Iceland Found Another Way to Clean Up a Financial Crisis
Unlike the U.S., the country let its banks fail and bailed out lots of consumers.
Bloomberg, September 25, 2018

Last week, I was at an ETF conference in Reykjavík. As I was flying there, it dawned on me I know practically nothing of Iceland. What little understanding I had, had come second-hand, via Michael Lewis’ epic tale of Iceland’s financial collapse, “Wall Street on the Tundra.” His 10,000-word Vanity Fair missive is practically a Norse Saga of its own.

Lewis explores the Icelandic bubble in delicious detail. The short version is that the Icelandic banks scaled up their debts from a mere few billion dollars to over $140 billion, without growing the asset base at the same time. To quote Lewis quoting an economist, it was “the most rapid expansion of a banking system in the history of mankind.”

We land at Keflavak International, less than an hour’s drive to the capital city Reykjavík. I rent a car, and make the trek across a treeless landscape similar to what greeted the Mars Rover when it landed on Aeolis Palus in the Gale Crater. Travel towards the mountains and glaciers west of Reykjavík and Mars gives way to the lunar-like black lava fields and basaltic surfaces. The only giveaway you are not on the moon or another planet is the blue sky, and the sun, which never seems to rise very far above the horizon, even in September. It is so unearthly here that the country side is frequently used as a set for film and television shoots: perhaps most famously, Game of Thrones is shot here, as was Star Wars (both Rogue One and The Force Awakens) and numerous others.

Unlike here in the states or in Europe, the Icelanders told the bankers to piss off. Instead of bailing  them out, they were sent into bankruptcy. The results were a fast and sharp decline, followed by a rapid, post-crisis economic recovery — faster and stronger than any other country in the world.

As I flew home, I put a few thoughts down about the lessons we should learn from Iceland.

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I originally published this at Bloomberg, September 25, 2018. All of my Bloomberg columns can be found here and here.