I am glad Jon Danielsson got this so quickly… on Paul Krugman’s misunderstanding of the Icelandic situation:
Krugman please get your facts right.
- Iceland did not devalue, the currency fell.
- This is not the kind of capital controls that often can be a sensible policy. These capital controls were imposed only to lock in carry traders, and by most accounts are causing considerable damage. For reasons of equality (because of EU and IMF), no distinction is made between inflows and outflows and the impact of the capital controls is to prevent FDI and discourage domestic investment.
- Mr. Krugman seems to imply that little austerity has been implemented in Iceland. The government is drastically cutting public services and lowering the salaries of government employees while at the same time imposing what may be the highest taxes in Europe. This is one of the strictest austerity programs around, if not the strictest.
- “a handful of operators built up enormous debts that their fellow citizens are now expected to repay.” The first part of this quote is correct, the second part is almost entirely wrong. These operators accumulated debt equaling a large multiple of the annual GDP. There is no way their fellow citizens could pay even a small fraction of his and indeed most of the losses will be written off by foreign creditor banks. The only part of this that may fall on their fellow citizens is Icesave, and the Icelanders havesuccessfully resisted paying that. On the contrary to the quote, I suspect one final analysis is done, the pre-crisis bubble and the subsequent crash will represent a large net transfer from foreign names to Icelandic names.
- One reason for why Iceland got onto such a mess is because of inflation targeting, and the Central Bank has not changed its policy. This is as orthodox as one can get.
- The stock exchange fell by over 90% wiping out peoples savings. This on top of large losses in money market accounts, and real estate price drop that may exceed 50-70%.
- “benefits of the financial bubble went overwhelmingly to a small minority at the top of the income distribution.” Judging by the amount of high end cars, expensive houses, foreign luxury holidays, and the like, I would think most people benefited. The impact of the bubble was to raise salaries across the board, and create a large number of very high paying positions. Indeed in common with other wealthy countries they brought in migrants to do their dirty jobs. The bulk of the money may have gone to the to, but most shared in the loot.
Related posts:
Knute Rife
1 year ago
So Krugman oversimplifies for a newspaper column and gives Iceland credit for internal discipline, and Iceland responds with one voice, “How dare you? We have no such thing.” And Jon Danielsson gives him an F while simultaneously continuing to make an academic career by repeating the obvious point that risk is difficult for regulators to measure and claiming that this is a systemic regulatory flaw that led to the current mess. That claim deserves an F. Risk is difficult for anyone to assess, and the purpose of regulation is not to assess it but to make sure that all financial players have equal access to the means to assess it. The current mess is the result of at 15 years, and more like 25, of regulatory capture and consequent dereliction.
Dadi
1 year ago
Not getting into debate about Jon´s other work… the point about one voice responding is probably due to a couple of factors:
1) Many Icelanders do not understand what Krugman was saying. This includes MP´s such as Olina Thorvardardottir who used the chance to applaud the government on the back of his article.
2) The Icelanders who have made reservations do so in Icelandic, such as Egill Helgason on his blogsite.
3) Krugman´s post in the NY Times takes an equally influential media spot to rebutt. There are very few Icelanders who have access to such a venue.
Hopefully academics won´t take Krugman´s article as “expert advice” on Icelandic matters….
D_Boone
1 year ago
Its good to see that your blog has recommenced after a “short break” I assume for exams?
The Krugman article is the 30,000 foot view. Sure you can grizzle at its minor errors. However, the big points he makes are that having your own currency, and some form of control over currency inflows and outflows for a period in the immediate aftermath of a “crash” are useful tools and should not be disposed of lightly. The outcomes are better in terms of unemployment and an equitable sharing out of the losses. As a consequence the recovery is quicker. Left unsaid is whether that is a viable strategy for the larger economies, but I think Krugman is mainly focusing on the “euro problem” in this case, because of the countries he selected.
Dadi
1 year ago
D_Boone, yes exams and other ventures … it is good to be back though.
If you are controlling the currency to that extent then maybe it is good. But as Jon Dan said the currency in Iceland just fell.
Then there is the debate about to what extent the currency is the culprit. A minuscule currency in a tiny open economy and a Central Bank with inflation targets of 2,5-3,5% made it attractive to hot money and coupled with consumer price indexation controlling inflation was never actually realistic.
If someone throws you off a cliff, do you call him a hero if he takes you to the hospital afterwards?
D_Boone
1 year ago
Ummm
“A minuscule currency in a tiny open economy and a Central Bank with inflation targets of 2,5-3,5% made it attractive to hot money and coupled with consumer price indexation controlling inflation was never actually realistic.”
Tell me about it … Not much different where I come from
http://i1041.photobucket.com/albums/b419/D_Boone/fxchanges.jpg
In fact a close look would suggest NZ probably has had bigger FX swings than Iceland but there are several differences: we actually had inflation of 2-2.5% for the last couple of decades, the Icelandic indexation business for loans etc is weird, and finally the NZ central bank is now attempting to reduce the hot money aspect via some changes in the banking rules. Successful? I suggest you come back in a few years. NZ is not better just different. However comparing what has happened and what is happening is useful for both parties and is a major reason for my interest. Three or four years ago we were constantly told that NZ was an underperformer compared to Ireland and Iceland and was on a fast road to the third world.
Dadi
1 year ago
The NZ comparison is interesting.
I still can not understand how we are supposed to have globalization and the krona.
Lino
1 year ago
if I understand what you mean with gloablization, you could with a closed, government controlled, exchange market: as it is, now, to all useful purposes.
Of course there is a catch:
1) you have to have a sound economy: Iceland has not
2) you have to set sustainable parities: Iceland can not or will not.
In Iceland’s situation that translates in no market (meant as meeting of bid/ask and liquidity). As it is now.
Not that a free regime would really change anything, excepted that the market would set the exchange rates, but obviously Iceland does not want that.
In my opinion the krona matter is a false or a “minor” problem, at best it’s a side effect of problems, grave ones, that lie elsewhere.
Where the krona (or not krona, so again it’s not a problem of which currency but of currency tout court) matters is that it is the lubricant and transmission joint of economic effects and yes, shocks.