This document compares the economic situations of Iceland and Ireland following the 2008 financial crisis. It discusses how Iceland's lack of prudent regulation and supervision of its privatized banks led to a highly leveraged and unstable financial system. When the crisis hit, all three of Iceland's big banks failed. The document examines the causes and lessons from Iceland's experience, including the role of inflation targeting and speculative finance, and draws parallels to Ireland's experience during the same time period.

1. ICELAND & IRELAND:
FAIR AND NOT-SO-FAIR
COMPARISONS
Dr Stephen Kinsella/stephen.kinsella@ul.ie/stephenkinsella.net

2. ––MAY YOU LIVE IN
INTERESTING TIMES

3. LAST TIME
A Rule-Bound
SGP Causes Problems
for Ireland wrt Fiscal Reform
Time to Break the Rules

4. Today
Iceland.
What’s the situation now,
How did it happen,
What lessons are there
for Ireland in 2009?

5. WHAT I WANT YOU TO
KNOW
Iceland’s economic situation Or: Pray.
is a direct outcome of its
Compare: Ireland
institutional history.
experienced the same
boom, the same bust
History Matters.
Contrast: But, we’re in the
Remedies for Iceland’s
EU.
problem: Either join EU or
kill its indigenous banking
system.

6. Oct 2008, All 3 big Icelandic banks fail & nationalisations
abound.
WHAT HAPPENED?
Nov 2008, IMF called in
UK ‘Attacks’ Icelandic economy
Speculative Attacks continue

7. WHY?
History
Pre 1990‘s: Icelandic economy previously highly regulated &
politicized
1990‘s+: financial liberalization with weak prudential regulation
and supervision
Privatised banks pursued highly leveraged positions
Imprudent monetary policy-Inflation targeting
Lack of Prudential regulation
Speculative Finance: The Minsky Hypothesis

8. 15
11.25
7.5
3.75
0
2003 2004 2005 2006 2007 2008
Inflation % yoy
Inflation target

9. 8
6
4
2
0
2003 2004 2005 2006 2007 2008
Real GDP Growth

10. 10X

11. MINSKY MOMENTS
1.Idea: Credit markets will breed their own reversal
2.How?
1.Cheap interest rates lead to increased lending.
2.This leads to increases in leverage (L/D ratio).
3.Perverse incentives breed dodgy lending via financial
innovations (Junk bonds/CDOS) ensues.
4.Something changes, dodgy loans default, banks fail, unless
they get bailed out by Big Bank/Big Govt.

12. WHAT COULD HAVE BEEN
DONE?
Dropped Inflation Targeting sooner (Danielsson)
Introduce Prudential regulation sooner
Listen to the experts (Buiter & Sibert)

13. WHAT IS TO BE DONE?
Join the Euro (Lane/Buiter *& Sibert)
Big risks even then

14. PARALLELS WITH IRELAND
Boom fueled by cheap money, perverse incentives, and light
regulation destabilised financial system
This lead to shocks in the real economy as bank lending dried
up. UE increased, GDP collapsed.

15. UNFAIR COMPARISONS

16. NEXT TIME