Iceland’s economy is not, by US standards, particularly big, clocking in at about US $12bn GDP. A bailout would, I presume, take only a fraction of that? And their troubles are really not their fault:

So how did Iceland get in so much trouble? That’s the odd part of the story: it isn’t because its banks gambled on the worthless subprime securities that helped undo Bear Stearns and so many others. Iceland’s banks prudently avoided the subprime market, even as they embarked on a lending boom at home and expanded abroad. What got Iceland in trouble was something more subtle: its banks got their money primarily from international investors, making the Icelandic miracle heavily dependent on foreign capital.

In normal times, this might not have mattered, given the country’s solid economic fundamentals. But these aren’t normal times. The subprime crisis, in which investors realized that they had greatly underestimated the risks of lending to people with bad credit, has spawned a wider credit crunch: investors now suspect disaster behind every door, and even seemingly solid borrowers find credit much harder to come by. The subprime crisis was an earthquake that caused a tsunami: the quake has done plenty of damage on its own, but the tsunami looks set to do even more.

Iceland has been swamped by that tsunami because it trusted in the availability of global credit in time for that credit to evaporate.

So why not bail them out? There is of course no legal duty to do so; I’ll even stipulate that there is no moral duty to do so. It’s just a way, quite cheap in the grand scheme of things, to make friends abroad and mitigate a global crisis. The Icelandic people would, I would think, be grateful for a generation. And other people around the world might see in this willingness to help out a sign of hope, which might help combat some the psychological aspects of the current crisis.

So, how much would we have to make available as a special loan facility to bail out Iceland? Any arguments against this other than it might invite other governments to ask for bailouts too and we can’t afford them all?

Al_Franken_Show Paul Krugman Theme Song.

Still think the global credit crunch is all about the TED spread and collateralized debt obligations? Think harder. Export-bound grain has started piling up in Canada as sellers have begun refusing to trust the credit lines and financial institutions linked to their foreign buyers.

The problem is that Canada’s export cargoes don’t get loaded until buyers can prove their ability to pay — proof that has been increasingly hard to come by in the wake of bank defaults and shrinking credit markets worldwide. Unable to get credit lines, many buyers have left the grain market, generating big losses for Canadian shippers. Add to this the greater costs that shippers now shoulder because of delayed payments, and the picture starts looking pretty bleak.

Krugman is right (again): if the IMF crowd can’t pull something fierce-looking out of the hat this weekend, next week is going to be a real shocker.

(But I find Evidence that we should freak out, episode II much less convincing. That sounds more like an investment opportunity than a looming disaster.)

Why Paulson is Wrong

Luigi Zingales

There are alternatives to a massive government bailout of the U.S. financial industry, according to Luigi Zingales—they just would be more costly for financiers and cheaper for taxpayers.

Questioning the Treasury’s $700 Billion Blank Check: An Open Letter to Secretary Paulson

Aaron S. Edlin

The Treasury wants a blank check for $700 billion, at taxpayer expense; instead a businessman like Buffett should be given the job of making the taxpayers some money out of this mess, according to Aaron Edlin.

Dr. StrangeLoan: or How I Learned to Stop Worrying and Love the Financial Collapse

Aaron S. Edlin

Last week, on Wednesday September 17, 2008, the Bush Administration almost stumbled upon a way to eliminate the U.S. debt and even taxes. Aaron Edlin’s ironic take on a world gone mad.

Investment Banking Regulation After Bear Stearns

Dwight M. Jaffee and Mark Perlow

The Bear Stearns bailout created an implicit guarantee that will create a great deal of moral hazard unless we smartly regulate investment banks in a way that doesn’t destroy their value; so say Dwight Jaffee and Mark Perlow.

Stand with your neighbors and say NO Bush Bailout!

Bring signs and friends so that we can all call on the government to invest in Main Street, not Wall Street.

I wonder why so often progressive rallies pick this corner? Yes, it’s on a main commuter route, but it’s soulless and not that accessible.

Update: find a rally near you

At the same time, Congressional Democrats said they were prepared to drop one of their most contentious demands: new authority for bankruptcy judges to modify the terms of first mortgages. That provision, aimed at preventing foreclosures, was heavily opposed by Senate Republicans.

I hope it is not true. I have yet to read a convincing case for why banks should get all the windfalls for their evident stupidities. I do not like being asked to pay large sums of money for windfalls to the improvident, but given the choice between improvident families losing their homes and stock and bondholders in improvident banks, I know whose windfall I’d choose to hand my a share of my income to.

On a somewhat more cheerful note, it seems that the Dems might “only” hand over $150 billion, which might leave a little money for social programs in the Obama administration. Even though the $700 bn number was clearly made up, I suppose this will be about as small a number as they can get away with. Think what it could have done for health care.

If the Congress doesn’t hold some sort of line on the amount, the GOP program of “starving the beast” — making the Treasury so broke that there’s no danger Democrats could afford anything popular — would truly have reached its apotheosis.

Fly a plane, catch a cold, it seems to be a law of nature.

This administration rushing a bill through congress, hogs at the trough, that seems to be a law of nature too.

But the Senate may be finding some spiny growths, so not all observed regularities in nature are reliable predictors.

(URL fixed, thanks to Adam)

I’m on board with at least six of these.

One of my students sent me the pages from Lehman’s filings listing the 30 top unsecured creditors. It’s a simple column of figures that makes sobering reading, even for a let-the-market-punish-them enthusiast such as myself. First past the post is CitiBank with $138 billion in unsecured bonds. Just for fun, I tried to find out what $138 billion will get you in today’s world.

The comparative numbers he offers are so big as to nearly defy comprehension.

I understand the Schumpaterian arguments for size and global competitiveness, but isn’t there still some virtue to keeping firms from getting too enormous?

OK, Lehman wasn’t too big to fail. But two or three Lehmans might be.

And we just socialized AIG (Fed to lend $85 billion to AIG, take 80 percent stake). Did FDR do anything on this scale?