Monday, September 10, 2012

Iceland shows how to do it right

Iceland is a great example of how letting the market work, how taking your medicine and starting over, leads to a much better result in the long run.
Iceland, like the rest of Europe, was faced with an almost unprecedented economic situation in 2008. Iceland’s central bank tried to rescue some of the country’s largest banks, bankrupting itself in the process. Iceland’s largest banks held almost 10 percent of Iceland's GDP in assets (much of it foreign) in 2008. The central bank was forced to attempt the rescue after agreeing to guarantee future bailouts in 2001. With the central bank out of commission and a crippled financial sector, Iceland’s GDP took a nosedive.
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Iceland’s GDP per capita (in current U.S. dollars) was a little over $65,500 in 2007; in 2009 it was almost $38,000. It would be cruel to overlook the effect a sudden loss in wealth like this had on the average Icelander’s economic well-being. Having investments you thought were safe vanish is unfortunate at best and tragic at worst. However, the economic future of young Icelanders will almost certainly be substantially better than that of their peers in Greece.
Icelanders will do better than Greeks precisely because financial institutions collapsed in Iceland

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