Comment by relate | Hacker News Reader

Comment by relate | Hacker News Reader

Icelander here - there seem's to be a lot of misconception about what happened in Iceland. We technically let the banks fail, but at no point did my debit card stop working, my online bank go down or my money disappear. Joe_the_user says we simply nationalized the banks, but that's not true - here's how it was done:

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.

This of course created a debt between the new X and the remains of each old X, which took some time to resolve.

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.

The proper term for what happened is the old banks were put into receivership. This has lasted for a lot longer than is healthy and the husks of the old banks are really poisonous to the economy and the political landscape. Some argue it would have been better to face the catastrophe of a crash than the languishing death spiral that ensued.

>Some argue it would have been better to face the catastrophe of a crash

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.

I meant: put through bankruptcy. That would have been catastrophic for the economy because Iceland would not have had a financial sector at all for some time.

I'm being pretty vague since I'm not really an expert, but yes the old banks were put into receivership but not bankruptcy. However, previous laws from 2002 already established that financial institutes would not go through normal bankruptcy ( http://www.althingi.is/altext/stjt/2002.161.html ), but I'm not sure how that would have worked out.

Sorry,

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.

The damage was pretty big anyway, no? The currency lost half it's value and never recovered, right?

Depending on circumstances, currency devaluation might not be such a terrible thing, as long as the movement is swift and rare.

An interesting point is there is a difference between damage to paper valuations and damage to the real economy. In Iceland's case there may have been a big paper impact where before the crash your currency was worth so many dollars and after many fewer but in the real world people had the same houses and cars and kept their jobs and so on. In Ireland on the other hand people lost their jobs and houses, topped themselves, emigrated and so on. At the end of the day real wealth and human well being are what counts and the financial system is only a tool to achieve that.

If the value of their paychecks was cut in half, then didn't that have a impact on their "real wealth and human well being"?

Because the value of most of the things you needed to buy (mostly other people's labors in food service, etc.) was cut in half too. Of course this doesn't count imports (which became twice as expensive in real terms) but that's a hit that can actually be survived.

The value of their paychecks probably remained about constant for local goods such as food and rent. They probably fell a lot in terms of things like flying to London to go shopping and that is a real change but probably one they can live.

It's really the value of their paychecks relative to imports. (In a small country, you do have to export a lot relative to GDP, but you can wind up exporting cheaper too)

Iceland wants to join the EU. They will have to pay their debt first. You cannot fool 'foreign' countries and join them at the same time.

First, the majority of Iceland does NOT want to join the EU - and the Mackerel dispute is not helping, since Iceland's main fear of the EU is due to the fishing policies.

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...

Most definately, although the currency has been very unstable from the beginning.

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$ )

Another Icelander here. Can confirm. This utopian story of Iceland jailing bankers and letting the banks fail is, in one very simple word: BULLSHIT.

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