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What happened with Iceland?
July 16, 2012 2:18 PM   Subscribe

It seems that Iceland's unorthodox crisis policy response has succeeded.
posted by knz (67 comments total) 33 users marked this as a favorite

 
Iceland’s approach to dealing with the meltdown has put the needs of its population ahead of the markets at every turn.

But, but... Will no one think of the job creators?
posted by twoleftfeet at 2:26 PM on July 16, 2012 [29 favorites]


Does this mena we'll be retroactively spared from people making more movies based on Michael Lewis books?
posted by psoas at 2:28 PM on July 16, 2012 [2 favorites]


Is there any argument (shy of the political one) why this wouldn't work in America? Not a rhetorical question: I'm sure there are differences in our economies that would probably affect how you deal with crashes.
posted by toxtethogrady at 2:33 PM on July 16, 2012


skíta já ísland!
posted by symbioid at 2:35 PM on July 16, 2012 [3 favorites]


Forgiving some of the debt of consumers allows them to have more liquidity to continue consuming, thereby functioning as a stimulus on the economy.

Forgiving much of the debt of banks allows them to have more liquidity to continue giving themselves huge bonuses, most of which are not going to be spent by the bonus-recipients, thereby functioning as a MUCH WEAKER stimulus on the economy.

If you wonder why Iceland is seeing a considerable growth while the US and Eurozone are not, look no further than the above 2 statements.
posted by chimaera at 2:36 PM on July 16, 2012 [67 favorites]


Is there any argument (shy of the political one) why this wouldn't work in America?

Well, the fact that "holding those responsible to account" is the "unorthodox" response should give you an idea of who actually runs shit.
posted by mhoye at 2:37 PM on July 16, 2012 [32 favorites]


but... Will no one think of the job creators?

That's been Ireland's response to the crisis. It hasn't worked out well for them so far.
posted by Blue Meanie at 2:38 PM on July 16, 2012 [2 favorites]


This wouldn't work because here in America we don't play the blame game! And also because the same people who would suffer the most from a just apportioning of responsibility either own the media outright or do business with those who do, and they'd never allow that applecart to be upset without a fight.
posted by feloniousmonk at 2:41 PM on July 16, 2012


but... Will no one think of the job creators?
Iceland’s special prosecutor has said it may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest banks, face criminal charges.
Looks like they have!
posted by GenjiandProust at 2:41 PM on July 16, 2012 [39 favorites]


A good takeaway from this article: "Icelanders who pelted parliament with rocks in 2009 demanding their leaders and bankers answer for the country’s economic and financial collapse are reaping the benefits of their anger."

Throw rocks at bankers and politicians until they shape up. With no sarcasm at all, I firmly believe this to be a good strategy.
posted by dazed_one at 2:42 PM on July 16, 2012 [60 favorites]


2 month old link which is then trashed by Icelanders in the comments section?
posted by Damienmce at 2:44 PM on July 16, 2012 [2 favorites]


Does anyone seriously think you could break windows in the US capitol and build a bonfire next to it without getting murdered by police?
posted by junco at 2:45 PM on July 16, 2012 [13 favorites]


No one could have predicted!
posted by furiousxgeorge at 2:51 PM on July 16, 2012


(every time you say that or express shock that austerity didn't work, Paul Krugman senses it and has to sit down in pain like Obi Wan when Alderaan blew up)
posted by furiousxgeorge at 2:51 PM on July 16, 2012 [30 favorites]


junco: Does anyone seriously think you could break windows in the US capitol and build a bonfire next to it without getting murdered by police?

That sort of successful power-to-the-people movement is precisely what our militarized police are being built up to prevent. It's no accident.
posted by gilrain at 2:53 PM on July 16, 2012 [40 favorites]


By bailing out the banks, our gov't:
1. preserved a culture of greed and corruption
2. failed to deal with any of the systemic problems that caused the problems
3. failed to hold anyone responsible for what happened
4. did almost nothing to help main st.

Best thing that ever happened to Iceland is: they did not join the EU.
If they had, they would be stuck with a corrupt financial service industry, like us.
posted by Flood at 2:54 PM on July 16, 2012 [10 favorites]


There's actually some interesting comments in that thread which, yes, is five months old. A sample:

"This story is completely false. The so called 110% way is an utter failure. 1/4 of all households in Icelands are in financial crises mode, not able to make mortgages payments and in many cases not even able to buy groceries, let alone medicines and other necessities. Another 1/4 of households is on the brink of financial ruin. Mr. Þórólfur Mattíasson is uttering complete nonsense as far as the reality here is concerned."

"The currency indexed loans, while ruled illegal, are still being collected as the government refuses to take any action against the banks. Most debtors in Iceland owe money on inflation-indexed loans, which are almost by definition imposible [sic] to pay off. Few, if any of the indicted banksters will face anything more than minor fines."

"I'm sorry to say ... that this is not a reliable or accurate article to base economy lessons on. Although debt restructuring and debt relief are beneficial, this is in truth not what is happening in Iceland."

So, as always, it looks like only one viewpoint is being presented, here, which is not necessarily reflective of how Icelanders perceive it. Naturally, your mileage may vary per viewpoint.
posted by jpolchlopek at 2:57 PM on July 16, 2012 [10 favorites]


The Occupy movement for the most part really does represent an attempt at changing policy at the national level by doing things more or less like what the Iceland protestors did. Unfortunately, thanks to (among other factors) the size of our country and the almost total inaccessibility of the people actually responsible for setting national economic policy, the style of direct action that worked so well to change the national government in Iceland instead ends up provoking confrontations with municipal governments that have precious little to do with the very real inequities that we desperately need to address, and that the Occupy movement was initially conceptualized as addressing. This shift toward relatively unmotivated skirmishes with municipal governments is pretty much the thing that frustrates me about Occupy.

I wish more than anything that I had even the faintest glimmer of an idea of how to accomplish goals like those of the Iceland protestors in an American context. But I don't...
posted by You Can't Tip a Buick at 3:03 PM on July 16, 2012 [7 favorites]


Steve Keen has been pushing for a debt forgiveness plan that also takes into account the need to protect savers. I'm not 100 percent sold on it, but I think it's worth thinking/talking about. You can watch an interview with him here.
posted by wuwei at 3:04 PM on July 16, 2012 [2 favorites]


It's interesting that all of the Icelandic commenters are in agreement that this story doesn't reflect the real situation. I did a quick Google but couldn't find any news that didn't agree with the article, though. Maybe someone who knows international economics would be able to point towards some alternate reporting on this?
posted by snorkmaiden at 3:05 PM on July 16, 2012 [2 favorites]


Best thing that ever happened to Iceland is: they did not join the EU.
If they had, they would be stuck with a corrupt financial service industry, like us.


Ironically, it was their membership of the European Economic Area which was their downfall. It gave their banks free rein to operate in the EU but through the wonder regulatory passporting they weren't subject to the same scrutiny they would have had they been a Chinese bank or similiar. As they were signed off by their local regulator, which was hopelessly out of its depth, the UK FSA couldn't intervene to stop them going bananas.
posted by Damienmce at 3:12 PM on July 16, 2012 [2 favorites]


snorkmaiden: consider also the use of paid shills-- Exiled Online has repeatedly caught paid shills in its comments section.
posted by wuwei at 3:13 PM on July 16, 2012 [4 favorites]


There are a couple of ways this could be working (and there's probably many more, all happening at once.

First, news agencies just tend to pass the same story around, like a case of journalistic genital worts at the Alan Sorkin Newsroom Summercamp. You're probably not going to find a lot of variation in mass-market reporting.

Second, this may be the equivalent of Extreme-Right/Left Wing commenters bombing in on a publication or viewpoint they don't like (case in point, Youtube comments - o god don't read the comments we are animals).

So, I also would be interested in getting some Iceland-Wo/Man On the Ground level reporting, as well.
posted by jpolchlopek at 3:14 PM on July 16, 2012


Is there any argument (shy of the political one) why this wouldn't work in America?

There's a pretty good argument this hasn't actually been the silver bullet Iceland that "saved" Iceland. In fact, many of us think Iceland is actually the same amount of generally fucked they were before. Here's why.

In the short-term, you're alleviating people's debt. Yay! However, if the people do the responsible thing and live within their means, they don't spend you out of a recession. They stop spending so much money on interest and instead put it towards their principal, alleviating their debt over time. This is good, but this does not create economic growth. Paying for things that were already produced and paid for doesn't increase production. This is why (here's the kicker) debt forgiveness didn't actually cause a rebound for Iceland.

Furthermore, their public debt as a % of GDP has increased nearly 40% during this time (to 123% of GDP) , which means that debt has just been transferred from consumers to governments, which will then be paid back by future citizens. Is that really a great outcome, especially given how much is already being slung on the back of young people and future citizens now?

Of course, this ignores what's actually happening in Iceland. Trade represents a massive part of the Icelandish economy, and exports have dropped nearly $1 Billion since 2008 while imports have tumbled nearly $2 Billion in that time, giving them a balance of accounts of around $1 Billion in positive territory, up from even in 2008.

This represents around 7% of the Iceland's GDP, and is way more than the growth they've experienced in this time. Essentially, they're importing way less stuff, which is creating a good balance of trade. That's wonderful, but contracting exports and either flat or declining consumption inside the country is not a robust economy at work.

GDP growth can be calculated as what is consumed, plus investments, plus government spending plus the net of exports minus imports. If the net of exports minus imports is greater than GDP growth, this means the net of government spending, consuming and investment is actually negative. This means the overall GDP growth seen is actually not happening domestically, but rather due to contracting imports creating a trade surplus while exports are declining.

You can see this in the unemployment rate; Iceland's unemployment rate is up nearly 7% since 2008 and up again in 2010. This is not the marker of a growing economy either; people are out of work because there is less actual production going on than there was in 2008.

So yeah, while I think debt forgiveness is an interesting public sector exercise, I think this article is way, way too early to be claiming that a little economic growth is attributed in any way to debt relief for citizens in Iceland, because the numbers I see as an economist tell me otherwise.
posted by Rodrigo Lamaitre at 3:17 PM on July 16, 2012 [24 favorites]


As I have pointed out in other threads regarding Iceland, the population of the country is only 319,000. That's somewhat less than the population of Honolulu. The Icelandic parliament has only 63 members, or roughly one for every 5,000 Icelanders. Members of the House of Representatives, by contrast, serve about 650,000 constituents, or 130 times as many people. Considering the population of the US is 1,000 times greater than that of Iceland, and the population of the EU about a third larger again, it is hardly surprising that the government of Iceland has been able to act in a more decisive and speedy fashion.

Iceland's extremely long parliamentary tradition and relative geographic and economic isolation are also significant factors. We might as well model ourselves on Singapore, which didn't have a recession at all and is growing at some ridiculously high rate like 16% per annum.
posted by anigbrowl at 3:19 PM on July 16, 2012 [8 favorites]


posted by Rodrigo Lamaitre ...

Now, *stop that*, young man. We'll have *none* of that fact-based nonsense, here. This is metafilter. Now go burn five investment bankers in effigy and go to bed.
posted by jpolchlopek at 3:21 PM on July 16, 2012 [5 favorites]


I came here to point out anigbrowl's point about Iceland's population numbers, as well as to mention how homogeneous the country is culturally and otherwise. It seems like it would be much harder to play the "divide and conquer" game that happens in the United States and other countries with seething social/economic tensions. I think a lot of things work in Iceland that aren't broadly applicable because of the small, somewhat homogeneous population.

It's like how poor Democrats and poor Republicans in the USA really have a lot to agree about, economically, but they are frequently baited against each other with various social issues. There are a lot of entrenched issues that prevent Americans from talking to each other in a constructive way that would actually get things done.

Of course the banks are operating with impunity. They see everyone else hopelessly bickering and they just laugh, knowing that even if they commit fraud right out in the open no one will be able to agree on what to do about it because agreement and civil discussion have become against American culture.

Anyway, good luck to Iceland.
posted by newg at 3:31 PM on July 16, 2012 [3 favorites]


I can't speak for the big picture but... I went to Iceland in March. It was really easy to see how crazy it got and some of the fallout. It seems like every car on the road is a new BMW, and next to little shanty houses are these huge, modern glass-walled homes. Our snowmobile tour guide said he works during the week as a mechanical engineer but got a second job as a tour guide to help pay the bills. He said everyone is totally screwed because when they took out loans for mortgages they were pegged to the U.S. dollar, so everyone saw their loans increase dramatically when their currency went to pot. At the same time, there were a fair number of immigrants (several from Poland) there working as waitstaff and in the kitchens. Some of them said the job market in Iceland is much, much better than at home.
posted by lubujackson at 3:31 PM on July 16, 2012 [2 favorites]


Rodrigo: So something I've been wondering (as a non-economist) is whether Paul Krugman's arguments (see this blog post, among many others) about the performance of Iceland's economy relative to smallish countries that have adopted austerity measures hold water for people closer to the field — and if they don't, why they don't. As an almost total outsider to the world of contemporary economics, it seems like what Krugman is saying makes sense, but I always have this sense that I'm not really qualified to comment on the wonkier/mathier aspects of his argument...
posted by You Can't Tip a Buick at 3:36 PM on July 16, 2012 [1 favorite]


So something I've been wondering (as a non-economist) is whether Paul Krugman's arguments (see this blog post, among many others) about the performance of Iceland's economy relative to smallish countries that have adopted austerity measures hold water for people closer to the field — and if they don't, why they don't.

Well, for starters, I'll introduce my speciality is in local economic development and I would consider myself a neophyte when it comes to international economics. Let's just get that out of the way right off.

When looking at Latvia vs. Iceland, a couple of things stick out to me. One, Latvia was outperforming Iceland (by way of GDP growth) in spades before the recession; its lowest annual GDP growth between 2001 and 2008 was 6.5%. By contrast, Iceland had only 2/7 years with that much growth.

Latvia is a heavily consumption-based economy, so in a worldwide collapse where consumers stop consuming, they're always going to get hit harder. In 2011, as people started consuming again, they actually outperformed Iceland again.

Furthermore, look at the countries these economies export to. Iceland - Germany, Netherlands and UK are top 3. Latvia - Lithuania, Estonia and Russia. Iceland's top export partners weathered the economic storm relatively well compared to Lithuania and Estonia (who bottomed out) and Russia. This has major implications for trade-heavy economies.

That's not to say I think Krugman is wrong, but rather, I think he's glossing over the glaring structural differences between the two economies and instead focusing on fiscal policy as the be-all and end-all that explains economic growth out of the recession.
posted by Rodrigo Lamaitre at 4:02 PM on July 16, 2012 [5 favorites]


Is there any argument (shy of the political one) why this wouldn't work in America?

While others have hinted at the differences in scale, maybe a simple look at the dollars will help.

Collectively, Americans owe $1.2 trillion more than their homes are worth.

There is currently about $14trillion in total debt, so we are talking about a 9% haircut to those holders. From that same link, we can see who is getting hit based on the holders.

Big banks hold $4.5trillion, so they take a $400billion hit, which would probably be enough to crash at least a couple of them. For comparison sake, Wells Fargo currently has around $150billion in equity, and JPM has around $192 billion.

The bulk of the remainder is held by government agencies, so yay, we do debt relief today and send the bill to our kids.

So yeah, I think there is an argument why it would not work here. The argument is 1) I dont want to pass the bill on to the next generation (considering we are talking about an asset impairment held by government, its not like its going away) and 2) the impact of having the banks write off another $400billion would be worse then playing the current hand out, with 3 possible scenarios - a) house prices recover and the problem goes away, b) some recover, some fail, some get paid off and say the net liability is 50% of the 400bil, or c) they end up writing it off down the road.
posted by H. Roark at 4:05 PM on July 16, 2012 [2 favorites]


Nothing that works in other countries would work in America because America is exceptional, partly because they insist on setting everything possible up in a way that nobody else has ever considered doing because they are exceptional, in a nice self-perpetuating argument.

It's like one of those stupid AskMe questions where they say 'I want to move in to a place about 350 square feet, with 7 bedrooms, no bathrooms, and it has to be within a block of the White House' and all the answerers are saying you need to drop one of your conditions. You can either keep every unique special snowflake tradition you've built up, or you can fix some of your problems. And just like said stupid Askers, the US seems to opt every time for continuing the delusion and just looking harder for their ideal property.

/sick of local news stories about cutting education in prisons and generally failing to maintain any semblance of a civilised society
posted by jacalata at 4:13 PM on July 16, 2012 [8 favorites]


The bulk of the remainder is held by government agencies, so yay, we do debt relief today and send the bill to our kids.

About 99.99% of the time, this concern over the next generation is a rhetorical ploy which means "my ideology does not approve of spending money on this set of people."
posted by goethean at 4:22 PM on July 16, 2012 [10 favorites]


I'm extraordinarily suspicious of arguments against increased government spending due to how it will result in debt that will be passed on to the next generation, just because it seems like the absence of government spending will result in serious, serious problems, the effects of which will themselves be felt even after our current generation is dead.
posted by You Can't Tip a Buick at 4:22 PM on July 16, 2012 [4 favorites]


But lest we paint Iceland's situation in too unique and rosey a fashion, I'd like to point out (if you'll pardon the repeated self-linkage here) that the party that ruined us, the very party that we drove from power in popular protests in 2009 - the conservative Independence Party - is polling stronger than the two coalition parties, the Leftist-Greens and the center-left Social Democrats, combined. In fact, the coalition is polling right now at about 24% - the same approval rating the Independence Party-led coalition had when it was driven from power.

At the same time, unemployment is now at about 6% - lower than the US average and way lower than the EU average - down from a high of about 9% in 2009. Inflation is gradually decreasing. Foreign investors are showing more interest in the country. Hell, we put a finance ministry official behind bars for insider trading.

So why are the people ready to vote back into power (elections are next year) the very same folks who ruined us? There are a few causes:

1. Hereditary voting. The Independence Party, while not the oldest party in the country, is still pretty old. it's sort of the "default option" for voting, if you don't know who else to pick.

2. The right sticks together. As elsewhere, the right wing in Iceland has seldom had any major splinters. They manage, somehow, even with all the bickering and in-fighting, to remain more or less monolithic. The left, by contrast, seems to be in a rush to splinter and divide the vote up, making it hard for any left-wing party to gain enough votes to lead a government.

3. Iceland has been a conservative country through its entire independent history until very recently. The left might have rejoiced at the opportunity the crisis gave them to come into power, but a financial catastrophe of this magnitude is a big mess to clean up, which brings us to ...

4. Change isn't happening fast enough for a lot of people. You can demonstrate with numbers that the economy is steadily getting better, but my grocery bill really hasn't changed that much since the initial 2008 collapse. And I don't even own a car, credit cards, a mortgage or major loans - these people are still struggling to dig themselves out of the hole they're in.

5. The European Union. The Social Democrats have been pushing to join the EU for a very long time now, and the government is currently in accession talks. However, it remains a very divisive subject among Icelanders, with a majority of them against joining.

But are these reasons enough to explain why would they vote back in the people who put us in this mess? Probably. The Independence Party had 16 long years to ruin this nation, and because the leftists can't fix everything in less than four, people are ready to say, "You know what? Fuck it, better the devil we know" rather than recognize how incredible an achievement just recovering this much has been.

Still, I'm pretty happy to be here. We got rid of the IMF as soon as we could, the forecasts are positive, inch by inch we're getting closer to the light at the end of the tunnel. Which is why it ties my stomach in knots to consider the prospect that our perpetrators might get voted back in by their own victims. I'm almost positive it'll happen at this point, even a year from election day, and I won't be bailing for Cuba or something if that happens. But god damn will I be unhappy about it.
posted by Marisa Stole the Precious Thing at 4:24 PM on July 16, 2012 [14 favorites]


6. Also, Icesave. Don't even get me started on that Mongolian clusterfuck.
posted by Marisa Stole the Precious Thing at 4:30 PM on July 16, 2012 [1 favorite]


The Weaponization of Economic Theory: Europe’s three needs: a debt write-down, a real central bank, and a more efficient tax system
posted by the man of twists and turns at 4:34 PM on July 16, 2012 [1 favorite]


5. The European Union. The Social Democrats have been pushing to join the EU for a very long time now, and the government is currently in accession talks. However, it remains a very divisive subject among Icelanders, with a majority of them against joining.

Wikipedia actually mentions this as a success factor: the third major factor behind the resolution of the financial crisis was the decision by the government of Iceland to apply for membership in the EU in July 2009. While views on the feasibility of EU membership are quite mixed in Iceland, this action has served to enhance the credibility of the country on international financial markets. One sign of the success of the above efforts is the fact that the Icelandic government was successfully able to raise $1 billion with a bond issue on 9 June 2011.
posted by Golden Eternity at 4:37 PM on July 16, 2012


I don't know why debt forgiveness isn't a more popular approach. My experience with tech support is that most problems are fixed if you just recycle the power.
posted by twoleftfeet at 4:38 PM on July 16, 2012 [2 favorites]


I came here to point out anigbrowl's point about Iceland's population numbers, as well as to mention how homogeneous the country is culturally and otherwise. It seems like it would be much harder to play the "divide and conquer" game that happens in the United States and other countries with seething social/economic tensions. I think a lot of things work in Iceland that aren't broadly applicable because of the small, somewhat homogeneous population.

320,000 people.
5 political parties in parliament right now, a new one formed at the municipal level, and at least three additional parties planning to run in 2013.

Homogeny? I wish.
posted by Marisa Stole the Precious Thing at 4:38 PM on July 16, 2012 [2 favorites]


I'm extraordinarily suspicious of arguments against increased government spending due to how it will result in debt that will be passed on to the next generation, just because it seems like the absence of government spending will result in serious, serious problems, the effects of which will themselves be felt even after our current generation is dead.

That's just the problem / point -- you can say *exactly* how much debt you'd be passing on to the next generation and make a fairly pointed rhetorical argument how much that would affect them.

It's just hard to do the same thing with projections about how much you'd be *helping* the next generation. God forbid you have .gov suck up that debt and things not improve fast enough for the opposing party, because whomever was in power at the time the debt was taken on would be proper fucked. Kinda like, oh I don't know, America today.

Not taking a stance on the worth of one approach over another; just on the short sighted nature of zero-sum politics.
posted by jpolchlopek at 4:41 PM on July 16, 2012


Wikipedia actually mentions this as a success factor

Oh, certainly, if you're a foreign investor, as that paragraph says. Joining the EU makes Iceland look more attractive as a place to put your money. But I'm speaking from a voting standpoint. Most Icelanders are afraid of having their economy dragged down by what many see as a sinking ship, not to mention concerns about agriculture and fishing rights (a major part of the accession talks, I'd add). The government has done a really weak job of selling itself. With all due respect for their stoic "let the actions speak for themselves" policy, in a practical political sense it just isn't working. They should be crowing their accomplishments from the rooftops 24/7, and more actively engaging in the EU discussion. Instead, populist human foghorns are practically steering the whole discussion about the economy and the EU.
posted by Marisa Stole the Precious Thing at 4:43 PM on July 16, 2012


jpolchlopek: well in the US the "debts of our children" thinking is nonsense at the federal level since the federal government isn't really "borrowing" any money. We're a sovereign entity.

twoleftfeet: forgiveness isn't a popular approach because it would redistribute wealth, and draw the fangs of the finance sector. And we can't have that!

Marisa Stole the Precious Thing: well, homogenous is a polite way of saying, Iceland does not have the history of racial strife that the USA has inherited. We have a prison/penal system that was designed to re-enslave black people (I can provide evidence) and there are significant factions of the United States that embrace a wholeheartedly racist ideology.
posted by wuwei at 4:47 PM on July 16, 2012


Well, homogenous is a polite way of saying, Iceland does not have the history of racial strife that the USA has inherited. We have a prison/penal system that was designed to re-enslave black people (I can provide evidence) and there are significant factions of the United States that embrace a wholeheartedly racist ideology.

That's definitely true, and I don't mean to make light of the bitter divisiveness in the US. Just wanted to point out that even if the whole country has a population in six digits, these folks sure looove to argue.
posted by Marisa Stole the Precious Thing at 4:51 PM on July 16, 2012


wuwei: Substitute "inflation" for "debts of our children" or some equally rhetorically-potent analogue, lather, rinse, agitate the base, repeat. But, you have to admit: pound-for-pound "think of our children" is worth its weight in election-year lawn signs, regardless of how un-grounded it might be in fact.
posted by jpolchlopek at 4:51 PM on July 16, 2012


The interesting thing to me is that Iceland's approach, I don't really feel, is so "unorthodox". The austerity nonsense that seems to have gripped the rest of the world is the real unorthdox economics; upsetting decades of research, hundreds of examples etc. But special interests have managed to con ignorant journalists and a partisan public that an orthodox economic response represents a pessimistic socialist agenda that will result in naught but disaster.
posted by smoke at 5:17 PM on July 16, 2012 [6 favorites]


jpolchlopek: Certainly there's a range of totally specious arguments that the bad guys can use to convince voters, but you can say that about just about any policy, good or bad.

... and I'm completely comfortable describing people who argue for continued or increased economic inequality as "the bad guys," unless they manage to find and muster a damned good, non-specious argument on why reducing economic inequality would lead to literal world destruction — and "we'll throw a tantrum if you don't give us what we want!", which appears to be the best argument they can muster, doesn't really count as "good" in my book.
posted by You Can't Tip a Buick at 5:23 PM on July 16, 2012 [1 favorite]


One thing that I think people aren't quite understanding is that the arguments that Iceland's policies helped and Ireland's (and other austerity) policies hurt are related but distinct. Austerity doesn't work for several reasons, currency devaluation does work for several reasons.

Those are the parts that really matter, "bank bailouts" covers a lot of territory and, for the most part, isn't the really important part of these stories and that aspect of what happened in Iceland is truly not comparable to what happened here and it's nonsense to frame it in that fashion.

I'm struggling here to even begin to provide any meaningful overview to people who think this comes down to "Iceland let the banks fail" and "US bailed the banks out". I mean, first of all, the financial crisis, while the proximate cause of the economic crisis, is a separate issue. In the US's case, these banks really and truly were too big to fail — the mere allowing of Lehman to fail and the fear that others would follow started a chain reaction that utterly shut-down the entire global credit market. This was a huge deal, it created an enormous systemic economic shock. And that was just the fear of failure (well, it was the fear of the unknown toxicity of all this securitized debt and that this would lead to all the world's biggest banks to fail). An actual failure of all these banks into bankruptcy would have created an economic disaster that makes what actually happened look tame. That was never an option. "Too big to fail" applies here, in combination with "too many to fail".

It sucks, there's no question about it. (But, as it happens, it's not really the case that the choices were "let them fail" or "bail them out and reward them". We could have kept them from failing while not rewarding any of the people involved and while forcing vast institutional changes. The fact that we didn't do this tells you what you need to know about Washington and Wall Street, not that we propped the banks up in the first place.)

In contrast, Iceland's banks made these Wall Street banks look conservative. And Iceland is small, making these few banks even larger to the relative economy. In short, Iceland's banks were, relative the US's and Europe's, too big to not let fail. That is, bailing them out and billing the taxpayers for the banks' obligations would have a monstrously large imposition on the taxpayer and the economy. It wasn't an option. The government had to basically blow off the banks' creditors. That included a lot of Icelandic people and institutions, but it also infamously included a whole lot of UK individuals who'd opened savings accounts in Iceland because they had been offering extremely high interest rates. All those people were screwed and that's why the UK, especially, is pissed about it. That's one big thing to keep in mind when you cheer on "screw the banks" in regard to Iceland.

In the peripheral European economies that have austerity forced upon them (let's leave Greece out of this, because while austerity isn't going to work in Greece, either, it's a unique case and it's not representative of the rest) what happened is the going to a common currency created a false sense of security and confidence and money flowed from the core (mostly France and Germany) to these countries:: Portugal, Ireland, Spain. The money originated from large banks in France and Germany, was loaned to banks in these peripheral countries, who then loaned it to construction in a housing boom and to a lesser degree an industrial boom. As a result of all this money flowing in and jobs being created, wages and costs went up dramatically.

Then, when the financial crisis happened and the credit dried up, the boom in these countries became a crash. Unemployment surged. Tax revenues plummeted, and safety-net payouts skyrocketed. In combination, this meant that where there had been modest government deficits and debt (Ireland) or even surpluses (Spain), those became steep deficits and increasing debt. And the banks in these countries that loaned all this money for the construction boom and the boom in general, and in relation to the global financial contagion that started all this, well, these banks also were at risk of failing.

What would it mean if these banks failed? Well, besides what it would mean in these specific countries? Well, the biggest thing to understand is that the biggest creditor to these banks were....French and German banks. If these peripheral banks failed, then it would be French and German banks who'd eat the loss and, well, there's the global financial meltdown thing again and so, really, the ultimate people who'd be holding the bill would have been French and Germans.

And they couldn't have that.

So, and because the politicians in these countries had been long accustomed to understanding that their economic security depended upon keeping the French and Germans happy, decided that they make sure that their own taxpayers bailed out these banks. That cost a lot of money in the context of economies that were already in deep recession and where government deficits and debts had skyrocketed.

Also, because things were so shaky, the bond market for these country's bonds, that is where they borrow the money to finance their government, had decided that the higher risk required higher interest rates — that is, these governments' borrowing costs increased dramatically. Which is also really bad.

So, the only thing they could do, and what everyone told them they had to do, was to slash public spending. This was also supposed to help with the bond markets because, supposedly, what the bond market feared was that these governments would become insolvent...they lacked "confidence". Lowering the deficit would inspire "confidence" and would lower the rates.

None of this will help unemployment. And here's the thing: it's not supposed to help unemployment. In austerity, high unemployment isn't a bug, it's feature.

Why? Because what had happened is all that easy money flowing to the periphery from the core fueled a bubble which, in turn, fueled wages and costs that were inflated in relative terms — that is, without the construction bubble, there really wasn't much interest in paying people that much and buying stuff for that much. These countries aren't competitive within the Euro at these wages and prices. What has to happen is that wages and prices have to drop. When that happens, then exports will rise and investment will pour back in, and unemployment will drop.

And unemployment is a virtue in this scheme because, given supply-and-demand, then a high supply of labor necessarily means that wages will drop as people become willing to work for less.

That's the theory.

In fact, the theory is probably right...if the timescale is measured in more than a decade. That's the literature. It will take at least a decade, probably considerably more, for wages and costs in these economies to come back into competitive alignment via "internal devaluation".

Meanwhile, the Germans are all very sure that this is how things should be. Why? Well, the Germans have told themselves a set of myths about themselves, both historically and recently. Historically, they believe that inflation is the mother of all evils. Recently, they have prospered by being an exporting economy which is frugal. They believe that every European country could, and should, do what they've done, even though what they've done has been to export primarily to the rest of Europe much more than they import from the rest of Europe so it's a logical impossibility that everyone else in Europe could do the same thing. But never mind that — logic isn't important here. What's important is that the Germans (and French, but especially the Germans) are very certain that these peripheral economies are wastrel irresponsible people who lounge in the sun instead of doing hard work, to whom they loaned enormous sums of money to (because, being wastrel irresponsible people, they were a good credit risk, I suppose) and who have made their own bed and now they will have to lie in it. No way in hell will they allow either their own banks, and thus themselves, have to pay for all that bad lending and, more importantly, they're certainly not willing to loan more money now.

Except, see, here's the thing. Two things are happening in combination here. First, there's the mismatch of competitiveness. Second, there's the high bond rates that are making it difficult or impossible for these governments to get the money they need to function. The European Central Bank, which is effectively a branch of the German government, could do whatever it takes to make it clear that these governments aren't going to go bankrupt (which will reassure the bond markets) and also to directly make money available to them. That would take the finger off the trigger, which is basically the situation now with these governments and these high bond rates. With regard to the first, well, what we're talking about here is relative competitiveness, relative wages and costs. Rather than make these peripheral economies wages and costs fall dramatically, what would also work would be for the core's wages and costs to rise. These two things are equivalent in terms of what this means for trade within the Eurozone and what that therefore means to these economies.

Okay, "rise dramatically" isn't really an option. But wages and prices are very sticky and even with high unemployment, as I wrote, it's very hard and slow to make them fall. We're talking a percentage point a year, if you can even get them to really fall. Why this is the case is a really interesting and controversial issue. But, anyway, it contrast, it's trivial to allow inflation to be a couple points a year higher than it is. The ECB and France and Germany could easily change their inflation target to be two or three points higher and that would do exactly the same thing, but more quickly, as trying to force the opposite to occur in the periphery as pushed by austerity and unemployment. But Germany, especially, won't do this because inflation is bad, bad, bad. Even low inflation. Inflation is, to the Germans, the bogeyman under the bed. Also, it would mean not punishing those wastrel irresponsible people in sunny countries, and that must happen or all moral order will collapse.

Iceland didn't bail out its banks because, basically, it simply couldn't afford to. A better model with regard to the banks, from that point of view, is probably Sweden in the 90s.

More importantly, Iceland had another option which Greece, Ireland, Spain, Portugal, and others don't have: Iceland has its own currency. It wasn't in the Euro. Because an alternative to the deflation/inflation scenario I described above is simply currency devaluation. Let your currency become much cheaper relative to other currencies, and suddenly your wages and prices are cheaper relative to other countries. Your exports become more attractive.

The important thing to understand about currency with regard to valuation is that it's relative. It's not absolute. US politicians often like to make hay with "the falling dollar". But, the thing is, a falling dollar is a good thing for some US producers and a bad thing to other US producers. That the dollar is strong or weak relative to another currency is a good or bad thing only in a particular relative economic context. The terms "strong" and "weak" are misleading here, unfortunately. Anyway, there are are some bad things that are associated with a relatively weak currency, just as there are with a strong currency.

But one very interesting thing that happened in Iceland was that all the Very Serious People were confidently predicting that if Iceland were to do what they actually ended up doing, with the defaults and the devaluation, then the bond market — remember the whole "confidence" thing and that this is how a government has access to funds to finance itself? — would punish Iceland, rates would go so high that Iceland would end up defaulting on its sovereign debt and would become a third-world country.

Except that didn't happen. What happened is that after an initial panic, eventually the bond market saw that Iceland was likely to recover. And so its rates fell.

The lie the austerity people are telling about the bond market and sovereign debt is that the bond market is all about "confidence" — and not just any confidence, but confidence that the government is "living within its means". But that's only true in the deepest sense — that is, the bond market is concerned about whether a government will or will not actually and truly default on its debt. Of course that's all it cares about. There's lots of things people can look at to try to guess whether this will happen — high debt is one of those things. But it's not the only thing and, more importantly, it's not the determinative thing. In the austerity nations, perversely, the more and more the government tries to do the "responsible" thing, cutting spending and whatnot, and satisfy the bond market so it will have "confidence", what actually happens is that the market keeps raising the rates. Why? Because what the market is actually looking at is the whole economic situation with regard to those economies. Austerity isn't improving the economic situation, and the bad situation is what's causing those countries to have lower revenue. Meanwhile, Iceland did all the "irresponsible" things but they were things which actually stabilized its economy and made it more likely to be able to meet its long-term obligations in the form of its debt. So the bond market rewarded it with lower rates, not higher rates.

The economic story about all this stuff is absolutely crystal clear. It's unambiguous. The only reason there's confusion and discord is because there's a lot of people who a) have a vested interest in telling a story that's false and/or, b) have a strong moral sense about how all this necessarily must work from a moral point-of-view and therefore they disregard any and all evidence that confounds their moral expectations.

And the thing is — this is true as well with regard to people who work from the moral assumption that "bailing out the banks was wrong". Sometimes it works, sometimes it doesn't. Bringing morality into it is a mistake with regard to the economic analysis and the pragmatic analysis. It's not a mistake when we're looking at who to punish for almost destroying the world. But punishing those people by way of letting the banks fail often can be a way to cut your nose to spite your face.
posted by Ivan Fyodorovich at 5:28 PM on July 16, 2012 [23 favorites]


I'm extraordinarily suspicious of arguments against increased government spending due to how it will result in debt that will be passed on to the next generation, just because it seems like the absence of government spending will result in serious, serious problems, the effects of which will themselves be felt even after our current generation is dead.

There's a difference between government spending and government buying debt. The former involves spin-off effects throughout the economy; procurement, jobs and income.

The latter involves paying off debts so people can be leveraged less, but in order for that to be accomplished, those people have to live within their means. They have to spend less than they previously did, which is actually a hinderance to the economy, especially if the government is diverting funds from spending to debt relief.

I am in favour of government spending during a recession; I think a lot of the austerity measures governments put in place for ideological reasons throw the economy into neutral or reverse. I am not necessarily in favour of simply writing off the credit card bill for things that have already been produced and paid for, because there is no real economic growth that comes from debt transferring from a person to a government.
posted by Rodrigo Lamaitre at 5:45 PM on July 16, 2012 [3 favorites]


That sort of successful power-to-the-people movement is precisely what our militarized police are being built up to prevent. It's no accident.

The United States has always been brutally repressive to protest movements. However, Iceland is a small country of 300,000 or so. Everybody knows everybody - the police are hardly going to beat up on their neighbours.
posted by KokuRyu at 5:55 PM on July 16, 2012


Pulls the handle and shields his eyes, as he lights up the Katullus Signal.
posted by Slap*Happy at 7:19 PM on July 16, 2012 [2 favorites]


The article is broadly correct in that the Icelandic recovery to the financial crash has been pretty good, relative to a lot of other places. There's a wide array of factors which have contributed. Of the ones not mentioned the biggest one is probably that the current government made sure that those on the very lowest rungs of the economy got increased assistance. Besides alleviating human misery it makes sound economic sense in that the poorest spend what they earn quickly, on food, housing, clothes et cetera, so the money circulates well.

As mentioned by others in this thread, there were a lot of outside factors which forced Iceland to react differently to most of the other badly-afflicted economies. That said, I think the current government (which I support, incidentally) has generally chosen wisely. They've prioritized the worst-off in society, disabled people and the economically disadvantaged. The current prime minister, Jóhanna Sigurðardóttir, happens to be Iceland's foremost expert on its welfare system, so was well placed to protect it once in power. Not everyone would have done the same.

Iceland is generally doing okay, economically. It's no utopia, certainly, but it's done better than I expected in the first few months after the financial crash. It's got some structural problems that will never go away, mostly due to its small size, but on the whole it's been doing quite well. As much as I'd wish that Icelandic society had become much more just, equal and serene post-crash, things are trending in the right direction. Iceland doesn't warrant being a rallying cry for radical causes, but it does merit a quiet cheer from time to time.

KokuRyu: The United States has always been brutally repressive to protest movements. However, Iceland is a small country of 300,000 or so. Everybody knows everybody - the police are hardly going to beat up on their neighbours.

You'd think so, but beatings by police were quite common in the 30s and 40s, when Iceland was an even less populous place.

Ivan Fyodorovich: In contrast, Iceland's banks made these Wall Street banks look conservative.

Nah, it was mostly small-time corruption and stealing writ large. Compared to to the oeuvre of Goldman Sachs et al., the Icelandic bankers of the pre-crash era had rather limited imaginations.

Marisa Stole the Precious Thing: But lest we paint Iceland's situation in too unique and rosey a fashion, I'd like to point out (if you'll pardon the repeated self-linkage here) that the party that ruined us, the very party that we drove from power in popular protests in 2009 - the conservative Independence Party - is polling stronger than the two coalition parties, the Leftist-Greens and the center-left Social Democrats, combined. In fact, the coalition is polling right now at about 24% - the same approval rating the Independence Party-led coalition had when it was driven from power.

While that is true, opinion polls in Iceland have long been rather volatile. For instance, the Left-Green party, when in opposition, would often poll much higher than turned out to be the case in elections. I think current support for the Independence Party is rather soft. Lord knows that were I running the campaign of the Social Democratic Alliance or the Left-Greens I'd have a field day campaigning against them. The Independence Party leadership is still heavily embroiled in various banking scandals. To give but one example, the leader of the party, Bjarni Benediktsson, is in trouble because of his involvement in banking fraud.

The main factor for the high numbers that the Independence party is registering is that the Icelandic media-sphere is very, very right-wing. The dominant newspaper outside of Reykjavík, Morgunblaðið, was taken over by the Icelandic equivalent of the Koch brothers post-crah, who installed a disgraced former Independence Party prime minister and central banker as editor. The newspaper, which is pretty much the only daily newspaper that is available outside of the Reykjavík region, is ferociously right-wing. Imagine Fox News as a newspaper. The most-read newspaper in Reykjavík (and therefore the country as a whole) is more moderate, but their editor is also a former right-wing prime minister. The state broadcaster is the closest we have to a properly balanced news source, but it's still an unbalanced mediascape.

That said, combined support for the Independence Party and the center Progressive Party (which used to be the party of agrarian socialists, but never mind) hit a historical low in the last election, so they will bounce back some in the next election. However, during most of the 20th Century these two parties combined had around 2/3rds of all seats in parliament, but the trend over the last few decades has seen support for both erode. Both these parties are in a long decline. While I wouldn't be surprised if the current government lost its majority, I'd be surprised if the Independents and the Progressives could form a government on their own. Most of my friends are more pessimistic.
posted by Kattullus at 8:02 PM on July 16, 2012 [6 favorites]


Somebody mentioned how Sweden dealt with their own banking catastrophe in the early 90's. Here's a NYTimes article - quote:

"Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government."

But actually here's a really interesting interview with Sveriges Riksbank’s Stefan Ingves about what happened and his thoughts about what the implications are for Europe and today's world - quote:

"So equity holders should be wiped out – as the Wallenberg family was told it would be regarding SEB back in the ‘90s – if the government takes over a bank?

SI: There was no intention on the part of the government to subsidise shareholders. In that sense, the rules of the game were very simple – you look at the good assets and the bad assets and you re-capitalise. If there is some private equity left you need to find a way of doing this jointly with the private sector. If all the equity is gone and there is no one around on the private sector side who wants to put in equity, then the equity holders lose the bank. It’s very simple because ownership gives control. If you want to control the bank, you have to come up with the money – those are the rules – that is something that is easy for people to understand."
posted by VikingSword at 8:46 PM on July 16, 2012 [2 favorites]


a strong moral sense about how all this necessarily must work from a moral point-of-view and therefore they disregard any and all evidence that confounds their moral expectations

Although I'm absolutely unqualified to pronounce on economic matters from an economic standpoint, I've spent a good part of my life considering ethics and morality. And it baffles me completely, so to speak, how anyone can think that practicality can trump morality. No moral person can countenance that view. Period. Full fucking stop. I mean, just stop and think about it, for fuck's sake.

As a postscript to that, I'd like to add that appeals to practicality are always, and without any exception that I am aware of, framed by those who stand to benefit from the legal status quo.
posted by bricoleur at 10:14 PM on July 16, 2012


While that is true, opinion polls in Iceland have long been rather volatile.

That's absolutely true, but the Independence Party have been riding in the upper 30s since at least mid 2010. I was initially confused, but then factoring everything in - including yeah, Morgunblaðið, even though their readership seriously tanked when they hired Davíð Oddsson, they're still the paper of the rural area - it doesn't surprise me anymore. As you point out, the government really ought to go on the offensive. Maybe within their circles, it should be plain-as-day obvious that they've achieved a great deal, but they seriously need to sell it better. If the conservatives are eroding - and I do hope they are - I wish they'd get it over with and stop spending years hovering at the support levels they have.
posted by Marisa Stole the Precious Thing at 10:26 PM on July 16, 2012


Although I'm absolutely unqualified to pronounce on economic matters from an economic standpoint, I've spent a good part of my life considering ethics and morality. And it baffles me completely, so to speak, how anyone can think that practicality can trump morality. No moral person can countenance that view. Period. Full fucking stop. I mean, just stop and think about it, for fuck's sake.

...you didn't like utilitarianism then? The central tenet is that a moral good can be selected by what produces the greatest good for the greatest number. That sounds rather like practicality, in that it's about the results rather than a preset selection of 'moral' actions.

I mean, one can criticise some of the tenets of Bentham and Mill (and people have) but it's rather a statement to say that no moral person can countenance the view that practical outcomes are the best measure of good and that therefore Bentham and Mill are not themselves moral. Unless I've misunderstood you, it sounds a very ill-considered statement.
posted by jaduncan at 10:29 PM on July 16, 2012 [5 favorites]


As a postscript to that, I'd like to add that appeals to practicality are always, and without any exception that I am aware of, framed by those who stand to benefit from the legal status quo.

Quick guide to Bentham: "His position included arguments in favour of individual and economic freedom, usury, the separation of church and state, freedom of expression, equal rights for women, the right to divorce, and the decriminalising of homosexual acts. He argued for the abolition of slavery and the death penalty and for the abolition of physical punishment, including that of children."

It's almost like he wasn't driven by personal benefit, given that his status as a white upper-class male.

See Marx/Engels for this also, given that they argue that Communism is natural due to economic effectiveness (practical reasons) even given that Engels was rich enough to sponsor Marx, and both would have been personally poorer if private property had been absorbed into the state as a whole.

I'm going to stop now, but I really question how much you can have read of ethics if you think that practicality can only be advanced as the ultimate yardstick by immoral people who stand to personally gain from the status quo.
posted by jaduncan at 10:43 PM on July 16, 2012 [1 favorite]


"Unless I've misunderstood you, it sounds a very ill-considered statement."

It's ill-considered in numerous other respects, as well.

Perhaps I wasn't as clear as I should have been — my complaint is not that morality doesn't matter, but that very often people who argue about economics from a very strong initial moral premise are being both simplistic and self-serving.

I was alluding to various examples of this which are found across the political spectrum — on the left, "banks are bad, they should be allowed to go bankrupt". On the right, "unemployed people are lazy, they shouldn't be coddled". Or "people in debt are irresponsible, they should suffer for it". In the largest macroeconomic sense, it's "a recession or depression is the necessary, even punitive, correction for irresponsibility and therefore easing it in any respect is bad".

But the problem with all these things isn't that there aren't moral principles at stake and which could be brought to bear. It's that self-serving and/or absurdly broad moral principles are applied in ways which don't even end up serving those moral principles. Often the guilty are rewarded and the innocent punished when you apply these sorts of stupidly simple notions of morality.

This is especially pernicious with regard to macroeconomic policy because entire nations suffer from bad policy. If your reasoning is primarily moral, and it's primarily that "a nation with high deficits and debt is irresponsible and its people deserve to suffer in order to correct it" then, well, people will suffer for it, even if the recession isn't, for example, caused by high deficits and debt. Or that high unemployment is caused by laziness. If you assume it is, and that suffering is "good", that punishment is just, then you'll get that punishment and suffering, even if you're totally and completely wrong about everything.

You don't have to take a utilitarian position to make the argument about economics that I'm making. The argument isn't that moral reasoning doesn't belong, but that it's misapplied. And that it's misapplied in very common ways that perversely lead to worse outcomes than otherwise would exist and often make a mockery of the very moral principles which were invoked to justify these policies.

One way of making this clear is that an economy is an open, complex, and deeply interconnected system. If you think primarily in terms of rewarding the virtuous and punishing the guilty, then your rewards and punishments are going to spill over to all the other parts of the system which are connected to them. "Punishing" Lehman by letting it fail resulted in an enormous amount of suffering by people who weren't guilty. Yeah, it punished the guilty (to some degree of "punish", although I imagine most are working and wealthy today), but it punished pretty much everyone else, too.

What's happening here is that bad economic conditions involve a lot of human suffering. We typically respond to suffering in several ways. One of those ways is to blame those who are suffering for their suffering, saying they brought it on themselves and it's justice. Another way is that we look for someone else who caused the suffering, and punish them. Yet another is that we ignore it. But a big human impulse is to look for someone to punish. And thus recessions and depressions end up being an argument in the civil sphere about who is responsible and should be punished. (Or that the guilty are already being punished — meaning the unemployed and the bankrupt homeowners and others.) And while, yeah, I'll agree that the guilty should be punished, eventually, I'm a hell of a lot more concerned with alleviating the suffering of the innocent. Until you stop focusing on "who can we punish" and instead concentrate on "how can we make this situation better", the situation won't get better and the innocent will continue to suffer. And the irony is that this distraction from alleviating suffering results from people who imagine themselves to be primarily motivated by ethics and morality, that they're concerned with right and wrong.
posted by Ivan Fyodorovich at 11:09 PM on July 16, 2012 [2 favorites]


Here's an example.

Krugman put up a blog entry a few hours ago. It's on Joe Weisenthal's Business Insider piece that points out that, contrary to popular belief, there's not a worldwide sovereign debt crisis. That is, there's not some global crisis of badly indebted governments:
Joe makes the well-known point that aside from certain euro area countries, yields on sovereign debt have plunged since 2007; investors are rushing to buy sovereign debt, not fleeing it. I was a bit surprised by his description of this insight as being non-”mainstream”; I guess it depends on your definition of mainstream. But surely the notion that what we have is largely a process of private-sector deleveraging, with government deficits the consequence of this process, and interest rates low because we have an excess of desired saving, is pretty widespread (and backed by a lot of empirical evidence).
What Krugman found interesting is the readers' comments to the piece, which were inflamed:
But those comments! It’s not just that the commenters disagree; they seem to regard Joe as some kind of space alien (or, for those who had the misfortune to see me on Squawk Box, a unicorn); they consider it just crazy and laughable to suggest that we aren’t facing an immense crisis of public deficits with Zimbabwe-style inflation just around the corner.

And I know that it isn’t just the Business Insider commenters; pretty obviously, the great majority of people who spend their time watching financial news and reading financial blogs operate in an intellectual universe where the surpassing evil of deficits and the imminence of vast inflation are just what everyone knows; year after year of low interest rates and failure of inflation to take off — which must have cost people who believe this stuff a lot of money — makes no dent in that certainty.

It’s an interesting phenomenon. I don’t think it’s just a product of the usual propaganda efforts from the right. There’s something about the deficits! inflation! story that evidently resonates with a lot of people no matter how often and how badly the worldview fails in practice — and is also completely resistant to attempts to point out that things must add up, that everyone can’t simultaneously spend less than their income.

What’s going on? I have some ideas, which I’ll try to flesh out in a future post...
What I'm pretty sure that he's going to say is what I've been saying here (and no wonder, since I'm basically recapitulating a lot of what Krugman's written over the last four years). He's going to speculate that the resiliency of this zombie story — that we're having a global crisis of bankrupted countries and that hyperinflation is imminent — has everything to do with peoples' moral intuitions about how things are and how they should be.

We have suffering — that's incontrovertible. Everyone — not just the right — blames the government for bad economic conditions. There have always been many people who moralize about government defiicits and debt and predict that some comeuppance for such irresponsibility is due any day now. And, of course, whenever the bad times come, because they do, they claim vindication. Worse, bad economic conditions greatly worsen deficit and debt and so those who make such claims can confuse cause-and-effect and argue that the recent increase in deficits and debt has caused the recent decrease in production and the increase in unemployment.

They're sure that the bond market will punish such governments, because they tend to see the bond market as being exactly such an instrument of justice. Not a market for lending that is concerned about repayment. But an instrument of justice. So, for such folk, the rise of interest rates for the US, or Iceland, or whomever, is a necessary fact of reality because it's both a guaranteed market mechanism (in their simplified economics) and a bitch slap to uppity politicians. Has to happen. Any day now.

Similarly, when it doesn't happen and the government borrows a lot of money, "flooding" it into the economy, and low rates from the central bank and quantitative easing and all that — well, that's just more profligacy! And you know what's the punishment for such irresponsibility? Inflation. It, too, isn't a way of describing economic conditions, it's also basically punishment.

This is why this and other zombie views just won't die. Because they're not about evidence or history. They're about stories that people tell themselves that reassure them that there's moral order to the universe.
posted by Ivan Fyodorovich at 11:41 PM on July 16, 2012 [3 favorites]


It's the just-world hypothesis run amok.
posted by mek at 11:48 PM on July 16, 2012


Oh, sure. But this is just saying that simplistic morality tales are a stupid approach to take when dealing with complex systems.
posted by jaduncan at 11:50 PM on July 16, 2012


I think the deficits! inflation! story resonates for a lot of people because the last really epic financial crisis America had was the 70s, and that seemed to be how it went down then (though that perception is arguably an inaccurate view propagated by interested parties). It's clearly not going down that way now, but many of those who are serious investors now are of an are of an age when the 70s are their defining scarring memory.
posted by ThatFuzzyBastard at 6:24 AM on July 17, 2012


Is there any argument (shy of the political one) why this wouldn't work in America?

This has already been discussed by others in more detail, so I'll just add a few things here.

First, when Iceland let its banks fail, much of the pain was absorbed by foreigners, particularly in the UK. I'm not talking about cascade effects, just the direct bank losses themselves. So what it really did was just stick it to a bunch of foreigners. There were more foreign depositors in Landsbanki in 2008 than there were people in Iceland. Conversely, there are more domestic depositors in US banks than there are people in most foreign countries, let alone foreign depositors in US banks. If Iceland had had to absorb all of that pain domestically, things might not be so rosy.

Second, if you take a look at the interest Iceland is paying on its debt, the picture is very different. In January 1998 it was 7%. It reached a peak of about 11% in late 2001. From mid-2003 through 2004 it reached historic lows of 5%. But right around the time Landsbanki went private, it started increasing, and it reached about 15.5% in early 2008. When Landsbanki went tits up, it shot up to 18%. Interest then fell fairly rapidly, reaching a low of about 4.5% in 2011, but it's back up to almost 6% today.

Conversely, US interest rates reached a recent peak at about 6.5% in mid-to-late 2000, dropped to less than 2% by the end of 2002 and then to 1% by the end of 2003, spiked back to 5% in 2006-2007, and have been at 0.25% since 2009. Even today, Iceland is paying twenty-four times as much interest as the US is. This is likely to hurt the country in the long term, but Iceland was in a position to do this because, as has been pointed out, it was able to foist off a lot of the damage on foreigners. It also didn't start with as as bad a debt/GDP ratio as the US did. Regardless, it increased its public debt load by 40%. If the federal government were to pick up a bunch of the current debt tab, we'd add another few trillion to the public debt, and the government's borrowing costs would skyrocket. The US government simply can't afford to pay even 5% on the nearly $16 trillion we already owe, much less on the $20 trillion we'd likely wind up owing if we tried such a move. We'd go from spending $227 billion a year on debt interest to over a trillion, if not two. At the least. Just not an option.
posted by valkyryn at 6:56 AM on July 17, 2012 [1 favorite]


Even today, Iceland is paying twenty-four times as much interest as the US is. This is likely to hurt the country in the long term

No, those interest rates are reflective of the inflation of the krona, which rapidly devalued relative to the dollar and euro. Bonds markets aren't stupid, therefore given inflation borrowers must pay equivalently more in interest. This is still less than Spain (or Greece, heh), where creditors are actually worried about the possibility of default. It is much less in real terms, as 6% interest with 6% inflation is effectively zero, while 7% interest with deflation is an enormous chunk of the budget. These differences matter a great deal: it's why Spain is in a debt crisis at 70% debt-to-GDP while Japan is not in a crisis at 200% debt-to-GDP. Spain cannot borrow further precisely because it cannot devalue its currency.

The US government simply can't afford to pay even 5% on the nearly $16 trillion we already owe

Just to be clear, the US owes a bit less than 100% of GDP right now. paying 5% interest on 100% GDP is paying 5% GDP. This is clearly affordable. But it's also irrelevant, since nobody is asking the US to pay this much interest - as you noted, the US can currently borrow at record low rates. The US will have to refinance about half of its current debt in the next year, as Mutant noted, and it'll do so at virtually no cost.
posted by mek at 10:06 AM on July 17, 2012 [2 favorites]


You've basically just reiterated the "confidence fairy" argument: that bond markets will punish debtholders with increased rates (and therefore austerity, not stimulus, is the answer). Japan is an obvious counterexample, but Iceland works just fine as well, since their interest rate has been dropping steadily from a 2009 peak.
posted by mek at 10:23 AM on July 17, 2012


No, those interest rates are reflective of the inflation of the krona

The 18% interest rate certainly is. But the 6% rate they're paying now isn't. That's right around the historical average for Iceland. I'm guessing it's because Iceland has a bigger risk of default than the US does.

paying 5% interest on 100% GDP is paying 5% GDP. This is clearly affordable.

No it isn't. We're already running a $1.6 trillion deficit, and we're only paying $227 billion in interest this year. Not only would the federal government likely need to assume at least a few more trillion in debt if we tried something like this, but the interest paid would go to closer to $1 trillion annually. We'd be borrowing money to pay our interest obligations.

What about that says "affordable" to you?
posted by valkyryn at 2:05 PM on July 17, 2012


It would definitely require modest tax increases, god forbid, but it wouldn't be at all devastating. If bond rates increased, it would be comparable to the situation Canada was in in the 90s. Not a great position, but nothing like Spain. That's a red herring anyway, as there is virtually no risk of significant rate changes in the near to medium term. Remember after the debt ceiling fiasco when the USA had its rating downgraded, interest rates dropped to record lows!
posted by mek at 3:40 PM on July 17, 2012


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