The economic crash of 2008 affected the world in a recession that many economists said was paralleled only by the Great Depression. America, a superpower in the global economy, was not the only country to experience the turmoil of financial collapse. Many parts of Europe, in particular, and areas of Asia also suffered as banking systems buckled, emergency loan funds were depleted, and national debts skyrocketed. For many, government bailouts were the last resort.
The underlying causes of the meltdown are multiple, and include an assorted domino effect that, when the last domino fell, took down financial giants and destroyed the working lives of many. Even after 6 years, it’s been a long road to recovery, and although many countries are on the path to rebuild their shattered economies, the struggle is still very real. Housing costs still stabilizing, financial institutions have to be rebuilt, and the trust of big and small investors must be regained.
Like a phoenix from the ashes, Iceland - the tiny country in the North atlantic with little more than 300 000 people - has proved an optimistic success story in its recovery. Before the crash, Iceland grew to a global economic powerhouse, looking towards home mortgages instead of metal-making and other natural resources to grow their capital. It worked. Their stock market grew exponentially, their real estate value tripled, and the assets of their three largest banks grew to 10 times the national GDP (Gross Domestic Product).
But what must go up, must also come down. Iceland eventually lost everything. Their currency, the krona, last a full half of its value, the stock market buckled, and their banks were at a $85 -100 billion loss—roughly $300 000 for each citizen.
Without the help of a bailout from the European Union — the government body it has never been a member of, despite on-and-off negotiations — Iceland bounced back. Their cafes and gourmet restaurants are bustling, the unemployment rate has decreased, tourism is high, and the country has attracted investors. Despite the country still having their share of problems, specifically with their housing debt, this little nation has become an exemplar of national financial savvy in its anomalous steady rise back to prosperity. How did Iceland live through the crash but avoid the decline into despair suffered by countries like Greece and Ireland? Here's how...
When many countries’ banks were crumbling, their governments effectively bailed them out at a public cost. In other words, governments used taxpayer money to ensure that their banks wouldn’t go bust. Iceland employed a different strategy: they let the banks fail. Although a bailout wasn't possible anyway due to the size of the banks in relation to the country’s economy, letting the banks go down had generally favourable effects. In doing so, Iceland effectively expanded their “social safety net,” according to Nobel Prize-winning economist Paul Krugman. Krugman also points out that “where everyone else was fixated on trying to placate international investors, Iceland imposed temporary controls on the movement of capital,” therefore allowing the country more room and time to strategize.
4 Government Control and Accountability
Some people say the government has no place in meddling with the banking systems of free markets. Iceland, however, marches to a different tune. Even until 2014, Iceland tightly regulated its banks, to the point of passing laws that make it illegal to pay out bonuses to executives that are more than 25% of base salaries.
3 Capital Regulation
In November of 2008, in the wake of the economic crash, Iceland imposed capital controls on all its financial institutions. It also dismantled the old, failing banks, and erected new ones such as Arion. The capital controls prepared by the International Monetary Fund (IMF) applied to capital outflows, and they were called by the IMF an "essential feature of the monetary policy framework.” According to the IMF, the controls helped Iceland reduce inflation, stabilize the currency, and keep rising debt at bay.
2 Saying No to the Euro
1 Thinking Outside the Box
Iceland has always had its own brand of historical, cultural and social identity. Their unique people, politics and business standards have often been their hallmark. It’s these characteristics that contributed greatly to their unparalleled recovery. At a 2007 conference in the country’s capital of Reykjavik, economist Paul Krugman noted the significance of Iceland’s ability to think outside of the box in their economic strategies. “Iceland zigged when all the conventional wisdom was that it should zag,” he said.
This thinking, combined with participating in the IMF-supported program worth $2.1 billion, paved the way to rebuilding their economy. The program’s three objectives were to stabilize the exchange rate, put public finances on a sustainable path, and restructure the financial system. Professor Joseph Stiglitz of Columbia University, another Nobel Prize-winning economist, agreed with Iceland’s policy standards, and their decision not to bail out their banks. “What Iceland did was right,” he said. “It would have been wrong to burden future generations with the mistakes of the financial system.”
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