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Some of you will understand the title of this post and for those of you who don't, I'll explain below. But for now, I should start with the bottom line, which is this: Iceland does stand as a powerful example against the rentier-fueled lie that default* must be avoided at all costs. However, what Iceland does not stand for - and what we truly need - is a country who can withstand the overwhelming pressure to protect creditors at the cost of the people.

The world economic crisis is, at bottom, a debt crisis. (See here, here and here). As we careen towards disastrous austerity measures at home and abroad, as Europe kicks Greece's inevitable default down the road time and again, as we fail to confront the debt overhang that continues to thwart America's recovery, we must remain mindful that debt restructuring is not only a viable option, but likely a prerequisite to recovery. Too many countries - buckling to the pressure of rentiers - have been too willing to impose austerity and essentially unwilling to even consider principal reduction.

Thus, the global financial cabal widely denounced Iceland and praised countries, like Ireland, who imposed harsh austerity measures in order to guarantee its banks' debts. What Iceland shows is that default, in some circumstances, is the better option. But what Iceland did not show - as much as I wish it would have - is that a country with real options can withstand the colossal pressures imposed by the rentier class.  

* Iceland did not default on its sovereign debt, it refused to guarantee all of its private banks' loans. However, economist Paul Krugman refers to Iceland as pursuing a policy of "default and devaluation" and as having "defaulted on its banks’ debt." Throughout this post, I am using the term default in this broader sense.

This very popular diary (or is it a post now?) was tweeted and then, due to inaccuracies, retracted by Naomi Klein (see here and here). Although the original diary mythologizes Iceland - and here the Kos diarist is not alone - it is true that Iceland refused to guarantee all of its "heedless" banks' loans and ultimately, fared better than countries who steadfastly rejected default.

It is tempting to believe that Iceland heroically refused to make the public pay for the excess of reckless bankers. But the fact is, Iceland didn't have a choice - its banks' debts were approximately nines times Iceland's GDP. A complete bailout was simply not an option:

Iceland is, of course, one of the great economic disaster stories of all time. An economy that produced a decent standard of living for its people was in effect hijacked by a combination of free-market ideology and crony capitalism; one of the papers (pdf) at the conference I just attended in Luxembourg shows that the benefits of the financial bubble went overwhelmingly to a small minority at the top of the income distribution . . . .

But there’s an odd coda to the story. Unlike other disaster economies around the European periphery – economies that are trying to rehabilitate themselves through austerity and deflation — Iceland built up so much debt and found itself in such dire straits that orthodoxy was out of the question. Instead, Iceland devalued its currency massively and imposed capital controls.

And a strange thing has happened: although Iceland is generally considered to have experienced the worst financial crisis in history, its punishment has actually been substantially less than that of other nations. . . .

The moral of the story seems to be that if you’re going to have a crisis, it’s better to have a really, really bad one. Otherwise, you’ll end up taking the advice of people who assure you that even more suffering will cure what ails you.

On the economic level it doesn't matter that Iceland didn't choose default. The point is Iceland did, in fact, default and actually fared better than the serious countries who guaranteed the debts of out-of-control bankers. But on the political level, it matters. It matters if a country can resist the tragic, pro-rentier austerity policies that have become orthodoxy both in Europe and at home.

Austerity is so economically backwards that Paul Krugman can only explain its hegemony by reference to the influence of rentiers:

If you look at the economic policy demands coming from the right in the face of our current slump, they seem remarkably insensitive to the fact that we are indeed in a slump. . . .

What explains this opposition to any and all attempts to mitigate the economic disaster? I can think of a number of causes, but Kuttner makes a very good point: everything we’re seeing makes sense if you think of the right as representing the interests of rentiers, of creditors who have claims from the past — bonds, loans, cash — as opposed to people actually trying to make a living through producing stuff. Deflation is hell for workers and business owners, but it’s heaven for creditors.

And here is the normally upbeat (borderline Polyanna) Jared Bernstein noting that this financial crisis should be a definitive repudiation of the neoliberal economic project. But neoliberalism is alive and well because in today's vastly unequal society, even ideas can be bought:

The financial crash of the 2000s revealed a confluence of many powerful and socially disruptive forces: levels of income inequality not seen since the dawn of the Great Depression, stagnant middle-class living standards amidst strong productivity growth, solid evidence that deregulated markets were driving a damaging bubble and bust cycle, deep repudiation of supply-side economics, and most importantly, even deeper repudiation of the dominant, Greenspanian paradigm that markets will self-correct.

We may not, in my lifetime, witness another historical moment where these destructive forces are so clearly revealed. . . .

And yet, at least from where I sit today, we let the moment pass.  Far from a debate over a new paradigm, our national political economy discussion is bereft of ideas, leaving us mired in recession as we self-inflict one economic wound after another. . . .  

Why did we squander the opportunity? . . . It is, at least in part, because the concentration of wealth and power blocked the new ideas from a fair hearing.

Deregulated markets, “rational market” theories, eroded labor standards, the retreat of unions, regressive taxation, financial engineering, global arbitrage, low rates of job growth, growth that eluded the middle-class and the poor…all have contributed to almost unprecedented levels of wealth concentration.

Such dynamics are self-reinforcing.  The narrow slice of winners, enriched beyond imagination by these forces, use their wealth to insulate themselves from new ideas that threaten their position by purchasing not just political power but even “ideas,” through bogus think tanks and media operations.

They and their representatives ensured that when history provided a unique, crystallized moment of clarity as to their fundamentally corrupt paradigm, too few would see it clearly and when those who did sounded the alarm, no one would listen.

Iceland is a shining example against the discredited, but dominant notion that default should be avoided at all costs. However, what I wish Iceland showed - what I desperately wanted it to show - is that a country with options can stand firm against the wrong-headed, cruel austerity policies of the global financial cabal. Unfortunately, we're still waiting for that country to appear.

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Comment Preferences

  •  Tip Jar (30+ / 0-)

    Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

    by PlutocracyFiles on Tue Aug 30, 2011 at 07:43:30 PM PDT

  •  Excellent post. Thank you for taking the time to (5+ / 0-)

    write it.  What these financial conglomerates are doing is similar to what "loan sharks" do, but at a grander scale.

  •  Thieves, liars and deadbeats (1+ / 0-)
    Recommended by:
    Euroliberal

    Let's get the record straight, the Icelandic government and people grew fat on the profits from the Icelandic banks who were operating what was in effect a Ponzi scheme.

    Their government allowed this to operate by failing to legislate proper controls and at the same time offered guarantees to depositors in those banks which they failed to honor once they went bankrupt.

    The biggest losers were not other banks but individuals and non-profit organisations like charities and local governments. In Britain, the latter were more or less obliged to invest in Iceland because of the high returns they were required to get for the deposits in their accounts. Many had accrued balances because their income is front loaded at the start of the financial year.

    When the banks went bust, the Iceland government bailed out individual depositors who lived there but not individuals who lived abroad. In the UK, the government was obliged to pick up that bill but the other NGOs and local government depositors were not covered by any scheme - despite the rules to get the best returns.

    In effect what happened in part was that the British and other governmentrs met the individuals' loses from their tax income but the rest lost the lot. The Icelanders stole that from some of the poorest by keeping the money deposited by charities and local governments. To bring it more relevant, one of those local authorities which lost tens of £millions was the borough containing Tottenham, the flashpoint for the riots this month. A contributory factor is said to be the lack of action to address social issues in that area, something which would have been helped if they had not lost those millions to the "brave" Icelanders.

    T

    Fight poverty, oppression, hunger, ignorance, disease and aggression wherever they occur.

    by Lib Dem FoP on Tue Aug 30, 2011 at 08:20:29 PM PDT

    •  Actually + (3+ / 0-)
      Recommended by:
      tardis10, farlefty, Rei
      Let's get the record straight, the Icelandic government and people grew fat on the profits from the Icelandic banks who were operating what was in effect a Ponzi scheme.

      If you link the the PK blockquote, he cites a PDF that shows that the benefits went to a very small slice of private individuals - there is no support that the people or even the government grew fat.

      As for the rest, it doesn't really address my points (except for the fact that I generally favor debt restructuring), but you should provides cites.

      Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

      by PlutocracyFiles on Tue Aug 30, 2011 at 08:28:40 PM PDT

      [ Parent ]

    •  And in general + (4+ / 0-)

      I would say that the fact that municipalities, pensions and NGOs were invested in Iceland is a result of disastrous privatization policies and misplaced faith in the free market.  These were investments. Thank goodness Bush didn't get his wish of privatizing social security. But the fact was there was too much there for Iceland to possibly guarantee - so partial default was inevitable. As for how the money is being divided - that's not an issue I addressed.

      Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

      by PlutocracyFiles on Tue Aug 30, 2011 at 08:36:59 PM PDT

      [ Parent ]

      •  This point bears repeating: (4+ / 0-)
        I would say that the fact that municipalities, pensions and NGOs were invested in Iceland is a result of disastrous privatization policies and misplaced faith in the free market.  These were investments.

        All investments involve risk.  The real question here is why anyone is allowed to play with people's retirement funds this way.  

        This unquestioning faith in the market is just another form of religious fundamentalism.  We've seen time and again that markets can be (and are) manipulated for speculative purposes.  Yet "municipalities, pensions and NGOs" place their money in the market, just as individuals do with their 401(k) funds.  It doesn't seem particularly wise to me, at least not in countries like the U.S. that lack adequate market regulation and transparency.

        Just rambling here, but that point really struck me.  Anyway, tips for yet another excellent post.

        "Ça c'est une chanson que j'aurais vraiment aimé ne pas avoir écrite." -- Barbara

        by FogCityJohn on Tue Aug 30, 2011 at 10:19:49 PM PDT

        [ Parent ]

        •  Exactly (3+ / 0-)

          Unfortunately, we don't really get a choice of whether to be in the market given the matching 401K scam.  If I had a choice, I would put all extra money into social security - I wish they had this - put extra into SS and get increased, guaranteed pensions.

          It's clear even the "safe" investments, like mutual funds, are Wall Street scams:

          http://www.nytimes.com/...

          But what are we going to do? Keep our money in cash I suppose, but again, because of the government-funded employer matching system, it doesn't make sense not to invest to at least that level (the amount of employer matching). So, we all get sucked into the market.

          Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

          by PlutocracyFiles on Tue Aug 30, 2011 at 10:33:53 PM PDT

          [ Parent ]

          •  I have a defined benefit plan. (0+ / 0-)

            I work for the state of California, and I have CalPERS.  So I know exactly how much my pension benefit will be when I retire.  (Assuming, of course, that they don't try to screw us out of it.)  I had the opportunity to buy five additional years of service credit, which would equal 12.5% of my salary if I retire at 63 or older.  So I took money out of an IRA I had and used it to buy the service credit.  A financial adviser told me it was a great deal.

            At this point, I don't participate in the 401(k) plan because there is no matching.  My extra money goes into cash savings and into paying my mortgage off early.  At some point, I suppose I'll kick some money into the 401(k), but for the moment I don't have a lot to spare given our monthly furloughs.  

            "Ça c'est une chanson que j'aurais vraiment aimé ne pas avoir écrite." -- Barbara

            by FogCityJohn on Tue Aug 30, 2011 at 11:39:25 PM PDT

            [ Parent ]

    •  I think this a really good diary... (4+ / 0-)

      ...in its limited scope that doesn't cover the losses and the cascade of injury that happens as banks default. You raise the point and it's a good one.

      Iceland, with a GDP of around $12billion, is small compared to, say, one of our TBTF.

      The simple fact that Paulson et al, knowing they were going to bail out the banks, still let Lehman Bros and Bear Stearns fail, allowed the panic that "disappeared" so much cash from the titans and the 401k workers. The day before and the day after the crash nothing has changed but the panic and losses. A more graceful transition might have saved millions of jobs.

       

      Eliminate the Bush tax cuts Eliminate Afghan and Iraq wars Do these things first before considering any cuts

      by kck on Tue Aug 30, 2011 at 08:38:56 PM PDT

      [ Parent ]

      •  Thanks - I've always found it suspicious that + (6+ / 0-)

        Paulson let Goldman Sachs' two main competitors (Bear Sterns and Lehman) fail, but then made sure Merill Lynch (run by former Goldman Sachs exec) was safely purchased, with huge exec bonuses, by BoA (who is probably still regretting the purchase of toxic-asset ridden Merill Lynch).

        Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

        by PlutocracyFiles on Tue Aug 30, 2011 at 08:46:52 PM PDT

        [ Parent ]

  •  Very good diary. Thanks. (1+ / 0-)
    Recommended by:
    trueblueliberal

    Let's hope the US can be that country that resists the push for austerity.

    Eliminate the Bush tax cuts Eliminate Afghan and Iraq wars Do these things first before considering any cuts

    by kck on Tue Aug 30, 2011 at 08:42:22 PM PDT

  •  Bernstein's comments are worthy... (0+ / 0-)

    of a repeated coverage and discussion on this site.  He is yet another "mainstream" economist who is awakening to Marx's analysis that the seeds of Capitalism's destruction are built into it:

    deep repudiation of supply-side economics, and most importantly, even deeper repudiation of the dominant, Greenspanian paradigm that markets will self-correct.

    (Others, like Roubini and even arch-Capitalist Bill Gross talk about "liquidity trap," but what they're really talking about--and Roubini admits it--are Marx's internal contradictions.)

    But even more importantly, especially considering Bernstein's background as an AFL-CIO economist and a former member of the Obama Administration, he is realizing how electoral politics is incapable of dealing with this situation:

    Such dynamics are self-reinforcing.  The narrow slice of winners, enriched beyond imagination by these forces, use their wealth to insulate themselves from new ideas that threaten their position by purchasing not just political power but even “ideas,” through bogus think tanks and media operations.

    This was what Einstein was saying about Capitalism 60 years ago.  I assume that Bernstein is being discrete, as a former member of the Administration, in omitting another factor mentioned by Einstein--the direct buying of politicians.

    We have a failing economic system protected from quicker collapse by a failed political system.  None of this is hidden from the people whose confidence in their institutions continues to crash.

    It's a hard rain a' gonna fall.

    •  I agree - I found Bernstein's comments to be + (0+ / 0-)

      really interesting.

      Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

      by PlutocracyFiles on Wed Aug 31, 2011 at 09:03:25 AM PDT

      [ Parent ]

      •  My impression is that these guys are scared. (0+ / 0-)

        They were scared in '08 too, but this is different.  Then it was a panic situation that didn't include, as Bernstein notes, much reflection on what this said about Capitalism more generally.  Now they're the deeper issue.

        •  They should be scared - we all should be scared (0+ / 0-)

          Thousands of years ago the question was asked: 'Am I my brother's keeper?' That question has never yet been answered in a way that is satisfactory to civilized society. ~ Eugene V. Debbs

          by PlutocracyFiles on Wed Aug 31, 2011 at 10:07:15 AM PDT

          [ Parent ]

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