The economic return of Iceland has proved that the joke was on Ireland

http://www.independent.ie/business/irish/dan-white-the-economic-return-of-iceland-has-proved-that-the-joke-was-on-us-3327164.html?ftcamp=crm/email/20121219/nbe/AlphavilleHongKong/product

by JumpCrisscross • 14 years ago

238 205 14 years ago

independent.ie

nacker2• 14 years ago

"Self-delusion is a characteristic of Irish society. In the old days we were told things about ourselves that in retrospect seem laughable. We were morally superior to other races, O’Connell Street was the widest street in Europe, the Shannon was going to be drained, the country reunited and the Irish language restored.

Such was the pathetic nature of the society that it tended to grasp at any idea, no matter how absurd, seen as positive to our warped sense of nationhood."

http://www.irishtimes.com/newspaper/opinion/2012/0920/122432...

nacker2• 14 years ago

"It is a symbol of Irish art. The cracked looking-glass of a servant." James Joyce

http://incomestrategix.com/incomestrategix/admin/uploadImage...

patrickk4• 14 years ago

Great, yet depressing description of the Irish psyche.

This part in particular rang true:

"The Republic of Ireland has never been truly independent. This could be because the best and the brightest were and are the most likely to emigrate, leaving behind the more deferential, insecure and apathetic people. British rule was overthrown in this part of the country in 1922 only to be replaced by an equally abusive system controlled from Rome.

This itself is in the process of being gradually overturned, but is being replaced by a regime controlled from Frankfurt, whose intentions are, as yet, unclear. Unless something fundamental changes in the public psyche, Ireland seems doomed to endlessly repeat its history of failure and to be a society that is deferential and provincial in outlook."

thwest2• 14 years ago

Argentina is also a fine case study for telling creditors to take a hike.

reinhardt• 14 years ago

Wondering if Greece could/should be next.

thwest2• 14 years ago

I believe they would have to leave the Euro and return to a national currency. But that is certainly a better prospect than the austerity project Germany and France are wishing upon them.

guylhem• 14 years ago

Maybe a simpler explain was that Ireland was in deeper trouble, part of it due to being bound to a currency which could not depreciate, since most of the "weight" was outside Ireland, in a german speaking country of continental europe. (and which is being far too patient with some creditors that are showing less willingness than Ireland)

EDIT: oops bad proofreading, a word was missing. It is "in deeper trouble"- fixed that

mpweiher15• 14 years ago

Not sure how Ireland was "in deeper": they were under no obligation to make up for the private losses of the banks.

How did being part of the Euro require the Irish state/tax payer to bankrupt the state in order to bail out the banks, or rather, their creditors?

drucken4• 14 years ago

Because as part of the Eurozone your national bank and sovereign state has monetary and fiscal obligations to the ECB and Eurozone creditors.

From a naive perspective, reneging on any of these obligations would put your Eurozone membership at risk.

In practice, the situation is almost the reverse. It is/was far easier to maintain the status quo as long as possible to enable the use (abuse?) of monetary policy transmission mechanisms of the ECB and other EU state bailout facilities than to take unilateral action like elective default.

Elective default would have meant any Eurozone state would almost certainly be required to leave the Eurozone, including rescinding ECB support and incurring the huge upfront cost of reintroducing their own currency.

TL;DR. Comparing Iceland's situation directly to any Eurozone state is an economic fallacy, especially since the Eurozone has no mechanisms at all that support leaving it (e.g. transition to a parallal ECU2-like currency while retaining access to ECB or other Eurozone facilities).

mcphilip• 14 years ago

the harsh truth of being a eurozone member is that the country's taxpayers are not necessarily intended to be involved in a decision to default on debts. Case in point, there was swift and sound backlash when the former Greek prime minister proposed a referendum on one of the many Greek bailout packages.

JohnsonB• 14 years ago

Makes sense, it is not irresponsible to refuse to entertain debts to shady creditors. One is responsible for the fate of one's investments, but not when the investment itself is betraying certain ethical and business standards that would be impossible to consistently audit of every investment one made. So unless future investors in Iceland are planning to skate the line between legal and illegal, there's no reason to doubt the future economic potential of Iceland.

tsotha11• 14 years ago

>Makes sense, it is not irresponsible to refuse to entertain debts to shady creditors.

It's not irresponsible to refuse to borrow money from shady creditors. But no matter how you dress it up refusing to pay debt freely taken on is theft.

b1daly• 14 years ago

It is not theft by any legal or everyday definition I have ever heard. Even if it were illegal, the crime would not be called theft. Are there any types of debt in the US in which a default is considered considered illegal?

Among the many differences between a loan and a theft, is that the transaction is entered into by the choice of both parties. Whether it is a true free choice is another question, as is the issue of fraud in creation or discharge of the obligation.

nikster• 14 years ago

Iceland did what any sovereign nation should do in that situation. They fixed it, and importantly they did it not by bailing out the bad guys but by taking everything from them!

Iceland also apparently knew that so-called investor confidence is a joke as far as countries are concerned. A few years on, who is even going to remember this? Of those who remember, who is going to think this might happen again - particularly since iron clad policy was put in place to prevent it from happening again.

Maybe Irish and Greek politicians are just too chicken to do the right thing. Or, and I think thats unfortunately more likely, they are fighting for vested interests of a few that pay them money rather than their country or their people. Iceland stands out in that the politicians acted in the interest of the people.

dataminer• 14 years ago

I think part of the problem with Greece and Ireland is also that they are part of EU and are no more sovereign and in full control of their financial policies.

waterlesscloud• 14 years ago

Ironically, Iceland's application for EU membership is cited as a major factor in its recovery.

The story here is not all that simple.

MaysonL• 14 years ago

Not just part of the EU, but members of the euro zone: i.e., they have neither their own currencies nor their own central banks.

rayiner3• 14 years ago

There are more than 50 US cities bigger than the whole country of Iceland. I think the kinds of conclusions you can draw from Iceland's experience is a bit limited.

maxxxxx2• 14 years ago

"But we are so much bigger" seems to be the standard excuse for the US not looking at what other countries are doing successfully and learning from them.

tedunangst3• 14 years ago

They also have a strong export economy, which makes it easier to push the reset button and start over.

jussij5• 14 years ago

What Iceland did was say to the bankers if you stuff up then it's your problem. Where're not here to bail you out.

In the US the bankers stuffed up, the tax payers bailed them out and the bankers got a nice big pay rise.

What this has taught the US bankers is they can safely put a gun to the head of the American people and their government will gladly hand over the money. No questions asked.

DigitalSea• 14 years ago

Anything can be scaled up or down. I don't see how other countries including the US couldn't take the Icelandic approach and do the same thing.

brc4• 14 years ago

But this supposes there is some line, that, if crossed, means that you must make creditors whole, even if that means handing people who didn't make bad decisions (ie, the public) the bill.

If this line exists, then it would be interesting for people to suggest at what size the line lies at. Because I believe the line 'too big to fail' is a weak defense of vested interests making sure they aren't left holding the bag.

tcbawo• 14 years ago

It probably helped that the amount was totally infeasible for a country of 320,000 people to pay back.

tsotha11• 14 years ago

>Iceland did what any sovereign nation should do in that situation. They fixed it, and importantly they did it not by bailing out the bad guys but by taking everything from them!

Well, you can always solve your debt problems by refusing to pay creditors. I wouldn't read too much in to the doings of a country with the population of a mid-sized city.

kaonashi• 14 years ago

Ireland and Greece are only quasi-sovereign as they adopted the Euro; their hands are tied unless they adopt their own currency.

patrickk4• 14 years ago

The Irish Government retains the power to unilaterally renege on our bank debt. They lack the political balls to do the right thing- the phrase used by chicken shit Irish politicians and Eurocrats is "the bomb won't go off in Frankfurt, it'll go off in Dublin".

The European Commission, the European Central Bank, Angela Merkel, and amazingly, US Treasury Secretary Tim Geithner have all leaned on Ireland to keep this bullshit charade of paying back all this bank debt.

The IMF and the UK Chancellor are the only external parties who've said there's too much austerity in Ireland and paying off this massive debt pile is not right.

Ctrl+F my username, I've posted links elsewhere to back this up.

jval2• 14 years ago

http://en.wikipedia.org/wiki/Moral_hazard

The only thing worse than making a mistake is failing to own up to it and suffer the consequences. The entire Western world, not just Ireland, is a victim of this.

taligent3• 14 years ago

It is naive to apply this to the current situation. Financial institutions aren't people and most importantly they aren't normal businesses. They make up the core infrastructure that every business and consumer needs just like power, water, electricity etc.

Every time someone says "just let them fail" ask if they would they say the same thing if it was a water company that needed bailing out.

ihsw• 14 years ago

The water company is based on a real, tangible resource. Stock markets and financial instruments are tools of imagination based on speculation and 'confidence.'

jval2• 14 years ago

I never said let them fail, I said that we are all victims of moral hazard. I don't profess to be able to solve all the world's problems in a HN thread, but the controllers of these companies were never held accountable for their failings and no message was ever sent to financiers that they have the same level of public responsibility that a water company does.

I don't necessarily think that straight failure is a great answer but I think that the culture needs to be changed and I know for a fact that the internal culture of the banks has not changed one iota from pre-GFC to now.

nikatwork• 14 years ago

Isn't the point of the article that Iceland "let them fail" and things got better instead of worse?

If an individual goes bankrupt through poor decisions, we castigate them. When a financial institution does the same, there are often little or no consequences.

What's the incentive for them to improve their behavior?

drewcrawford• 14 years ago

> ask if they would they say the same thing if it was a water company that needed bailing out

The difference between water companies and financial institutions is that if the San Francisco water utility goes under, you have to move to a new city. But if the bank that offers you credit goes under, you just send your checks to a different address.

damian20003• 14 years ago

This has some parallels in the ability to declare personal bankruptcy; to start anew. Unlike the US, many countries still don't allow this and hold past debts over you forever. In Victorian England, there were special debtors prisons and workhouses where you had to spend x years literally working off your debt.

damian20003• 14 years ago

I think Greece could have taken a lesson from this too - in my view they would have been better off allowing their currency to devalue and just write off their debts. But they are probably past the point of no return now in terms of being able to do that.

jussij5• 14 years ago

Probably one big difference is the types of economies involved.

From what I have read of Iceland, it's export driven, so a low dollar (i.e. krona) is a blessing and leads to prosperity.

Greece on the other hand is a net importer so a low dollar means poverty and misery.

Edit: Added krona reference.

recipro• 14 years ago

Seems you got this the wrong way around. Unless by dollar you meant "whatever their local currency is called ... which for me happens to be dollar ... so I will just call everybody's currency a dollar"

damian20003• 14 years ago

But isn't tourism a huge part of their economy... i.e. foreign tourists bringing in foreign currency which would be great when the local currency is low?

toyg3• 14 years ago

Greece was not allowed to devalue anything -- they didn't have a currency by that point!

I agree that they were screwed by the European establishment, but certainly the solution was not as easy as "just devalue".

mpweiher15• 14 years ago

They screwed the European establishment, not the other way around...running up huge debts that they knew they would never be able to repay.

What Europe is doing now is trying to save their sorry asses (apologies) without giving them a blank cheque to do it again.

guelo• 14 years ago

Indeed. Unfortunately the Greece public valued the Euro too much to tell the ECB to f' off. Now their economy is entering serious depression territory with none of the devaluation benefits.

Symmetry• 14 years ago

The financial types might have been giving bad advice, but that wasn't necessarily mainstream economics - and seems like it might have been a bit self-interested too.

"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." http://www.themoneyillusion.com/?p=14895

zmmmmm• 14 years ago

I wonder though if this is something that can only work on a small scale. Iceland has only 320,000 people, which means that even as huge as their debt was, the economic ramifications of their default were quite small on a global scale. It seems to me that the effects of this kind of thing would scale up in a highly non-linear way and you can't just assume that an economy 10x the size will behave the same way a smaller one would, let alone the US or other major economies. For example, the primary reason Iceland is doing OK now is that the rest of the world economy (despite being in extremely poor shape) managed to survive, so Iceland's export industries have somewhere to export to. If the whole world economy had collapsed Iceland might be in the worst shape of all.

thewarrior• 14 years ago

Yes the world economy would have collapsed and like Iceland recovered much faster (Not that I'm sure about it but thats the point being made here).

martythemaniak3• 14 years ago

Iceland did what numerous other countries have done in the past to deal with the same situation, including Argentina in the 2000s, Sweden in the 90s and the US during the 30s.

philwelch• 14 years ago

The US during the 30's ended up remaining in a deep depression that didn't let up for well over a decade, something that casts doubt on any of the actions the US government took during the time.

chalst2• 14 years ago

One of those things is not like the others: the Argentinian financial crisis was about the Argentine government defaulting on its sovereign debt, which did not happen in the other cases.

The Argentine crisis was about the government (i) borrowing excessively, (ii) having its debts in a foreign currency (dollars), and (iii) maintaining a fixed exchange rate. Rather like the Greek situation.

Sweden was in a similar situation to Iceland (though not as extreme), but chose to guarantee bank creditors - so it behaved in the opposite manner to Iceland, making the same choice that Ireland did, though it was much smarter in how it went about recapitalising banks than Ireland was.

anigbrowl4• 14 years ago

Of course that was a factor. Every time I ask anyone I know from Iceland about stories like these, they roll their eyes and say it's BS.

Also, notice that this is published in the Irish Independent, a fairly newspaper which traditionally supports what is now the opposition party and which dug the country into a hole in the first place. It would be a mistake to assume this commentary is wholly objective; likewise it would be a mistake to overlook the historical record, in which Ireland has been through past periods of austerity and emerged sooner than its peers for having taken the bull by the horns. In the meantime, it's useful to remember an Irish proverb: 'faraway hills look green.'

disgruntledphd22• 14 years ago

And its written by Dan White, he of get on the property ladder and the time to buy is now. Seriously, I cannot understand how anyone still listens to him, but apparently they do.

martythemaniak3• 14 years ago

Pretty much proving today's field of Economics to be a bunch of quackery.

In every respectable field of study there are certain basic scientific expectations - supporting your positions with evidence and data, reversing your views when your theory has been disproved etc. At the onset of the 2008 crisis, some people very accurately predicted the type of crisis it was (a financial panic) and recommended policies that were tested and proven to work. The mainstream camp however, thought otherwise and most of the world followed their advice.

With 4 years of data we now know who was right and who was wrong, and yet that has done almost nothing in the field of Economics. Few high profile economists have reversed their deeply flawed views and the views of those baked by data and correct predictions are still not taken seriously. It's as if the LHC found the Higgs, yet most physicists still denying it exists - the situation really is THAT absurd.

Economics is deeply corrupted by politics and the financial interests of its practitioners. If the quacks and charlatans aren't purged soon, the either field will be discredited. You can't practice alchemy or voodoo and expect people to treat you like a scientist.

ryanmolden• 14 years ago

>With 4 years of data we now know who was right and who was wrong

Do we? I think at best you could argue that what was done was wrong, that doesn't imply the other alternative was right. There exists more than two possible courses of action and thus we can't simply anoint one as right and the other as wrong, they could in fact both be wrong. I think that is one big problem with macro-economics as a science, you can't really have controlled experiments whereby we try each of N hypothesis in turn, controlling externalities, and see which yields the most accurate outcome vis-a-vis the predictions that that hypothesis made. Even repeating what worked N years ago isn't a guarantee of anything, since it is highly unlikely that all the confounding variables are the same.

martythemaniak3• 14 years ago

You seem to be implying that because economists can't run clean experiments like physicists, they can't prove or disprove anything, they can't tell us what happened and they certainly can't guide us. At this point I have to ask, how is your view of economics different from theology? What is the point of such a useless field of study?

Of course, economics can be useful. Economists have a ton of data and a wide variety of tools with which to conduct their study, and while they can't achieve the purity of physics, economics can still be a valid and useful field of study. The problem isn't economics itself, but practitioners whose views are clouded by politics, ego and money.

dreamdu5t• 14 years ago

You can't test hypothesis with no control group and no way to falsify theories. Comparing economics to physics is absurd.

jrogers65• 14 years ago

There has been a silent revolution in the last few decades which has resulted in a new branch of mathematics called Chaos Theory.

http://en.wikipedia.org/wiki/Chaos_theory

It happens to be quite capable of making a science out of traditionally difficult to understand subjects such as economics, psychology and sociology.

https://docs.google.com/viewer?a=v&q=cache:naTCJqLey4QJ:...

The comparison would have been absurd last century, not so much today.

fijal• 14 years ago

How about astrophysics? Climate science? We don't always get a whole lot of experiments to do, sometimes one.

nl2• 14 years ago

There are two groups of economists: scientists who predicted that austerity wouldn't work and would make things worse, and quarks (aka the Chicago school) who recommended it.

In most areas of science bad ideas don't disappear, it is just that those who support them die and ideas with some evidentiary support become the new norm.

After the response to the 70's oil shocks economists knew that austerity didn't work. Unfortunately measures that are known to work are a political minefield, so those "economists" who don't support it get a lot of support from politicians who don't support it either.

In some ways it is similar to evolution or climate change. You can find "scientists" who deny them both. Economics is worse though, because it is so closely tied to politics.

Incidentally, Krugman has been writing about Iceland since 2010[1].

[1] http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-po...

tsotha11• 14 years ago

>There are two groups of economists: scientists who predicted that austerity wouldn't work and would make things worse, and quarks (aka the Chicago school) who recommended it.

Oh please. The idea that you can spend your way out of debt has been shown to be disastrous over and over, and yet like the Marxist "scientists" before them these Neo-Keynesians are going to claim everything is peachy until even the slowest among us can see they're wrong (and not scientists, either). But like any good faith healer they'll say "You didn't do it hard enough". Does that sound familiar?

In the short run austerity is painful. In the long run it's the only option, and putting off the pain only makes it worse when you're out of options. Either you do it honestly by cutting expenditures, or you do it the normal way by printing money.

The idea you can derive globally applicable lessons from a country the size of Cleveland is a bit daft.

othermaciej4• 14 years ago

Estonia and Latvia are doing pretty well with austerity: <http://www.businessweek.com/articles/2012-07-19/krugmenistan...;

It's understandable that regular readers of Krugman may not know this since he goes to great pains to deny the obvious on this point.

brc4• 14 years ago

No economist calls themselves a scientist. They call themselves economists.

The term 'austerity' is meant to apply to a government living within its means. These days it is applied to a government with single digit debt growth instead of double-digit growth. Kind of like how eating balanced meals is now called dieting.

It's true that you can avoid unemployment by borrowing money to pay people to dig holes and fill them in again. What is also true is that, without production there is no consumption. Digging up holes and filling them in is not production, ergo, consumption will not rise.

TLDR; J.B. Say was right. Keynes was wrong.

Tichy8• 14 years ago

The scary thing about Krugman is that his whole ideology seems to depend on that example of one babysitting exchange ring that didn't print enough money and therefore couldn't trade. It's an interesting story, but I wouldn't simply translate it to whole economies of nations. I can think of a lots of other factors that might have made the babysitting ring fail.

gizmo• 14 years ago

> The mainstream camp however, thought otherwise and most of the world followed their advice.

Not the mainstream -- a vocal minority. Ordinary Macro 101 textbooks predicted the consequences of the policies in the the US and Europe pretty accurately.

cynicalkane2• 14 years ago

This. If you look at the right ideas of Macro 101, the success rate is pretty high. Bailouts, demand-side policy, properly applied monetary stimulus, expectations management and confidence. If you look at famous wrong ideas, their failure rate has been pretty high. Austerity, strong currencies, lazy ZIRP stimulus, do-nothing policy, inflation paranoia. What is true in macro before the recession has become more true. The econ pundits who focused on these Macro 101 truths have been mostly right, with the monetary guys being perhaps a little more right than the fiscal stimulus guys. This should not be surprising as the things that are "true" in econ are such by virtue of hundreds of years of examination and highly reasonable philosophy, which anyone who's bothered to study econ would know.

Most people who say "econ is not a science" have had little to no experience with people who conduct economics as a science. I understand the cargo-cultists and pundits are much louder voices, but someone good at "science" shouldn't lazily examine the most shallow voices and use that to conclude deep things about a field of study.

There's cargo cult science, and then there's cargo cult scientific criticism.

freshhawk3• 14 years ago

I think you are mistaken only in assuming that economists don't know this. It's blatantly obvious as soon as you learn about the philosophy of science.

The problem is that economic decisions still need to be made and "confidence" actually is a big factor in how markets react to news.

Since you can't start doing science in economics at this point then you better look to your preferred economic philosophy for some pointers and rules of thumb. And you god damn better make sure people have confidence in you (since it literally makes things work better and because then you get less blame for mistakes).

Since the creation of a fake Nobel prize in Economics to borrow some of that sweet sweet confidence people have in Physics and Chemistry it's been seen as an image problem. A branding problem.

It's very Straussian I suppose, in that "the masses must be lied to for their own good, rulers need to show strength and project confidence" kind of way.

It's definitely gotten out of hand in my opinion, so little effort going towards moving economics towards science and so much on religious arguments when all sides know they can't really model or predict anything.

cynicalkane2• 14 years ago

The opinion that the Nobel Prize in Economics is a "fake" prize is not shared by the Nobel Foundation, which treats it as equal to Nobel's prizes and awards them in the same way, with the same people, by the same criteria as the other science prizes. They differ only in name as they were named after different benefactors. I wish people would stop saying this. On the other hand, it's a sure sign you don't know what you're talking about.

http://www.nobelprize.org/nobel_prizes/economics/

Joeri• 14 years ago

Just like you can reliably model a gas but not its particles, i think you can reliably model a crowd but not its individuals. To me economics is the science of predicting the interactions of crowds.

paulsutter2• 14 years ago

Could someone help me out why this Middlebrow Dismissive Comment has been voted up? It contains no information, takes no position, and merely lobs cynical derision at everyone.

Marty's other comment in this thread was cogent and interesting, comparing Iceland's actions to earlier crises Sweden and Argentina. But this comment, useless.

What am I missing here?

mcantelon• 14 years ago

It would indicate that others share his lack of faith in mainstream Western economics.

eupharis2• 14 years ago

It makes a great deal of statements, and does take positions. Factual positions no less. For example:

"At the onset of the 2008 crisis, some people very accurately predicted the type of crisis it was (a financial panic) and recommended policies that were tested and proven to work."