Iceland, Bank Bailouts, and Alternative History

Revisiting Iceland

In November of last year, my wife and I spent a long weekend in Iceland. In case you missed it, you can read my blog post about the trip.

Iceland was beautiful and anyone that likes to travel should definitely add it to their bucket list. Anyway, I'm revisiting my blog post not to pitch you on a trip to Iceland (just go), but to provide you with an update on the country's economy and to play a fun game of Alternative History. Exciting, no?

Eight Years Later: Recovery

While reading this week's edition of The Economist, a headline caught my attention: The End of a Saga: Iceland Lifts Capital Controls. What does lifting "capital controls" mean and why is it important? It means that pension and investment funds are once again allowed to invest their money abroad. This is important because eight years after the financial crisis, Iceland's economy appears to have recovered, thanks to strict financial controls and a big boost in tourism.

Why, you ask, should we celebrate Iceland's economic recovery? Well, aside from the fact that the country produces the best yogurt ever, Iceland's recovery presents us with an interesting case study of how to manage an economic crisis. Iceland's leaders took a different approach to handling the crisis than did their counterparts in the United States. I wonder if perhaps our leaders chose...poorly.

Now for a brief summary of how we got here.

Hop Into My Wayback Machine And Let's Travel Back To 2008

Remember when that little thing called The Global Financial System had a complete meltdown? If not, I highly recommend reading or watching The Big Short, which provides a great (and often funny) overview of what caused the financial crisis. 

Iceland was one of the countries hardest hit during the economic meltdown of 2008. Three of the country's largest privately-owned banks defaulted on $62 billion of foreign debt and eventually collapsed. But wait, there's more! Iceland's currency, the krona, fell 50% in one week. The stock market fell 95%. Nearly every business in Iceland went bankrupt.

Here's the major difference with how the crisis was handled: Unlike the too-big-to-fail banks in the United States, Iceland's three largest banks were allowed to fail.

Alternative History (Not Facts)

Would the United States be better off today if our banks, like those in Iceland, had been allowed to fail?

This question started an ongoing debate between my wife and me. She has always argued the United States would be better off today if our banks had been allowed to fail. I've argued that bailing out banks was the correct course of action because it was the only way to avoid widespread economic hardship.

After reading about Iceland's recovery, I've been questioning my opinion on the bank bailout. That's right, I'm admitting my wife might be right.

News of Iceland's recovery isn't the only reason I'm questioning the wisdom of bailing out banks; the aftermath of the 2016 presidential election also plays an important role in my thinking. It's clear there's a sharp - and growing - divide between rich and poor in the United States. Much of that divide can be attributed to rapid changes in technology, which is going to be exacerbated by advances in A.I. and autonomous vehicles. Very little seems to have changed for the better for a large segment of the population. I wonder if letting the banks fail - a reboot - could have benefitted a greater number of people.

The downside of letting banks fail is that we would have seen mass bankruptcies, an inability to borrow money, even greater losses in the U.S. financial markets, and mass unemployment. And probably worse: Riots and civil unrest. But maybe the country as a whole would have come out stronger on the other side. 

I guess it comes down to this: Which option is less terrible? Your answer will most certainly depend on what you stand to gain (or lose).

Not An Apples-To-Apples Comparison

Iceland, while an interesting case study, is obviously far different from the United States. For example, Iceland has a population of ~325,000, compared to ~310,000,000 in the U.S. That difference makes it difficult to imagine the scale of problems the U.S. would have faced if banks had been allowed to fail.

Ultimately, there's no way to determine what would have happened if the United States had followed the same course of action as Iceland. But it's a fun question to consider! *

* It's possible my idea of fun differs from yours.

Listening / Reading / Watching

Here's what has my attention right now:

Basic Income: A Radical Proposal for a Free Society and a Sane Economy by Philippe Van Parjis and Yannick Vanderborght. The idea of Universal Basic Income (UBI) has been around for a long time but has resurfaced as people such as Elon Musk have suggested it as a solution to a world facing radical change due to advances in A.I. and autonomous vehicles. Would it work? I don't know, but it's a fascinating subject.

The books in the sci-fi series The Expanse offer a template for UBI:

Don't want to work? No problem. You'll receive Basic, which is enough money to live off of. It will be a no-frills, not-especially-comfortable life, but you won't have to work.

Want to have a more comfortable life? Great. You have to work for a year to ensure you really want to work. Succeed and you're allowed to go to a university where you'll learn a trade or profession that will enable you to earn more than just Basic.