In tack­ling banks, Ice­land set in­ter­na­tional ex­am­ple

The China Post - - COMMENTARY -

If the strug­gle to re­cover from the 2008-09 global eco­nomic cri­sis were to be viewed as a com­pe­ti­tion among the be­nighted na­tions, neu­tral spec­ta­tors would be root­ing most for Ice­land, a peren­nial eco­nomic un­der­dog that has done what the United States and other coun­tries re­fused to do. It let its banks fail. It let them fall on the swords they forged them­selves. This is moral com­mon sense at its finest.

In deny­ing that its bank­ing in­sti­tu­tions were “too big to fail” — that con­temptible claim still echo­ing from Washington — the gov­ern­ment of Ice­land has taken on de­faults to­talling US$85 bil­lion. But it is also cit­ing the banks’ mis­han­dling of in­vestors’ money as jus­ti­fi­ca­tion for pros­e­cut­ing their ex­ec­u­tives on var­i­ous frau­drelated charges.

Let­ting the banks fail is an enor­mous gam­ble, econ­o­mists around the world have warned, but it’s also the right thing to do morally. “Why should we have a part of our so­ci­ety that is not be­ing po­liced, that is with­out re­spon­si­bil­ity?”

Spe­cial pros­e­cu­tor Ola­fur Hauks­son de­clared in tri­umph af­ter Ice­land’s supreme court up­held the con­vic­tions of three bankers and sen­tenced each of them to be­tween four and five-and-a-half years in jail. “It is dan­ger­ous that some­one is ‘too big’ to in­ves­ti­gate — it gives the sense that there is a safe haven.”

Not Just Back, But Above

There is no safe haven for the cor­rupt and the crim­i­nal, and stop­ping these peo­ple in their tracks pays div­i­dends. The In­ter­na­tional Mon­e­tary Fund says Ice­land is achiev­ing eco­nomic re­cov­ery with­out un­der­min­ing its abil­ity to con­tinue fund­ing healthcare and ed­u­ca­tion. In fact, Ice­land is widely ex­pected to be­come the first cri­sis-hit Euro­pean coun­try to get pro­duc­tion not just back to pre-cri­sis lev­els but above them.

The United States, where the cri­sis be­gan in a swamp of risky in­vest­ments and se­cret deals, chose to res­cue its bankers at mas­sive ex­pense to the tax­payer. The mea­sures im­ple­mented af­ter­ward by the White House and Congress were in­tended to look tough, and sev­eral key mar­ket traders did go to jail, but not the top ex­ec­u­tives chiefly re­spon­si­ble for tak­ing the world to the brink of eco­nomic catas­tro­phe. By most ac­counts they are back in busi­ness to­day, run­ning vari­ants on the same old scams. Their in­sti­tu­tions are “too big to fail” only be­cause their in­flu­ence in elec­tion pol­i­tics and the news media is so per­va­sive. The top ech­e­lon is re­garded as un­touch­able.

Ice­land has had to sum­mon t re­men­dou s po­lit­i­cal will to stop the rot in its fi­nance in­dus­try. Hauks­son is a po­lice of­fi­cer from a small fish­ing vil­lage who shoul­dered the daunt­ing task only be­cause no one else dared take on the role of spe­cial pros­e­cu­tor. Par­lia­men­tar­i­ans did their part by loos­en­ing laws that pro­tected fi­nan­cial deal­ings, open­ing the in­for­ma­tion gate for gov­ern­ment lawyers.

With a mea­sure of suc­cess now in hand and grow­ing op­ti­mism for the fu­ture, Ice­land still faces hur­dles. There might well be an out­flow of cap­i­tal that would de­value the krona. But such risks are worth tak­ing, even if for no other rea­son than Ice­land be­com­ing the first na­tion to act eth­i­cally and de­ci­sively, in the gen­uine in­ter­est of or­di­nary cit­i­zens rather than in the in­ter­est of the priv­i­leged class.

Two schools of eco­nomic thought are clash­ing here. Ice­land is try­ing to prove that banks are not too big to fall if their ex­ec­u­tives be­have im­pru­dently or fraud­u­lently, heed­less of the dam­age their greed does to peo­ple lower down the fis­cal lad­der. By con­trast, the United States is adamant that the col­lapse of ma­jor fi­nan­cial in­sti­tu­tions would trig­ger a dis­as­trous domino ef­fect for the econ­omy as a whole.

Morally, Ice­land is the coun­try on the right path. Eco­nom­i­cally, Ice­land ap­pears to be out­pac­ing ev­ery other na­tion in terms of post-cri­sis re­cov­ery.

There are cer­tainly econ­o­mists who be­lieve the bank ex­ec­u­tives have learned their les­son and that tough, well- en­forced mea­sures will pre­vent a re­peat of the 2008 night­mare. They say let­ting crooks off the hook is prefer­able to putting the en­tire econ­omy at risk.

We join Ice­land in re­ject­ing that ad­vice. This is an ed­i­to­rial pub­lished by The Na­tion on June, 27th.

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