In the NZZ,
Charles Ferguson’s movie Inside Job portrays as
- evil: Feldstein, Hubbard, Paulson, Rubin, Summers, Wall Street, … ;
- clueless or not convincing: Bernanke, Campbell, Geithner, Greenspan, Mishkin, Portes, … ;
- aware (at least ex post): Buiter, Johnson, Lagarde, Lo, Partney, Rogoff, Roubini, Strauss-Kahn, Tett, Wolf, … .
Economics and economists are considered part of the problem rather than the solution. While the movie
- depicts Ragu Rajan as the hero,
it is silent about the fact that Rajan is one of the most prominent economists.
Scott Sumner reviews the case and concludes that Iceland did embrace “austerity.”
The Icelandic government announced its strategy of liberalizing the country’s capital account after seven years. Press statement of the Ministry of Finance and Economic Affairs; FT report by Richard Milne and Jeremy Grant.
Update (18 June 2015)
The Economist reviews Iceland’s recent economic history and the planned steps to liberalize the capital account.
Iceland is considering fundamental monetary reform. A report (PDF) by Frosti Sigurjónsson, Member of Parliament, discusses problems under the current fractional reserve system as well as possible alternatives. The report was commissioned by the prime minister (website of the Prime Minister’s office).
The report argues that the Central Bank of Iceland lost control over the money supply. Commercial banks lent pro-cyclically; they effectively forced the Central Bank to provide base money when needed; the Central Bank’s interest rate policy didn’t suffice to keep the growth of broad monetary aggregates in check; money creation by commercial banks shifted seignorage revenue from the Central Bank to commercial banks; and the deposit insurance accompanying the fractional reserve system encouraged risky lending, distorted competition and gave way to taxpayer funded bailouts when systemic banks collapsed.
The report discusses the Sovereign Money proposal (Fischer 1930s; Huber and Robertson 2000; Dyson and Jackson 2013) according to which all physical and electronic money is created by the Central Bank; commercial banks administer transaction payments and serve as intermediaries; new money is brought into circulation by way of transfers from the Central Bank to the Treasury; and the Central Bank may also lend funds to commercial banks which in turn lend these funds to businesses.
The report recommends that either the Central Bank proactively enforces credit controls or, preferably, that money power is secured with the state owned Central Bank (p. 17). The report recommends to commission a feasibility study of the implementation of the Sovereign Money proposal in Iceland.
Concerning the Sovereign Money proposal, I remain favorable as far as the analysis of the problem is concerned but rather skeptical regarding the proposed solution. In particular, I remain very skeptical as to whether a Sovereign Money regime could be enforced at all. I have previously described and evaluated the Swiss version of the Sovereign Money proposal—the “Vollgeldinitiative.” And I have made an alternative proposal for monetary reform (see also here).
The Economist reports about an EFTA court decision concerning Iceland’s decision to discriminate among depositors after the collapse of Icesave, an online bank. The bank had collected deposits in the UK and the Netherlands, using a European “passport” which relied on the notion that the Icelandic deposit insurance scheme would back those deposits. After the collapse, the insurance turned out to be insufficient; while Icelandic savers received their money back, British and Dutch depositors did not. But eventually, their respective governments bailed them out—and now went to court.
… the court found that Iceland was obliged only to make sure that it had a deposit-insurance scheme. The state was not required to pay out if the scheme had no money because of a banking crisis. Oddly, the court also found that Iceland had not breached an obligation not to discriminate between domestic and foreign depositors, even though it made only the domestic ones whole.