Why Don’t We Bail Out Iceland?

Here's a serious question: Iceland has long been a strong ally and a NATO member, despite having no armed forces. As we all know, the Icelandic economy is suffering from a virulent case toxic shock.

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?

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10 Responses to Why Don’t We Bail Out Iceland?

  1. Money says:

    How about the fact that our country already has a rapidly growing $10 trillion deficit, approximately $100 trillion in unfunded promises to social security and medicare over the remainder of my lifetime and no plans to balance the budget in the near future?

    Of course your generation will be dead by that time so why should you care? It’s students like myself that you’re teaching today who are going to be screwed by all this debt.

  2. michael says:

    I have kids, so I’m as concerned about deferred liabilities as the next guy.

    But I don’t see why this would cost us anything. To coin a phrase, the fundamentals of the Icelandic economy seem sound. The Mexico bailout didn’t cost us anything; nor should this. The issue is a short term liquidity collapse. To the extent we incur some carrying costs for a load, I think they’d be all too happy to pay it back maybe even with interest.

  3. Ereshkigal says:

    Considering that Russia is eager to intervene to help Iceland, and that we have reason to suspect that U.S. and Russian interests will not always coincide (consider Russia’s energy reserves, and its recent difficulties with Georgia), it would seem that bailing out Iceland would be to our strategic benefit.

    Definitely NOT to our strategic benefit: Russia having a closer shipping/military/trade ally so geographically close to a non-supporting U.S., especially with Cuba’s new-found energy holdings and the poor U.S. – Cuba relationship.

    Of course, under Obama, the U.S. and Cuba interaction could improve (one certainly hopes so!), and the U.S. and Russia could take steps to improve their deteriorating connections. In that case, having a more economically stable and U.S.-friendly Iceland would not be in any way detrimental to our needs.

    A bail-out, especially with the potential for security as well as economic benefits, looks like a bargain for us.

  4. God bless the tiny, independent country of Iceland.

  5. wcw says:

    Iceland is not in trouble. Iceland’s banks are, whose total assets were, before they blew up, something like eleven or twelve times the size of the country’s GDP.

    That’s why.

  6. Chuck says:

    Just a thought on Russia’s potential bailout of Iceland.
    Russia sends lots of money, later Iceland cuts them a deal on an aid package for arms into Iceland, Then a cooperation on Aluminum technology, then they get a good deal on military options, and then suddenly the U.S. Listening post goes down and the Russian subs can flow out to the Atlantic without the US being aware of them coming through the Greenland-Iceland-Irish gap. OOP’s, says the US Military.

    It would take years, but for a small investment it contains big rewards for Putin, who’s looking to get back in office for several 6 year terms.

  7. Randon says:

    All hail the Mighty O!

    The Mighty O shall Spread the Wealth(tm) when the time is right. I believe he is already planning to put the Icelanders to work in Green Collar Jobs!

    Why worry about money when the New World Order and Economic Union is just around the corner!

    All hail the Mighty O!

  8. Antony says:

    Why should we bail out a foreign banking system which lent crazy amounts of money in comparison to its population. When will small countries learn that they cant survive by being a banking nation. Sound banking requires massive reserves for the bad times and islandic banks never could have had that.

  9. Randon says:

    Antony asks why?
    michael, loyal servant of the Mighty O, has already answered you: “to make friends abroad”. The New World Order of O will be easier to establish if we pay other countries to be our friends.

    Now that you know why Antony, I’m sure you have no further protest and your taxes will be raised accordingly. Is it not wonderful that the Party so desires to Spread the Wealth? Wonderful and Glorious!

    All hail the Mighty O! Praise to michael his loyal servant, who brings vision to the blind!

  10. Odin says:

    This was the fault of my goverment and now we will see the first revolution in europe for a long time… it will spread to other nation…mark my word

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