Paul Sweeney: A most interesting and unexpected link here. Of all places, the IMF website has a short piece on Iceland. The key difference between us, besides the letter, is that up there “the decision not to make taxpayers liable for bank losses was right, economists say.”
The piece says private creditors ended up shouldering most of the losses relating to the failed banks, and today Iceland is experiencing a moderate recovery. Unemployment is declining, and the government was able to return to the capital markets earlier this year
The welfare state greatly helped, and benefits were redirected to lower income groups, according to Stefán Ólafsson of the University of Iceland. “The result was that inequality in Iceland actually decreased during the program,” he said.
In contrast to Ireland’s orthodox approach, Nobel winner in economics, Joseph Stiglitz of Columbia University, endorsed Iceland’s policy response: “What Iceland did was right. It would have been wrong to burden future generations with the mistakes of the financial system.”
Another Nobel winner, Paul Krugman said that “despite warnings that economic Armageddon would follow Iceland’s decision not to accept liability for the losses of private banks, credit default swaps on sovereign debt are now much lower in Iceland than in Ireland, where the state assumed full responsibility for bank losses”.
Krugman compares and contrasts us to Iceland though he uses slides without comment. Thus we can see the fall in say wages in Iceland, compared to here, due largely, one assumes to its ability to devalue. Devaluation is of course a crude a cut in earnings but it hits all except most of those in exporting businesses.
Here, the attempt by the previous government at internal devaluation - of wages only – failed. Happily for employees and for many others in business, this failure to depress/cut private sector wages also helped to sustain a modicum of domestic demand.