By Bill Wilson – Now that Iceland has told international banks and the European Union (EU) to pound sand, by refusing to bail out the UK and Netherlands who covered the losses of British and Dutch investors who lost $5.8 billion in Icesave when the bank failed in 2008, a funny thing has happened.
Or has not. The Earth did not open up, sucking the North Atlantic island nation into the deep reaches. The sky did not fall. The world did not end.
Instead, eyes are opening, and citizens the world over are realizing that “too big to fail” may have just been a canard by financial institutions to save their skins by shaking down taxpayers with threats of the “next Great Depression”.
One reader, Dagur Thomas, wrote to Americans for Limited Government (ALG) in reaction to the recent national referendum that defeated the bailout of foreign investors, “I’m from Iceland, and I truly hope the world will do the same as we did.” Why?
The Icelandic people can see the forest for the trees, and when they look around the world, they see whole peoples in chains, shackled to sovereign debts that cannot possibly be paid. They understand and are affirming their independence, and are saddened by those nations that have capitulated to the demands of a few well-connected financial institutions.
While the rest of the world, including the U.S. and Ireland, were rushing to heap bank losses on the backs of their citizenries, Iceland was letting its banks fail when its losses became too large for taxpayers to bear. In fact, the losses were so gargantuan — roughly ten times the size of its entire $12 billion economy — that it could not possibly have covered the losses.
By the “too big to fail” hypothesis, the failure to bail out Icesave should have wrecked the economy. But, businesses have not closed shop, failing to meet payroll as credit dried up. And although international banks are retaliating, downgrading its credit rating, the New York Times editorial board reports that, somehow, with no bailouts, Iceland is “pulling through.”
The editorial explains, “The I.M.F. expects it to grow 2.5 percent this year. Unemployment is falling. Compare its case to Ireland, where the government put the banks’ debts on the shoulders of taxpayers. Its economy shrank at least as much as Iceland’s, and it is recovering more slowly.”
More or less, the bank bailout in Ireland is inhibiting that nation’s recovery, and the lack of it is fostering Iceland’s. The Times also reports that “insurance on Icelandic government debt is cheaper than from Ireland”. The lesson? A tremendous expansion of sovereign debt to bail out banks is not necessarily an economic panacea. In fact, it may prove to be a ball and chain slowing the West down for decades to come.
When even the Times gets that letting investors take their richly-deserved losses is self-evidently the right course, why doesn’t Ben Bernanke, Timothy Geithner, and Barack Obama?
Would that the U.S. had followed its own fiercely independent streak, and let financial institutions that bet poorly on the housing market, Fannie Mae and Freddie Mac, those insured by AIG, and delinquent borrowers all take their losses. Make no mistake, had we let them all fail, it would have been painful as Hell.
But we would have endured.
Instead, those who bought mortgage-backed securities, AIG derivatives, and other shoddy financial “instruments” were given 100 cents on the dollar for their bad paper. Instead, risk has been nationalized, and losses have been socialized. And yet, growth is still sluggish, the national debt has never been higher (or growing faster), and unemployment remains persistently high.
So why were the bailouts “necessary”?
Basically, as in the case of the UK and Netherlands demanding Iceland reimburse them for covering the losses of their own citizens, the ruling class of creditors here did not want to take any losses. Moreover, in the U.S., many of the institutions who were exposed to bad mortgage paper were the very same institutions the Treasury depends on to buy U.S. debt.
So, the government did not want to lose its capacity to deficit-spend — and constituent-building power it fosters — and so Congress, the Treasury, and the Federal Reserve dutifully bailed out the nation’s creditors with trillions of borrowed and printed dollars.
But not even a drop in sales of U.S. treasuries would have justified propping up these zombie institutions. The “worst” that would have happened is that the budget would have been balanced.
But as Mr. Thomas from Iceland notes, it is not too late for free peoples everywhere to throw off the shackles that the creditors have neatly fitted around their ankles. Submission to the will of the few is never a fait accompli.
Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.