Lessons from Iceland’s Financial Crisis

Published on the blog Triple Crisis (a publication from Dollars&Sense), by Nina Eichacker, Nov 16, 2015.

… One factor that contributed to the Icelandic financial crisis was the lack of financial market transparency. Organizations that could have reported on the conditions of the Icelandic financial marketplace and the state of the Icelandic economy did not … //

… Keynes and Minsky argued that financial systems without adequate regulatory apparatuses are inherently prone to crisis. The Icelandic Central Bank’s decision to change from stability-promoting to inflation-targeting monetary policy led to rising interest rates, precipitous increases in capital flows and prices, and asset bubbles in the housing market. The Icelandic government’s promotion of non-financial firms’ and households’ purchase of shares in Icelandic banks created perverse incentives for banks to raise share prices, and increased the scope of losses in the event of the banks’ decline. These processes increased Icelandic instability and the costs of the inevitable crisis.

Irrational exuberance and moral hazard nullified the effects of evidence that Iceland was dangerously over-leveraged. Investors had access to data demonstrating instability and illustrating the risks of investing in Iceland’s financial system and economy. Many, however, continued to follow the advice of economists like Mishkin and Portes who argued that Iceland should not be assumed to have the same financial risks as developing economies, despite the newness of its supercharged financial system. Outside investors’ continued willingness to lend to Iceland increased the leveraged state of Icelandic banks and the scope of the eventual financial crisis.

National and international unwillingness to compare Iceland’s policy actions and history to that of developing economies like Chile, Argentina, and Uruguay demonstrates an assumption that Icelandic institutions were ready for the job of supervising a radically transformed financial sector. The Icelandic government’s repression of data demonstrating instability, and the Icelandic media’s unwillingness to publish unflattering stories give lie to the notion that Western European states’ financial institutions and governments were robust enough for very liberalized financial sectors.

Iceland’s crisis indicates the need for the following policies: Any state that liberalizes or changes the fundamental premise of monetary policy rapidly should be subject to increased scrutiny. The consequences for Iceland’s population demonstrate that while some actors and institutions may recognize the potential for financial crisis and act in ways that maximize their profits the broader public must be aware of the changes of their new financial landscapes. Greater financial literacy insures local populations against broader losses in the event of a crisis. Finally, states should reconsider finance-led growth strategies. The costs of financialization, given moral hazard and irrational exuberance, expand rapidly without meaningful oversight; Iceland’s experience illustrates the effects of such to the rest of the world.

(full text).

(Nina Eichacker is a lecturer in economics at Bentley University. This blog post summarizes her recent Political Economy Research Institute PERI working paper Too Good to Be True: What the Icelandic Crisis Revealed about Global Finance).


New Zealand - RAW DATA: Interview with Labour’s finance spokesman Grant Robertson, on NBR, Nov 7, 2015;

Justice is an essential condition for achieving the ideal of universal fraternity, on Current Cncerns, Nov 6, 2015: speech delivered by the Holy Father at the General Assembly of the United Nations in New York;

Switzerland’s commitment to the peaceful coexistence of peoples, on Current Cncerns (scroll down), by Thomas Kaiser, Nov 6, 2015: bilateral workshops between Russian and Swiss Presidents of Parliament – The Swiss-Russian cooperation comprises a variety of topics, during the discussions the potential of a closer collaboration on the technical level in the fields of innovation, research, health and energy was in particular elicited;

World yuan-ization thanks to the City of London, on Voltairenet.org, by Ariel Noyola Rodríguez, Nov 5, 2015: the Government of China promotes the internationalization of «the people’s currency» (‘renminbi’) through a policy of alliances that does not take ideological barriers into account. In a first moment the diplomatic forces of the yuan were concentrated in Pacific-Asia, but in a second moment, it became necessary to gain the support of the West. After the President Xi Jinping visited London, between the 19th and the 23rd of October, the bases of the «golden age» between China and the United Kingdom were established, with which both countries looked to push the yuan-ization of the world economy;


  • Blood on his hands: CIA officials, others implicate Snowden disclosures in Paris attack, on Russia Today RT, Nov 17, 2015;
  • Die Französische Republik als Geisel, auf Voltairenet.org, von Thierry Meyssan, 17. Nov 2015: der Krieg der bis nach Paris reicht, ist für die Franzosen, die fast alles von den geheimen Tätigkeiten ihrer Regierung in der arabischen Welt, von ihren widernatürlichen Bündnissen mit den Golf- Diktaturen und ihrer aktiven Teilnahme am internationalen Terrorismus ignorieren, unverständlich. Nie wurde diese Politik im Parlament diskutiert und die Mainstream-Medien haben nur selten gewagt, sich dafür zu interessieren;
  • La République française prise en otage, dans Voltairenet.org, par Thierry Meyssan, le 16 nov 2015:  la guerre qui s’étend à Paris est incompréhensible pour les Français qui ignorent presque tout des activités secrètes de leur gouvernement dans le monde arabe, de ses alliances contre nature avec les dictatures du Golfe, et de sa participation active au terrorisme international. Jamais cette politique n’a été discutée au Parlement et les grands médias ont rarement osé s’y intéresser;
  • Passeport : le retour, dans Voltairenet.org, par Jean-Claude Paye, le 15 nov 2015: Faut-il en rire ou en pleurer : depuis le 11 septembre 2001, il n’est pas d’attentat terroriste sans que les coupables, sensés se cacher, ne se fasse identifier en laissant derrière eux leurs papiers d’identité. Pour le sociologue Jean-Claude Paye, l’apparente stupidité répétitive des terroristes doit être interprétée comme un artifice rhétorique du Pouvoir pour sidérer les citoyens. C’est parce que le récit officiel est absurde qu’on ne peut pas, qu’on ne doit pas le contester;
    (mon commentaire: je pense plutôt que ‘Paris’ est une punition de LA FRANCE {comme l’est pour L’ALLEMAGNE la révélation du scandal de Volkswagen} – de la part de la mafia internationale/shadow gov – pour un {dédectable} début de non-soumission à ses dictats géopolitiques – Heidi).

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