Perhaps this is a model we here in the United States could learn from.
Iceland is a living experiment in what can happen when a country forces its financial firms to go under, rather than bailing them out, as much of the rest of the world did during the global financial crisis.
In October 2008, all three of Iceland’s major banks collapsed. None failed more spectacularly than Kaupthing, the bank whose glass headquarters were on the waterfront. At one point, it had a balance sheet four times as large as the annual economic output of the entire country. Last month, four former Kaupthing executives were sentenced to multiple-year prison terms.
Emerging from the crisis are three new ventures, including Arion Bank, the successor to Kaupthing, that hold only the local assets of the old firms. They also have a different mind-set from the brash tenacity that prevails elsewhere in the financial industry.
“The mandate was to build a new bank on the foundations of the old collapsed bank,” said Hoskuldur Olafsson, the chief executive of Arion Bank, sitting in his sparsely decorated office overlooking the water. “It didn’t look good. It had no direction whatsoever. What we needed to do in the beginning was find some sort of a direction for where we would go with this bank.”
Iceland’s unusual path has been held up as a successful model of what can happen when a country opts to let its financial firms go under. The result in Iceland is that new banks are missing the big bonuses and risky trading desks that have fed populist anger elsewhere.
While some may say that a course of action similar to the one Iceland’s government took in 2008 wouldn’t be possible here in the United States because our banks are simply “too big to fail,” keep in mind that the three major banks Iceland’s government took control of in 2008 were 10 times as large as the country’s gross domestic product. In contrast, bank assets in the United States are roughly the same size as the annual Gross Domestic Product.
Another difference in American Banks is that the largest are more international than national with assets spread around the globe and involving many trade agreements. The economies that would be disrupted are virtually unknowable as would any plan for reconstruction.
The main difference, however, is the world’s dependence on the dollar for monetary stability. How many years (and wars) has it taken for this confidence to be developed?
My main confidence in President Obama has been his ability to understand these consequences, despite the abject disregard and opposition of much of his political base.