to even be possible, but perhaps more regulation of this area is required.
You have to consider that when an investment bank sells you a structured product it then naturally has the opposite position. If you want something that pays off if interest rates rise, an investment bank can sell you something like that in the form of an interest rate swap. You are now long interest rates and the bank is short them, but there wasn't anything malicious there. The bank just sold you the product you wanted. Now the bank has to hedge somehow or sell the swap on to someone who wants to be short interest rates. It may have clients that are interested in that sort of exposure.
I'm not trying to defend Goldman here, but when people say things like "banks are betting against their clients" it usually shows a misunderstanding of the business.
That was the fraud. It told its clients the portfolio had been created by someone who was trying to put together a reasonable-ish CDO when in fact it had been put together with the exact opposite in mind. I will also point out that there are no claims by the SEC that Goldman itself was short the CDO.
Here, for example, in english it says: "Credit agricole and Keytrade save Kauphting's client" and explains how the 21 000 belgians who had accounts at Kauphting didn't lose a dime.
That's far from being "wiped out".
http://www.express.be/sectors/fr/ict/le-crdit-agricole-et-ke...
Or by "elsewhere" did you mean "Outside the EU"?
(honest question...)
The non-tax paying, non-residents? Yes.
They were subsequently bailed out by foreign governments and/or entities, but from Iceland's standpoint — which is the important one when it comes to their taxpayers' finances — they were wiped out.
That is why the UK and Holland, in particular, were so pissed at Iceland and threatened to block EU-entry negotiations at one point. They spectacularly footed the bill, and I presume so did other countries. They then sent it to Iceland.
Iceland, on its end, raised its middle finger. Slowly.
Not just once, either.
The politicians tried to sneak the debt back in to be accommodating. And twice, a popular vote was organized and the referendum yielded a big fat no by a massive landslide.
http://en.wikipedia.org/wiki/Icesave_dispute
Credit Agricole, btw, was bailed out using US-funds funneled by Bernanke's largess through AIG, rather than by France:
http://money.cnn.com/2009/03/07/news/companies/aig.fortune/i...
Icelanders, Americans and Greek have all experienced a sharp reduction in their standard of living (Icelanders, like Greeks, experienced this through a large currency devaluation). Both Icelanders and Americans live more or less under the same system that existed before the crisis.
The consensus of mainstream economics at the time was "holy shit are you fucking nuts?", and I don't think it looks any more sane with the benefit of time.
[1] http://www.vanityfair.com/business/features/2011/03/michael-...
Notice as they keep comparing the Icelandic unemployment rate to the EU average unemployment rate ?
Comparing its unemployment rate with that of the US would seem as bizarre as comparing Ohio's with that of the EU.
But the biggest point is that Iceland has taken a very different path from Ireland, Spain or Greece with very different outcomes.
(of course, the situations were not exactly similar at the beginning but comparable enough to draw those comparisions)
IANAL but I understand that what Iceland did would not have been permissible under EU law. That is part of the reason why Ireland, for example, took the path it did, in relation to the bank bail-outs.
However, what Iceland did was still unilateral. They didn't ask for anybody's permission and didn't expect their decision to be accepted.
Laws and treaties still need to be enforced and those countries are still sovereign. What happens if a country does something that is against EU law ? At worst, they may be expelled from the EU.
So it's really a matter of comparing the advantages of EU membership to the cost of the path of action that was taken.
It's still a political decision.
It's clear for instance that UK public money went to UK depositors. The UK is entitled (though maybe unwise) to do this and it sets up a framework for explicit guarantees. In Ireland's case, god knows who really got bailed out. The EU loaned Ireland money to loan to their banks to pay back depositors who were other banks..etc. There was pressure from Germany as both the source of much of the financing and the destination of much of it (Irish banks owed money to German banks). No one went bankrupt, for a normal definition of the term.
It amounts (in my limited understanding) to a few important difference that leave the system far more robust. (1) there is some transparency. It is knowable who is getting bailed out and where the money is coming from. (2) Some long tail risk is put onto depositors, especially foreign/large depositors so it can be priced in. A Hayekian sort of systemic risk reduction. (3) It appears to have reduced the flow of money from poorer future people to current rich people. (4) It clearly defines depositor bailouts as depositor bailouts. Money goes from the public purse to Ms Gunnarsdotter's. In other bailouts (Ireland) the public was driven to fear that banks would collapse and their savings wiped out unless some unknown quantity of money was put into an unknown funnel from where it would flow (among other places) back into their deposit accounts.
IMO we need to come to a long term setup that is simple enough for a first year economics student to understand and first year finance student to price. A guarantee is fine, if we can set it to an affordable level (say, deposits up to €25k) payable directly from the government to qualifying depositors with potential recovery by a bankruptcy court.
A lot of people who borrowed from the Irish banks were forced to go bankrupt - apparently mostly those who had borrowed relatively small sums (less than 20 million or so).
Those who borrowed from the banks and went bankrupt were the cause, rather than the result, of the banking crisis (speaking purely from an accounting perspective -- no moral or policy judgement.)
That detail is anything but trivial. It's the difference between giving the assets of a company to creditors during bankrupcy, or just clearing the debts, and keeping the assets as company possessions (and keeping the company owners).
To tell you the truth, I still can not understand how the US (out of all countries, the one where people do not trust the State) accepted that bank bailout.
Bailouts are contrary to the spirit of capitalism.
Someone should explain that to what passes for capitalists nowadays.
So what's happened to the $85 billion a month ($1 trillion a year) that Ben Bernake has pumped into the banks in the last year, during the third round of quantitative easing (QE3)? "It all got bottled up in the banks, and essentially none of it ... got lent out." Source: http://www.npr.org/2013/12/17/251796694/year-in-numbers-the-...
In the mean time, lending disappeared which caused grave liquidity problems for otherwise solvent firms both in the financial sector and in the "real economy." Those firms failed to meet their obligations producing a chain reaction which continued until severe government intervention put a stop to it years later.
Bernanke and many others were playing off the 1933 script in 2008. Bernanke himself had actually written a book about the Great Depression. I'm not at all happy with what has happened on wall street since 2008 but Bernanke and many others were operating in good faith trying to prevent a catastrophe.
There is really no parallel between the USA (in 2008 or 1929) and Iceland in 2008.
In the case of Iceland, you have a series of hedge funds, basically, domiciled in Iceland but speculating on foreign securities using foreign capital. They had little to do with cod fishing or hot springs or aluminum smelting but when they exploded, the foreign bondholders wagged their fingers at Iceland and said "this is your problem now, you fix it."
Icelanders wisely said "no," they opted not to impoverish themselves to make good the debts of local private hedge funds to the foreign speculators.
I don't understand how people think that the policy during 1929-1933 was "do nothing" when the following things occurred during that time period: Smoot-Hawley Tariff Act, Glass-Steagall Act, the Federal Home Loan Bank Act, the Emergency Relief and Construction Act, the Reconstruction Finance Corporation, the Hoover Dam(!), and more.
Despite Hoover stating that he wanted less government intervention, that isn't actually what happened. Basically, the notion that "we did nothing" during 1929-1933 (as you've suggested) is a giant misconception that really needs to die.
You can read more about it here: http://en.wikipedia.org/wiki/Herbert_Hoover#Great_Depression
N.B. I don't claim that these policies were effective. Just that "nothing" is far from the truth.
You are correct, of course that Hoover didn't "fiddle while Rome burned" but fiscal policy was largely non-interventionist and monetary policy tight until the Emergency Banking Act of 1933[1] which was the "severe government intervention" I mentioned in the OP.
[0] http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legislat...
Bernanke should have looked earlier and not to the policies of Hoover. I fear we will have the same continuing problem until we look to 1946 to get us out.
Capitalism has nothing to do with 1929.
Maybe at full employment it's not. In a country winding down production from WWII, rebuilding someone else is the best thing that could possibly happen to the economy.
Government production would down (thus the budget), but domestic production for domestic items kicked in pretty hard. You might want to check the labor statistics of the day.
If Britain or France has come out of the war unscathed and been able to rebuild the rest of Europe, the postwar history of the United States would have been significantly different.
How much money was spent on manufacturing here for both versus total GDP?
"If Britain or France has come out of the war unscathed and been able to rebuild the rest of Europe, the postwar history of the United States would have been significantly different."
The US would have still been fine and given the same policies minus the Marshall Plan, we would have had less government spending. Also, if the UK and France came out unscathed then the US would probably have not needed to enter the war in Europe.
The question is, what do we do then? Do we let a company that took 50 years to build up fail? It is so easy to destroy something, and such a pain in the ass to build it.
Maybe the idea instead is to make it such that we only have to bail out a portion of the 1 in 200 companies that fail each year? The portion that should be considered a going concern.
What about General Motors? That is an incredible wealth-generating asset. A blip in the cash-flow statement could have made that into 1-2% of its productive capability, but the US didn't let that go down.
You make it sound like GM had no control over it. And that additionally, when a company goes bankrupt, all the wealth just disappears into thin air. Neither is true.
What's the alternative? Tax people and give their money to the aristocracy (because you just created one)?
I am certainly not aristocracy. The US government stepped in with temporary funding to stop GM going under. I stepped in later to replace that funding by buying some high risk equity (about enough to buy a used car-tyre). So did lots of other people. Luckily, I made a return for this investment (others, not so much).
If you care to look, it endend about as well as Iceland, a short term impact, with growth resuming just after it.
The government basically forcibly reorganized the banking system in a matter of weeks.
The only difference is stockholders from the failed banks only lost 98-99% of their investment instead of 100%. A small price to pay for a quick solution to the largest financial crisis in 80 years.
Iceland banned Bitcoin too, for the same reason:
https://en.wikipedia.org/wiki/Legal_status_of_Bitcoin#Icelan...
Iceland did almost everything right. They stiffed the bank creditors to avoid aggravating the moral hazard problem, just like the textbooks recommend. In the eurozone the bank creditors are being bailed out. They relied of fiscal policy to address S/I and debt issues, and let monetary policy address AD, just as the New Keynesians were recommending in the 1990s. In the eurozone they combined tight money with reckless deficits. And now Iceland is growing fast and the eurozone is stagnating.
The middle class is being bleeped since 1975. Checkout the graph on gdp per capita vs median income. http://www.quora.com/Economics/Why-is-there-a-divergence-bet... http://lanekenworthy.net/2008/09/03/slow-income-growth-for-m...
Being such a small welfare nation makes Iceland special in many ways. Their political openness and strong traditions of democracy are very interesting to observe, popular examples of which are the Bobby Fischer and Wikileaks stories. Iceland is often considered the world's oldest active democracy, their parliament was founded in 930 A.D.
Also the rugged nature is incredibly fascinating, and while easy to overlook it is one of the most amazing holiday destinations I have ever experienced.
Cross me once, shame on you. Cross me twice, shame on me.
And much of the world has let itself descend far too far into the second sentence.
People abused the finance system and related laws and regulation, severely. Those people should not have been given a second chance.
Keep the system. Throw out the bad actors and policy.
Instead, we have set ourselves up to be crossed again, by bad actors that have as a result grown even more powerful.
Kudo to Iceland, for giving theirs the boot -- and in some cases, a jail cell.
Estonia is the other one, government and all processes are entirely computerized and PKI is used to control access. Yeah I know it is a tangent - but the other summer I make from the story is that the smaller the government the more tansparent it has to be - there are fewer combinations for government bureaucrats to use to further their own private agendas that may well be to the detriment of the entire country.