Vox
October 26, 2011
Much of macroeconomic policymaking is trial and error. This column discusses calamitous error on the part of Iceland’s policymakers, in the hope that others can at least try something else.
The Icelandic banking system collapsed in October 2008 and its three internationally active banks were taken over by the government. Disregarding best international practice, the government opted to restructure the banks on national grounds. Soon after two of the three passed into the hands of foreign ‘vulture’ funds which had no expertise or interest in running a banking system – they just wanted to cash out assets. The government has also maintained direct control of the banks, implementing an overarching regulatory structure and discouraging regular banking activities.
As a result, Iceland is saddled with a dysfunctional banking system more interested in maximising short-term asset recovery and compliance than providing the core banking services necessary for economic recovery.
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