NationStates Jolt Archive

We are now in a situation where governments are rushing in to defend the markets -specifically to prop up the banks as one of a raft of measures to stabilise their economies. We are faced with a return to bank regulation. Th eFreidmanite ideologues have been caught with their pants down. What do you think? This is what Thomas Friedman thinks:

The Great Iceland Meltdown :eek2:

By THOMAS L. FRIEDMAN

Published: October 18, 2008

Who knew? Who knew that Iceland was just a hedge fund with glaciers? Who knew?

If you’re looking for a single example of how the globalization of finance helped get us into this mess and how it will help get us out, you need look no further than British newspapers last week and their front-page articles about the number of British citizens, municipalities and universities — including Cambridge — that are in a tizzy today because they had savings parked in Icelandic banks, through online banking services like Icesave.co.uk.

As Dave Barry would say, I’m not makin’ this up.

When I went to the Icesave Web site to see what it was all about, the headline read: “Simple, transparent and consistently high-rate online savings accounts from Icesave.” But then, underneath in blue letters, I found the following note appended: “We are not currently processing any deposits or any withdrawal requests through our Icesave Internet accounts. We apologize for any inconvenience this may cause our customers.”

Any “inconvenience?” When you can’t withdraw savings from an online bank in Iceland, that is more than an inconvenience! That’s a reason for total panic.

So what’s the story? Around 2002, Iceland began to free its banks from state ownership. According to The Wall Street Journal, the three banks that make up almost the entire banking system in Iceland “grew quickly on easy credit” and “their combined assets rose tenfold in five years.” The Icelandic banks, while not invested in U.S. subprime mortgages, had gone on their own borrowing and lending binges, wooing savers from across Europe with 5.45 percent interest savings accounts.

In a flat world, money can easily seek out the highest returns, and when word got around about Iceland, deposits poured in from Britain — some $1.8 billion. Unfortunately, though, when global credit markets closed up, and the krona fell, “the Icelandic banks were unable to finance their debts, many of which were denominated in foreign currencies,” The Times reported. When depositors rushed to get their money out, the Icelandic banking system had too little reserves to cover withdrawals, so all three banks melted down and were nationalized.

It turns out that more than 120 British municipal governments, as well as universities, hospitals and charities had deposits stranded in blocked Icelandic bank accounts. Cambridge alone had about $20 million, while 15 British police forces — from towns like Kent, Surrey, Sussex and Lancashire — had roughly $170 million frozen in Iceland, The Telegraph reported. Even the bobbies were banking in Iceland!

So think about it: Some mortgage broker in Los Angeles gives subprime “liar loans” to people who have no credit ratings so they can buy homes in Southern California. Those flimsy mortgages get globalized through the global banking system and, when they go sour, they eventually prompt banks to stop lending, fearful that every other bank’s assets are toxic, too. The credit crunch hits Iceland, which went on its own binge. Meanwhile, the police department of Northumbria, England, had invested some of its extra cash in Iceland, and, now that those accounts are frozen, it may have to reduce street patrols this weekend.

And therein lies the central truth of globalization today: We’re all connected and nobody is in charge.

Globalization giveth — it was this democratization of finance that helped to power the global growth that lifted so many in India, China and Brazil out of poverty in recent decades. Globalization now taketh away — it was this democratization of finance that enabled the U.S. to infect the rest of the world with its toxic mortgages. And now, we have to hope, that globalization will saveth.

The real and sustained bailout from the crisis will happen when the strong companies buy the weak ones — on a global basis. It’s starting. Last week, Credit Suisse declined a Swiss government bailout and instead raised fresh capital from Qatar, the Olayan family of Saudi Arabia and Israel’s Koor Industries. Japan’s Mitsubishi bank bought a stake in Morgan Stanley, possibly rescuing it from bankruptcy and preventing an even steeper decline in the Dow. And Spain’s Banco Santander, which was spared from the worst of this credit crisis by Spain’s conservative banking regulations, is purchasing America’s Sovereign Bankcorp.

I suspect we will soon see the same happening in industry. And, once the smoke clears, I suspect we will find ourselves living in a world of globalization on steroids — a world in which key global economies are more intimately tied together than ever before.

It will be a world in which America will not be able to scratch its ear, let alone roll over in bed, without thinking about the impact on other countries and economies. And it will be a world in which multilateral diplomacy and regulation will no longer be a choice. It will be a reality and a necessity. We are all partners now.

basically it is the 70's again. US generates world wide economic crisis. Followed by US rebounds from crisis faster then everyone else. sometimes I wonder if these things are planned.


though in the end the way to avoid this would be to create one world wide bank. not like the IMF but like the fed reserve for the world. 1 set of world wide banking regulations and one reserve rate to cut on down on interest rate shopping.


too bad the US would never go for it.

basically it is the 70's again. US generates world wide economic crisis. Followed by US rebounds from crisis faster then everyone else. sometimes I wonder if these things are planned.


though in the end the way to avoid this would be to create one world wide bank. not like the IMF but like the fed reserve for the world. 1 set of world wide banking regulations and one reserve rate to cut on down on interest rate shopping.


too bad the US would never go for it.
The US generated the oil crisis how exactly?

The US generated the oil crisis how exactly?

I was actually referring to the 70's currency crisis(the one where we ended up going off the gold standard and the world shit itself). Because we printed so much money our currency devalued. and because of the Breton woods system all of Europe's currencies inflated. also there is a lot of room to argue that oil prices were just a reflection of the inflation with a 1-2 year lag time.

basically it is the 70's again. US generates world wide economic crisis. Followed by US rebounds from crisis faster then everyone else. sometimes I wonder if these things are planned.


though in the end the way to avoid this would be to create one world wide bank. not like the IMF but like the fed reserve for the world. 1 set of world wide banking regulations and one reserve rate to cut on down on interest rate shopping.


too bad the US would never go for it.

The Antichrist! Communist! ¥0v $|-|4L1 |\|o† ¶ 4$s!!!111

The Antichrist! Communist! ¥0v $|-|4L1 |\|o† ¶ 4$s!!!111

general US response yes

general US response yes

Your welcome. Did I overdo the leet?

I was actually referring to the 70's currency crisis(the one where we ended up going off the gold standard and the world shit itself). Because we printed so much money our currency devalued. and because of the Breton woods system all of Europe's currencies inflated. also there is a lot of room to argue that oil prices were just a reflection of the inflation with a 1-2 year lag time.The Nixon Shock? How on earth does the Nixon Shock even come close to comparing with this?

Interesting link here from April 2nd 2008:
http://www.topix.com/world/iceland/2008/04/iceland-is-facing-banking-crisis
Iceland is facing banking crisis
Worries that a major Icelandic bank may default - and send losses rippling into European economies - became more acute today as the country's main banks were put on 'Negative Watch' by a global ratings agency. via Business World

Read All 2 Comments

Only 2 comments. :eek:

Your welcome. Did I overdo the leet?

i couldn't read it. so yes until you said leet i thought it was just you using symbols for swear words.

Did I overdo the leet?

Leet cannot be overdone - it r leet!
:p

i couldn't read it. so yes until you said leet i thought it was just you using symbols for swear words.

¥0v $|-|4L1 |\|o† ¶ 4$s!!!111 = You shall not pass!

The Nixon Shock? How on earth does the Nixon Shock even come close to comparing with this?

you didn't live in the 70's. and it started before the Nixon shock. when we would over print US currency and inflate all western European currencies but western European countries didn't get the benefit of the increased liquidity as the IMF stopped European countries from over printing their currency.
It is also a good part of the reason you have the Euro today as you didn't want the US to be able to ruin your currency via bad fiscal policies again.

then we can look at growth rates. prior to the 70's western Europe grew at 6% a year. afterward western Europe grew at what 1.8% ? that's a pretty bad fall.

but for comparisons sake shall we look at the misery index. (inflation + unemployment)
http://en.wikipedia.org/wiki/Misery_index_(economics)

look at Nixon, ford, and carter. Thus far the 70's have been much worse.
where as Bush has came in lower then Nixon.
Ps sorry I didn't look up Germany I couldn't find any info in English in the 2 minutes i was willing to use for this.

¥0v $|-|4L1 |\|o† ¶ 4$s!!!111 = You shall not pass!

join me good sir knight in the international banking round table.

From Article
...from towns like Kent, Surrey, Sussex and Lancashire...

FAIL!

Kent, Surrey, Sussex and Lancashire are Counties not towns. However the financial turmoil in Iceland is a very bad thing.

Towns like Lancashire :D What a hack :D

Anyway, aye, what's actually not been learned here is that Iceland needs to diversify. Go and set Greenpeace on fire or something and build that bloody hydroelectric damn they were talking about using to smelt aluminium with. Genius.

Globalisation shall saveth thee from the mess that globalisation gottest thee into in the first place... :hail:

FAIL!

Kent, Surrey, Sussex and Lancashire are Counties not towns. However the financial turmoil in Iceland is a very bad thing.
Pff, you don't know what your talking about.
He was obviously referring to Sussex, Wisconsin (http://en.wikipedia.org/wiki/Sussex,_Wisconsin); Surrey, British Columbia (http://en.wikipedia.org/wiki/Surrey,_British_Columbia); and Central Lancashire (http://en.wikipedia.org/wiki/Central_Lancashire).

The only mistake was when he referred to Swedish band Kent (http://en.wikipedia.org/wiki/Kent_(band)) as a town. Unless he meant their fans, but I don't think two dozen Scandinavian pot-heads really count as a "town."

Globalisation shall saveth thee from the mess that globalisation gottest thee into in the first place... :hail:

its more like globalization has come but no one has bothered to put into place a system for it. so we are globalized but running on the old system. which allows people to go to one country (Iceland) for deposits and another country (USA) for loans. this creates money shortages everywhere.

So Iceland pwns :hail:

I like the emotes

FAIL!

Kent, Surrey, Sussex and Lancashire are Counties not towns. However the financial turmoil in Iceland is a very bad thing.

And Sussex is two!

so we are globalized but running on the old system. which allows people to go to one country (Iceland) for deposits and another country (USA) for loans. this creates money shortages everywhere.
That makes no sense.

Iceland is the victim of the same thing the Asian countries experienced in '97, except in this case the imbalance between debt and reserves is large enough to produce the same result even without a crash in reserves caused by a run against a currency peg.

Not new, not particularly surprising, not "ooh, what a brave new world we live in". Answer: more banks moving their corporate HQs into countries large enough to bail them out when necessary. Iceland is not a very credible regulator for a global bank, and unless some sort of global system gets built (and my thread (http://forums.jolt.co.uk/showthread.php?t=569631) on that issue has been ignored with stunning commitment despite a garish title), that means big banks will want to be where there is a good regulator. That may not mean less of a regulator, though it obviously doesn't mean more either. It means good regulation, which we'll see whether anyone has the brains to come up with.

We are now in a situation where governments are rushing in to defend the markets -specifically to prop up the banks as one of a raft of measures to stabilise their economies. We are faced with a return to bank regulation. Th eFreidmanite ideologues have been caught with their pants down. What do you think?
I seriously have to ask you to stop talking about this in terms of ideology. I asked right when this current phase in the crisis started what sort of regulations had been abandoned, what sort of political steps taken - anything to justify people connecting this and liberal economics. The results were disappointing to say the least. So either make a case, or just drop it.

I seriously have to ask you to stop talking about this in terms of ideology. I asked right when this current phase in the crisis started what sort of regulations had been abandoned, what sort of political steps taken - anything to justify people connecting this and liberal economics. The results were disappointing to say the least. So either make a case, or just drop it.

Don't take it personally Neu L but what has happenede over these last couple of months kind of takes the wind out of the sails of the free marketeers.

Neu L - I have to hand it to you. You're like a Collingwood suppoerter - you'll even barrack for them when they're down (Dear readers, that was an Australian Rules Football reference. DFor those in the US, substitute "Lakers" for Collingwood and "root for" rather than "barrack for". "Root" in an Australian context has sexual overtones.

Don't take it personally Neu L but what has happenede over these last couple of months kind of takes the wind out of the sails of the free marketeers.

Neu L - I have to hand it to you. You're like a Collingwood suppoerter - you'll even barrack for them when they're down (Dear readers, that was an Australian Rules Football reference. DFor those in the US, substitute "Lakers" for Collingwood and "root for" rather than "barrack for". "Root" in an Australian context has sexual overtones.

Interesting. You learn something new every day.


Anyway, I find the struggles to justify the system that got us into this mess pretty entertaining.

That makes no sense.

Iceland is the victim of the same thing the Asian countries experienced in '97, except in this case the imbalance between debt and reserves is large enough to produce the same result even without a crash in reserves caused by a run against a currency peg.

the problem is the banking system doesn't work well past a national level.

Take Iceland. high interest rates. A great place to deposit money.
However for the same reason no one with any common sense borrows money from the bank of Iceland because the interest rates will eat you alive. So how does the bank of Iceland get enough to pay its interest. well they buy the really high interest loans of other banks. However high interest loans are normally high interest because they are also high risk. so a small recession and suddenly these high risk loans default in mass.

The solution is to establish an international reserve. Set the interest rates internationally. so there is no real benefit in storing your money in one countries bank and borrowing form another.

Don't take it personally Neu L but what has happenede over these last couple of months kind of takes the wind out of the sails of the free marketeers.
How? It doesn't change things any more than the Enron scandal did, or people getting mugged on the street does.

Sometimes people, either by themselves or as a group, make wrong choices. Sometimes these choices are honestly stupid, sometimes they're malicious. The market is a mechanism for people to make decisions and act according to their will, which produces optimal outcomes, provided people make good decisions. Whenever they don't, market outcomes may not be the best, and some outside force could improve things. Though that is not a given either, of course.

The only people who would disagree with this are anarcho-capitalists. They are few and far between, and they have no problem in disassociating what they support from the system we have, since it's obviously nothing like anarcho-capitalism.

In this case now some people made malicious choices, the vast majority just acted stupidly. The market outcome was subsequently suboptimal, and the state as the only actor independent of market forces is the logical candidate to go to for improvement. The alternative is the market shifting to a new, better equilibrium given the new information available and the changed behaviour of the actors - but with very significant transition costs. None of this is really controversial, and none of it goes against neo-classical economics.

The next question to be answered is whether, given that the market didn't do well, the government will do any better. That depends on the people making the decisions, and there are very few decisionmakers who I would trust to 1) know what they're doing and 2) have the right motives. This is where economic liberals such as myself can disagree with some others who, it seems to me, tend to assume supernatural powers on the part of the state that allow them to automatically conclude that a market failure must equal a government fix. But we'll see whether this becomes relevant during the conference.

Immediately relevant is of course the question of regulations. There were holes in this case which weren't caused by ideology but by a combination of financial innovation, which created new types of assets and ways of treating them, and the same overreliance on certain types of statistical modelling by regulators as was exhibited by bankers. Some particularly harmful practices, such as moving assets into opaque off-balance sheet vehicles, were actively encouraged by regulations. In Australia, there still is no need to include such assets into considerations of regulatory capital adequacy. On the plus side, that meant losses on such assets didn't mean they immediately had to raise capital, as US banks did. On the downside...who knows what that stuff is? I guess we'll find out if the Australian mortgage market ever implodes.

At any rate, I just want to get a point across: this isn't an issue of more or less regulation, but of better regulation. You won't find a banker who will disagree with this, nor an economic liberal. Banking and finance is already an incredibly regulated business, as you would expect given its nature. There is no other industry in which you'd be required to constantly give the government information about virtually anything you do. More rules, and I wouldn't even know what they might be, wouldn't fix anything. If it turns out that way, it might even be best if we came out of all this with fewer rules which simplify standards, reporting and so on and thus eliminate any incentive to shift things around. Minimise the returns from regulatory arbitrage, and you'll have gone a long way already. Time will tell, I suppose.

However for the same reason no one with any common sense borrows money from the bank of Iceland because the interest rates will eat you alive. So how does the bank of Iceland get enough to pay its interest.
Icelandic banks are able to offer high interest rates because official interest rates in Iceland are high. I'm not sure exactly what monetary policy regime the central bank there operates under, but rest assured that it either has means of meeting its own interest obligations or (more likely) it doesn't actually have to, because it isn't the one paying any interest in the first place.

The solution is to establish an international reserve. Set the interest rates internationally. so there is no real benefit in storing your money in one countries bank and borrowing form another.
I have a feeling the "national sovereignty" crowd is gonna raise a stink.

Not to mention that the ECB already found that, given economic conditions and positions in the cycle vary even between the relatively similar economies of western Europe, doing a common monetary policy is hard work and rarely optimal.

Icelandic banks are able to offer high interest rates because official interest rates in Iceland are high. I'm not sure exactly what monetary policy regime the central bank there operates under, but rest assured that it either has means of meeting its own interest obligations or (more likely) it doesn't actually have to, because it isn't the one paying any interest in the first place.

considering they are the one country that found themselves with enough subprime mortgages from the US to default their country Id say they are having problems meeting interest rates domestically. Not just wreck their retirement programs default the entire country until Russia bailed them out.

I have a feeling the "national sovereignty" crowd is gonna raise a stink.

Not to mention that the ECB already found that, given economic conditions and positions in the cycle vary even between the relatively similar economies of western Europe, doing a common monetary policy is hard work and rarely optimal.
Somewhat however banking is one of the easier issues to get by. after all prior to the Nixon shock the IMF had pretty strong control over most developed countries banks, with the exception of the US (who control the IMF)

Prior to 1911(birth of Fed reserve) ever state in the US had a cycle. most of the panics and depressions were confined to New york city. or The east coast if it was particularly far reaching. You put everyone on the same system their cycles will synchronize.

considering they are the one country that found themselves with enough subprime mortgages from the US to default their country Id say they are having problems meeting interest rates domestically. Not just wreck their retirement programs default the entire country until Russia bailed them out.
Iceland's banks didn't die from subprime mortgages, they died because their funding costs have gone through the roof.

From the central bank they can only get kroner. To pay the interest and other liabilities for the many things they'd done overseas they needed euros, dollars, pounds and all the rest of it. Normally they would've borrowed that in the interbank market. When that suddenly seized, other banks had their central banks and governments to run to while Iceland's banks didn't. As the kroner's value dropped, anything the government could do for them was less and less effective, until they died. It's as simple as that.

Prior to 1911(birth of Fed reserve) ever state in the US had a cycle. most of the panics and depressions were confined to New york city. or The east coast if it was particularly far reaching. You put everyone on the same system their cycles will synchronize.
Eventually. But it would take some time - try putting the US and China under the same interest rate right now. Both places would go nuts.

Iceland's banks didn't die from subprime mortgages, they died because their funding costs have gone through the roof.

From the central bank they can only get kroner. To pay the interest and other liabilities for the many things they'd done overseas they needed euros, dollars, pounds and all the rest of it. Normally they would've borrowed that in the interbank market. When that suddenly seized, other banks had their central banks and governments to run to while Iceland's banks didn't. As the kroner's value dropped, anything the government could do for them was less and less effective, until they died. It's as simple as that.


Eventually. But it would take some time - try putting the US and China under the same interest rate right now. Both places would go nuts.

likely about the same as putting Montana and new york city. Also the one currency of a singular reserve system would eliminate that as well.

Neu_L something dramatic is going to come from the November meeting of world leaders. There will be a new US President and the world will see a more globalised economy but it won't be a classical free-market one.
I think it will be a neo-Keynesian hybrid. Why wouldn't it be?

I think it will be a neo-Keynesian hybrid. Why wouldn't it be?
Because neo-Keynesianism doesn't really prescribe a hybrid.