Dr. Michael Hudson was in Iceland recently. Here he takes questions from the readers of Lara Hanna’s excellent blog.

“Confidence” reflects faith in a country’s ability to pay. If Iceland commits itself to pay the overhang of bad debts, it will have no room at all to take on new credit for many years. On the other hand, if it does what Argentina has done – and repudiated its foreign debt twice in the last decade – it will have free up its ability to pay and thus foreign creditors will have confidence that this time, Iceland is “doing it right” rather than gambling away its bank loans as in the past.
- Foreigners should NOT be given a “stake” in the banking system. Creating credit is free. It is a public utility. Why would Iceland want to give away a natural monopoly for free, whose gains belong basically in the public domain?
- Also, foreign-owned banks would do just what the recent “bad banks” did: lend against property already in place, and try to make a quick killing. That is the problem with finance: It lives in the short run. In order to subordinate credit creation to Iceland’s long-term interests, the government needs to retain regulatory power. Letting foreign banks in will create lobbying pressure to corrupt and distort the financial system away from productive lending to purely extractive lending, alas.

From larahanna.blog.is

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