3 The IMF, Moral Hazard, and the Temptation of Foreign Funds
Chapter 3
The IMF, Moral Hazard, and the Temptation of Foreign Funds
The late 1990s saw a strengthening of the International Monetary Fund’s core mandate as a global financial parent, on the lookout for perceived instabilities to correct in the name of economic development. Several alterations in the scope of its operations following the crises of the previous twenty years had given the Fund a far wider range of policy options, as well as far greater resources, with which to support faltering economies.
4 Currency Mismatching
Chapter 4
5 The Consequences of the Boom: Malinvestments
Chapter 5
The Consequences of the Boom: Malinvestments
Austrian business cycle theory describes the process whereby a general error-induced boom is produced.1 Credit expansion misdirects spending and investment in three main ways.
6 A Timeline of the Collapse
Chapter 6
A Timeline of the Collapse
Icelandic banks had no difficulties as long as international liquidity was ample and they could easily renew their short-term foreign-denominated debts. In early 2006, however, problems in the interbank market surfaced, in what would later be called the “Geyser crisis.” Price inflation increased and the króna depreciated as foreign money started getting nervous about the sustainability of the Icelandic boom.
7 Why the Fed Could Save Its Bankers, But the CBI Could Not
Chapter 7
Why the Fed Could Save Its Bankers, But the CBI Could Not
On November 13, 2001, the Central Bank of Iceland, headed by Davíð Oddsson, issued a press release announcing it would effectively become a lender of last resort for the nation’s financial community. While almost all central banks in the world implicitly undertake this role, Iceland’s central bank explicitly committed itself to shouldering the weight of the banking system’s bad decisions.
8 The Necessary Restructuring
Chapter 8
The Necessary Restructuring
Three aspects of Icelandic life need to return to normal for the economy to regain its footing and climb out of its pit.
Malinvestments—those misdirected resources and entrepreneurial errors—need to be liquidated. Prolonging their existence prevents the economy from moving production and consumption patterns to those that are conducive to long-term growth.
9 Concluding Remarks
Chapter 9
Concluding Remarks
The spectacular collapse of the Icelandic economy has attracted much interest. Often it is asserted that speculators or free-market reforms caused the downturn. Nothing could be farther from the truth.
References
References
Adrian, Tobias, and Hyun Song Shin. 2008. “Financial Intermediaries, Financial Stability, and Monetary Policy.” Paper presented at the Federal Reserve Bank of Kansas City Symposium at Jackson Hole. August 21–23. http://www.kc.frb.org/publicat/sympos/2008/Shin.08.06.08.pdf.
Index
Index
A
aid to Iceland
early requests for liquidity swaps ignored, 97
from foreign countries, 2–3, 77, 92–94
from International Monetary Fund, 92, 93, 94
sought from Russia, 93, 94
Alcoa, 55
Althing
funds construction of power plants for aluminum smelting, 55
overspends budget, 4,
votes for accession talks with European Union, 120
aluminum smelting, 54–55, 94, 106, 117
American Insurance Group, 79
Anti-terrorism, Crime, and Security Act of 2001, 86
Armani, 70
The Place of Religion in the Liberal Philosophy of Constant, Tocqueville, and Lord Acton
