Is Iceland the Canary in the U.S. Coal Mine?

The collapse in late January 2009 of the Icelandic Government is being blamed directly on the collapse in 2008 of the country's banks after they were overleveraged to such an extent that the world-wide financial crisis caused investment values to implode. During a period of rapid growth, the banks amassed huge debts in financial implements that turned out to be based on little more than promises that the good times would last forever.

Turns out forever had an expiration date. As a result of the banks' implosion, the currency has plummeted, unemployment is rising and inflation is growing as the value of the currency falls.

Iceland was unable to prevent the banks' collapse - it was simply too much, too quick. Elsewhere in the world, governments have been creating money hand over fist and pumping that money into banks by any means possible to avoid what happened in Iceland. Results are hard to quantify so far because the extent of losses seems to grow with each passing month.

In the UK, the government there is talking of nationalizing banks, yet no one is talking about how much is still at risk in these banks. The general feeling is that if the true extent of the losses were made public, the pound would literally ‘take a pounding’ in the currency exchange markets.

Here in the US, the same problem is showing up. Predictions less than six months ago that the total losses of bad investments would be around a trillion dollars have now been surpassed, with new estimates putting the total losses over 2.2 trillion dollars. 350 billion dollars of government bailout has not righted the economic ship and proposals now include spending the rest of the 700 billion dollar stimulus, plus another 850 billion dollars in new spending and buying up the “bad” assets by the US government.

However, just as in Iceland, no one is willing to admit just how much “bad” assets will need to be purchased or guaranteed by the government to stem the crisis. No one is even willing to admit to just how much needs to be written off, although research by NYU economist Nouriel Roubini is now placing US banking losses at some 3.6 trillion dollars. If that is accurate, it is 16% more than the entire US budget for this fiscal year.

The US continues to literally throw money at a problem that we are clueless about. The banks refuse to divulge any information that would make them look bad or create a “crisis in confidence” among their depositors, but it's okay to take government funds, paid as taxes by those same depositors.

Still, the problem for the government remains how to save the banks, which could be completely insolvent due to bad assets on their books, without further shooting the economy which is in a recession. Both appear to be drowning, and with Iceland as the most recent model of what follows a banking collapse, the US government may not be willing to lose banks that could trigger a political coup. For the average person in the US, the question may be one of getting the bad medicine over quickly, or a lingering illness that produces a long term Japanese Pseudo Recovery.

For US politicians, it must appear as a no-win situation, and not a single politician wants to be accused of doing nothing while the crisis grows. But ignoring the consequences of their actions as an excuse for throwing money at a problem is not the answer. 350 billion dollars already spent would have given every man, woman and child in the US about $1000 each. That would have allowed some people to postpone the repossession of their homes, allowed others to pay bills or buy Christmas presents or even save for a rainy day. Instead the money went into a banking black hole and for all visible purposes, vanished from sight. Banks won’t even say how they have used the funds.

We may not be able to resuscitate this canary. The question may be, is there a better solution available or is it going to die anyway?

Comments

[Tradememe]

The problem is that the US is trying to revive dead banks. The longer the financial mess continues, the more time it would take the economy to recover.

2009 Jan 29 04:25 AM

[HOKIENERD]

It's hard to take you seriously when you say things like "The US continues to literally throw money at a problem that we are clueless about." Someone in the government is physically tossing currency?

In the same vein, if the true extent of the losses were made public, people in the UK would physically beat their money?

2009 Jan 29 06:17 AM

[Roger Knights]

User 346873 was objecting to the incorrect (but widespread misuse of "literally" where "virtually" should have been used--or, better, no adverb should have been employed.

2009 Jan 29 06:46 AM

[a. palmer jr.]

I think that possibly if the banks aren't willing to disclose how they are using the money then the government should make them give the money back immediately, say within 3 days or have the bank taken over. I can't think of a business that should have been as easy to make a profit with as a bank or an insurance company. Both institutions seem like they are being run by complete idiots!

2009 Jan 29 09:55 AM

[sunnsea]

Anthropologists study simple societies in order to understand more complex, so-called "advanced" societies like our own. The collapse of Iceland's economy, and you might as well include Ireland into this, are smaller and easier understood at a glance than one's like the US, Japan or the EU. Studies of smaller economies might even trigger off a whole new branch of economics, something like "anthro-economics". Same MBA "free-market" lies., same result. If you bought into it, you got burned,

2009 Jan 29 10:31 AM

[notsosmart]

what so hard.yes its hindsight.if you buy phony rated AAA wothless paper you will go bankrupt.iceland could have stayed away.so could others.but greed is king.anybody for tulips?

2009 Jan 29 10:56 AM

[MGA_1]

A lot of bad debt out there...

2009 Jan 29 11:06 AM

[MGA_1]

Well, every empire has it's time. To me the question is: how long will it take to reestablish productive exportable manufacturing? I think the answer to that question is when America will have a turn around. Hopefully sooner than later.

2009 Jan 29 03:45 PM

[Socialism cannot compete!]

"For US politicians, it must appear as a no-win situation, and not a single politician wants to be accused of doing nothing while the crisis grows."

Doing nothing while it grows? It is their actions that CAUSED this mess!! Until everyone understands that social engineering in housing via the CRA is at the root of the mortgage collapse, we will not bottom. LESS government IS the solution. No, of course the politicians don't want to do nothing -- doing nothing means a) admitting their wrong-doing, and b) passing by the opportunity for grabbing more power!!

2009 Jan 29 03:58 PM

[monday1929]

You are being paranoid etc. And you are right. As was I.
NO ONE ever listens.


On Jan 29 01:40 PM WAKEUP wrote:

> Interesting. When I first posted a couple of comments, a year or
> so ago, wondering if this might be a much bigger financial meltdown
> than in previous times, there were multiple comments in response,
> saying that I was being paranoid, etc. Now, well, it seems that this
> is a situation of almost limitless proportions. So, here we go, again.
> NOW I wonder if we haven't already crossed a line that we will never
> be able to re-cross; that is, I suspect that we have shot ourselves
> in both feet, and lost so much financial ground that in our lifetimes
> (maybe forever) the U.S. will not recover completely, and will, in
> fact, live at a reduced standard, from now on. OK, I've got my helmet
> on, bring on the response.

2009 Jan 29 04:07 PM

[monday1929]

The Banks which have begged for Billions, JPM, Citi etc. are all BANKRUPT. Let us stop saying they may be , might be. They will not reveal their Trillions in near-worthless off-book holdings because then EVERYONE
would know they are bankrupt.
We must try those Bankers responsible for destroying the Economy for Treason. If found guilty they must return 10 years of fraudulently obtained bonuses and they must be hanged by the neck until dead.
And close down the utterly corrupted SEC.

2009 Jan 29 04:12 PM

[Nobby]

To address the problem in the US you need to government to print their own money as well as minting coins. So long as the Federal Reserve has a strangle hold on the American people this slavery will continue. The Fed is not accountable to government or the people but is privately owned.
Understanding the history of Fiat and the fractional reserve banking system is key to understanding inflation and deflation and why our hard earned money ends up providing us so little. Also there is a lot of money being siphened into slush funds. See comprehensive annual financial reports for the details.
History repeats itself because few decide to learn from it. The game continues.

2009 Feb 02 12:45 AM

[Daniel 351]

It's really amazing how many bad decisions are being made right now and I agree with Tradememe in that it's pointless and futile to try and revive dead or bad businesses by just handing money over to them.

That's essentially what the US gov. did with the first bailout and all the banks did was hoard the money and now we're getting ready for round two?

2009 Feb 05 01:29 PM