Trying to drive out the Devil with the Beelzebub

Naked Capitalism has a post up with the title “Ragnarok – Iceland and the ‘Doom of the Gods’”.
Most days I am reading Naked Capitalism and New Economic Perspectives in parallel and while I know that there is only a bit of overlap, the disconnect can sometimes be a bit jarring, like when I read:

[…] but when the global financial crisis hit the next year, and Iceland’s over-leveraged banks collapsed, he went bankrupt, leaving the state to complete the project.

And where would be the problem with that? Iceland, as the post points out, is still sovereign when it comes to issuing its currency, so the state could have just spent the Kronas necessary to complete the project, stimulating the construction sector in the process.

With the possibility of investment overseas removed, investors, including pension funds, must look for opportunities at home where choices are very limited. Their consequent purchase of government bonds allows the government to finance its budget deficit, reducing pressure to cut deficit spending.

This is just plain wrong: once again, Iceland is sovereign, the government is the issuer of its own currency and it doesn’t need to “sell” bonds to “finance” its spending. There’s absolutely no need for a government issuing its own freely floating currency to reduce its deficits, unless the economy is at capacity and government spending leads to inflation. If 20% deficit are needed for full employment in Iceland to be reached, why shouldn’t the government run this deficit?

The agreement with the IMF involved postponing cuts for a year, then imposing both tax increases (corporation tax increased to 18% from 12%, increased income tax and VAT and also a wealth tax) and spending cuts simultaneously, rather than favouring primarily spending cuts as was done in countries like Ireland.

Cuts there have been, and these, as always, have hit the poor the hardest. The pension system has been raided and healthcare provision has been scaled back, with sharply increased co-payments required.

So after, as the post points out, the crisis has been caused by the neo-liberal playbook, a deal is made with the point organization of neo-liberalism, and the sacrifice being made consists of impoverishing the vulnerable via regressive taxation and reduced social spending?

The longer term considerations matter less, however, than the short term popularity of debt relief. 150 billion krónur is to be eliminated, through a combination of outright cancellation (80 billion krónur) and allowing, and incentivizing, people to use their tax-free pension savings to pay down household debt (70 billion krónur). The measures will be paid for through taxation of the estates of the old banks, in other words with foreign funds trapped behind capital controls.

So, let me see – from what I understood, the Icelandic banks are bankrupt and effectively state-controlled. This would mean that all mortgages that these banks held are now held by government, which also means that the government could forgive all the loans for which these mortgages were security, without having to “pay” for this debt-forgiveness. In particular, this would mean not swindling people out of their pension savings (although private pension savings are not a good idea anyway, since they take away from aggregate demand and are pointless unless the investment in the infrastructure – nursing homes, medical sector, care personnel – has been made)

The company [CCP] itself is barred from trading with a foreign bank because of the currency restrictions, he added, Icelandic banks are too small for such a large company—but they shouldn’t be any larger.

I know I sound like a broken record but the fact remains: the Icelandic government is a sovereign currency issuer! If Hilmar Veigar Pétursson needs Kronas, any government-controlled bank can give him a loan as large as needed, although the question comes to my mind why a video game publisher needs such large loans. If he needs foreign currency, I understand the problem but then I wonder again why he needs large loans of foreign currency for business.

All in all, the analysis of this post and the potential solutions it offers, seems entirely couched in neo-liberal think and speak…which I find perplexing since it is exactly this think and speak that created the mess in the first place. How about going into alternative directions? Imagine the last government, instead of playing along with the IMF’s rules, would have put the welfare of the Icelandic population first, engineered debt relief, and spent what was necessary to fill the demand gap – they might just still be in power.

Edit: Actually, my favorite part was the following:

However, adopting another currency would come at a high price in terms of loss of sovereignty and loss of any control over monetary policy.
[…]

If Iceland ditched its currency, it wouldn’t have control over monetary policy to boost the economy, leaving layoffs as the primary way to deal with downturns.

Monetary policy has shown its toothlessness in the last five years, except when it comes to blowing new bubbles, fiscal policy, in the form of austerity, on the other hand, has been proven to be brutally effective. Yet, losing fiscal control is not even mentioned as a negative effect of giving up currency sovereignity…

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This entry was posted in austerity, debt, deficit spending, democracy, developed countries, economic policy, macroeconomics, MMT, neo-liberalism, private debt, public debt, standards of living. Bookmark the permalink.

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