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.