Monetary Expansion Cures Incipient Depression in Small Open Economies with Flexible Exchange Rates
Yves Smith:
naked capitalism: Iceland Proves That in a Financial Crisis, Breaking Glass and Trashing Currency is a Good Remedy: The headline exaggerates, but not by much. Back in April, a Vanity Fair story about Iceland's remarkable financial blow up was grist for a Vanity Fair story by Michael Lewis, "Wall Street on the Tundra". The quick version is that Icelandic men were not merely reckless, that is such a common male pathology as to barely warrant mention, but were possessed of a particular fondness for physical aggression and bullheadedness that helped made Iceland ground zero for the most spectacular banking industry boom and bust in the history of man. Iceland managed to go on a debt party that saw its obligations soar to 850% of GDP, leaving America at a mere 350% firmly in the dust.
So how is Iceland faring now? One would assume still broke and chastened. One would be dead wrong.
The krona is down 50% from its peak, and it seems to have sparked a speedy revival. I remarked when Iceland fell apart that someone should swoop in and buy a business that sold strictly in international markets (I had thought fish oil would be a good candidate). But that takes time, legwork, and walking around money.
This is the same remedy that the Nordic countries used in their banking crises, save they nationalized the banks, put in new management, cleaned them up, and reprivatized them, But they also devalued their currencies versus the ECU.
But Iceland and the Nordic countries can make move like that without precipitating competitive devaluations. What works individually does not work collectively.
