Blogs For Victory

You might have been reading and seeing the stories out of Greece – riots and demonstrations and bail out proposals and motions of no-confidence in the government. A huge mess as the entire European Union tries to prevent a default – a default which almost certainly cannot be prevented. In contrast to this, there is what the people of Iceland did when the financial crisis hit – from the Globe and Mail:

Iceland’s method of coping with the financial crisis had a brutal charm about it. In essence, the country hoisted its middle finger to the owners of bank bonds, and a few other people it owed money to, and walked away.

Iceland’s method of coping with the financial crisis had a brutal charm about it. In essence, the country hoisted its middle finger to the owners of bank bonds, and a few other people it owed money to, and walked away…

…It worked. For evidence, note that Iceland made a triumphant return to the international bond markets late last week, and that its tiny economy is growing at a fair clip, both remarkable achievements when you consider its punishing economic and banking collapse in late 2008…

It is true that the people of Iceland were complicit in the problem – like just about everyone in the western world, the people of Iceland figured they could get a free ride. That they could borrow and spend endlessly and never have to pay the piper. As punishment for this bit of foolishness, they have paid the price of a gigantic, asset-destroying financial collapse. The difference is that in Iceland – unlike everywhere else – the people didn’t add to the idiocy by figuring they had to bail out the banks which were even more responsible for the crash than the people were.

The responsibility of a bank is to wisely manage money. At bottom, that is all there is – take in money and carefully manage it so that, primarily, no money is lost and, secondarily, that the value of the money grows over time. There are lots of ways to do this and while no financial transaction is without risk, there are things which are wise risks and things which are akin to giving a case of whiskey and car keys to a pack of teen aged boys. The banks went hard and heavy in to whiskey distribution…and then wanted the taxpayers to bail them out.

Having more wisdom and courage than the rest of us, the people of Iceland did hoist that middle finger and they walked away…and they paid for it, but now that it’s over it is, indeed, over. Iceland still lives. The people still work and build wealth. And banks will still lend them money – now with a bit of wisdom attached. The rest of us have lacked this wisdom and courage and so we’re still stuck – in a kind of financial suspended animation, just hanging over the abyss of economic collapse, unable to climb back out while being unwilling to fall all the way down. But as we do this the problems just fester and grow…making whatever does finally happen worse than it would have been earlier.

When you’re broke, you’re broke. When you’ve borrowed more money than you can possibly repay, you can’t repay it. It will be lousy for you the borrower, but shed no tears for the lender – the lender is a bank and the bank is supposed to be staffed with hard nosed financial experts who would never be so idiotic as to loan more money than someone can repay. As the banks have not been filled with such people, they’re going to have to take a bath with the rest of us.

The United States is still some years away from being in Iceland’s position a few years ago, or Greece’s position right now. But plenty of other nations are right there – most notably Japan, Italy, Spain and Portugal (and probably a good number of other nations which simply haven’t made the headlines). The key for these nations is to just default – have done with it; you can’t repay the full debt, so don’t even bother trying. The bankers will just have to take their lumps and hopefully the survivors will have more sense. Yes, this means global recession – yes it means that trillions in paper assets will likely be wiped out. It will be lousy for a couple years…but once it’s over, it’s over. We’ll know where we stand, and we can all start to rebuild wealth.

HAT TIP: Mish’s