Iceland: What We Should Have Done

Posted by Jeff Carter
on June 16th, 2011

Starting in 2007, the US government developed aggressive programs to save the big banks($GS, $MS, $C, $BAC). Without them, each of them would have probably gone bust.

Advocates of those programs, and that aggressive intervention on behalf of a few large, private companies said they saved the American economy. Since the American economy is the largest driver they reason that they saved the world economy too. Captain Government Program to the rescue!

America wasn’t alone. Proving that dumb ideas can proliferate, the Europeans rescued their banks too.

I wasn’t an advocate of those programs. I would have let all the banks go broke. There would have been market pain, but the system we had post-crisis would have been a lot better. America had a long set of bankruptcy laws and legal precedent, along with financial safeguards built into the Federal Reserve system to keep us afloat. Instead we are left with big zombie banks that are an even greater fiduciary risk to the system than before.

Iceland didn’t rescue its banks. It couldn’t afford to do it. So, they went bust. Iceland looked like it was going down a path of permanent financial armageddon. However, Iceland is in better financial shape than the rest of Europe today.

“Europe’s bailout path has only diverted ever-more resources to failing enterprises, postponing and deepening the problem. Iceland’s restructuring was both painful and costly for the population, but the government did not throw good money after bad, and the taxpayers were spared a nationalization of private debts. Is it any wonder that forward-looking financial markets are now betting on the Icelandic recovery?”

No Dodd-Frank. No super heroics. Just a level headed, clear eyed administration of bankruptcy law. The same would have happened here. Read the whole article.

UPDATE
Thought it might be interesting to see who voted for TARP and bailouts. Here is the link to the Senate (October 1, 2008). Yes Obama was pro-bailout, as was Harry Reid.

Here is the House. Pelosi was pro bailout, as was John Boehner.

Thank you for the link Instapundit, and welcome to his readers.

Thanks for the link Michael Savage. Welcome to his readers.

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