In tackling banks, Iceland set international example
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.