http://www.progressive-economics.ca/2008/10/14/milton-and-the-meltdown-in-iceland/
Can we chalk this up to Fractional reserve banking, or can we go more indepth? Has anyone written on this?
Alan Greenspan, former head of the U.S. federal reserve, had no particular expertise in economics, but was a disciple of libertarian Ayn Rand and an advocate of Friedman’s economic policies, including tax cuts and deregulation.
I guess having an M.A. and later PhD from NYU (one of the best econ schools in America) and also having studied in Columbia (another top econ school) under Arthur Burns (a Fed chairman) is having no particular expertise in economics.
Although we are in the midst of them, it appears that these experiments inspired by Friedmanite economics are not meeting with much success. Each action taken by the U.S. Treasury and federal reserve until mid-October was met with a further decline in stock prices. Stock markets did not start to recover until much more aggressive action was taken by European nations, including effective nationalization of major banks, and then followed by the U.S. This is far beyond what Friedman and his followers would have advocated.
The stock markets have not yet "recovered." They're still crashing all around us. And I suppose you can't call the numerous fiscal stimulus plans that governments have issued (anyone forget the checks they got from Uncle Sam?) since there have been economic troubles Keynesian.
The country is now essentially bankrupt after taking over its three major banks to prevent them from failing. These banks owe more than $60 billion overseas, about six times the value of Iceland’s annual economic output.
Which is why countries shouldn't attempt bailouts. It's interesting how the author claims that nationalization works and then gives us an example of an entire country essentially going broke after nationalization.
This made me wonder: what on earth happened to get Iceland and its banking sector into such a state? It turns out that Iceland, despite its coalition governments and Nordic social mores, became a poster child for Friedmanite economic policies from the 1990s on.
It turns out that Iceland, despite its coalition governments and Nordic social mores, became a poster child for Friedmanite economic policies from the 1990s on.
What's better than post hoc analysis?
Under Prime Minister David Oddsson and explicitly inspired by Friedman, they implement a radical (but now familiar) program of privatization, tax cuts, reductions in spending and deficits, inflation control and targeting, central bank independence, free trade and exchange rate flexibility. Corporate taxes were cut from a rate of 50% down to 18%. Privatization and deregulation were driven directly through the Prime Minister’s office and the major banks were privatized early this decade.
Yup, I'm sure tax cuts were the reason for economic meltdown.
Icelandic banks and businesses, with the support of their government, expanded aggressively overseas, particularly into the U.K. and the Netherlands. The banking industry and private businesses flourished and created a number of billionaires on the island. Then it all came crashing down. Short-term interest rates and inflation have both hit 14% and the country’s currency has lost half of its value. As a result of its economic and financial meltdown, iceland now has an external debt equivalent to about $200,000 per person with virtually no prospect of repaying it. This wasn’t caused by the U.S. subprime crisis or by what is happening at the former centre of free market capitalism on Wall Street, but instead by the same Friedmanite free market policies being applied in one of the smallest countries in the world.
Icelandic banks and businesses, with the support of their government, expanded aggressively overseas, particularly into the U.K. and the Netherlands. The banking industry and private businesses flourished and created a number of billionaires on the island.
Then it all came crashing down.
Short-term interest rates and inflation have both hit 14% and the country’s currency has lost half of its value. As a result of its economic and financial meltdown, iceland now has an external debt equivalent to about $200,000 per person with virtually no prospect of repaying it.
This wasn’t caused by the U.S. subprime crisis or by what is happening at the former centre of free market capitalism on Wall Street, but instead by the same Friedmanite free market policies being applied in one of the smallest countries in the world.
So... high interest rates and high inflation, both of which the central bank controls, are the fault of free markets? Huh?
Political Atheists Blog
Well, obviously, tax cuts lead to too much economic growth... ?? I did want to call him on that - the "Tax cuts" thing is kind of like when mom makes a to-do list for you. One of those things like walk the dog and clean your room that gets thrown on reflexively.
Thank you for taking the time.
That article is a flat-out lie when it says that the US subprime mortage had nothing to do with it.
First, the easy credit didn't just go to US nationals. Our banks(I´m from Iceland) were knee-deep in dealings with most of the bailed-out banks in the US. In fact, the govt. takeover of Glitnir Bank(the first one to fall) was a direct result of margin calls triggered by the fall of Lehman Brothers. We collectively as a nation deserve every ounce of shame for our current situation that is hurled our ways, make no mistake about that, but it is not like our bush league "elite" would have been able to engineer a meltdown of this scale by themselves - they had plenty of international assistance in that.
We also had our very own housing bubble, almost identical to yours. In fact we are six months to a year ahead of the United States in the bubble-popping process. In that time we have seen interest rates at close to 20%, public protests day after day, currency controls, rocks, teargas, and eventually a government that was forced to resign.
Oh where? Oh where have the monetarists gone? Oh where? Oh where can they be???????
The answer is actually awful for modern society. They have been swallowed by the Keynesians and it has been inflate-spend-inflate more-spend more... ever since.
The monetarists were of the opinion that to solve economic problems you just inflate-inflate-inflate more-inflate more. But politicians hate to have all this funny money with nowhere to go and nothing to do. So they use it and make the structural problems left over from previous inflation all the worse.