EC4024 Lecture 14: Iceland and Ireland: Fair and Unfair Comparisons

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THis is a lecture about Iceland's financial meltdown and Ireland's similarities and dissimilarities with their predicament.

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EC4024 Lecture 14: Iceland and Ireland: Fair and Unfair Comparisons

  1. ICELAND & IRELAND: FAIR AND NOT-SO-FAIR COMPARISONS Dr Stephen Kinsella/stephen.kinsella@ul.ie/stephenkinsella.net
  2. ––MAY YOU LIVE IN INTERESTING TIMES
  3. LAST TIME A Rule-Bound SGP Causes Problems for Ireland wrt Fiscal Reform Time to Break the Rules
  4. Today Iceland. What’s the situation now, How did it happen, What lessons are there for Ireland in 2009?
  5. WHAT I WANT YOU TO KNOW Iceland’s economic situation Or: Pray. is a direct outcome of its Compare: Ireland institutional history. experienced the same boom, the same bust History Matters. Contrast: But, we’re in the Remedies for Iceland’s EU. problem: Either join EU or kill its indigenous banking system.
  6. Oct 2008, All 3 big Icelandic banks fail & nationalisations abound. WHAT HAPPENED? Nov 2008, IMF called in UK ‘Attacks’ Icelandic economy Speculative Attacks continue
  7. WHY? History Pre 1990‘s: Icelandic economy previously highly regulated & politicized 1990‘s+: financial liberalization with weak prudential regulation and supervision Privatised banks pursued highly leveraged positions Imprudent monetary policy-Inflation targeting Lack of Prudential regulation Speculative Finance: The Minsky Hypothesis
  8. 15 11.25 7.5 3.75 0 2003 2004 2005 2006 2007 2008 Inflation % yoy Inflation target
  9. 8 6 4 2 0 2003 2004 2005 2006 2007 2008 Real GDP Growth
  10. 10X
  11. MINSKY MOMENTS 1.Idea: Credit markets will breed their own reversal 2.How? 1.Cheap interest rates lead to increased lending. 2.This leads to increases in leverage (L/D ratio). 3.Perverse incentives breed dodgy lending via financial innovations (Junk bonds/CDOS) ensues. 4.Something changes, dodgy loans default, banks fail, unless they get bailed out by Big Bank/Big Govt.
  12. WHAT COULD HAVE BEEN DONE? Dropped Inflation Targeting sooner (Danielsson) Introduce Prudential regulation sooner Listen to the experts (Buiter & Sibert)
  13. WHAT IS TO BE DONE? Join the Euro (Lane/Buiter *& Sibert) Big risks even then
  14. PARALLELS WITH IRELAND Boom fueled by cheap money, perverse incentives, and light regulation destabilised financial system This lead to shocks in the real economy as bank lending dried up. UE increased, GDP collapsed.
  15. UNFAIR COMPARISONS
  16. NEXT TIME

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