Iceland was a poster child for the kind of crazy speculative real-estate-fueled boom-and-bust that characterized the 2008 crash around the developed world. Now Reuters is reporting that Iceland is on the mend. How did it do it? Part of it was due to the blessing of being a relatively small economy not directly tethered to the euro, which allowed the government to depreciate its currency, regain competitiveness for its exports, and make itself an attractive tourist destination once again.But profligate Greeks chomping at the bit to leave the eurozone shouldn’t get too excited. It turns out that currency depreciation is not the whole story:
Capital controls, progressive taxes and a careful phasing-in of austerity measures were also key to getting the country back on track, bringing a more than 10 percent fiscal deficit back to a near balance.Iceland also did what other parts of Europe haven’t dared to do—let its banks go under. It took some of the cost itself but forced foreign creditors to take the biggest hit.
The article rightly points out that the heterodox Icelandic approach is not universally applicable. But that’s not the important take-away from the story, as Via Meadia sees it. Rather, it’s that sometimes it is best to rip off the band-aid rather than prolong the agony. The pain was intense, and the crisis has left deep wounds on Icelandic society that may take years to scab over. But there is life after the crash.Sometimes it’s better to take the hit and move on — and there is no moral obligation to rescue banks or bank stockholders when loans go bad. Capitalism is about risk, and while the general good may sometimes require financial bailouts and other methods at the height of a crisis, the moral hazards created by profligate and indiscriminate bailouts in the long run can be more costly and more destructive than a short and sharp financial crash.