Here is an interesting panel discussion about the Icelandic financial crisis. It is chaired by Martin Wolf (see blogroll), and includes Paul Krugman (see blogroll), Simon Johnson (see blogroll), a deputy director of the IMF, the current head of the Icelandic central bank, and another knowledgeable Icelander.
To recap: Iceland had by some measures the worst financial crisis in the history of the world (Wiki summary here.). However, because there was zero chance the country could bail out its banks — and it is not a Euro area member — they had to go bust, capital controls were introduced, and foreign wholesale funders of the Icelandic banks took the main financial hit. The obvious comparison is with Ireland, which has a similar-size crisis but is in the Euro and partly as a result was forced to go the bank rescue route. So, while Iceland has written off much of its bad debt and is recovering, Ireland is presently set to honour every European cent it owes and faces a decade of painful adjustment.
The event was filmed this week and runs to 1.5 hours. It is just about worth watching the whole thing, but if you don’t have time, scroll through and check these highlights as a taster menu of the way the world has changed — intellectually — as a result of the global financial crisis.
6 mins: Martin Wolf talks about the previously unthinkable phenomenon of the IMF admitting to mistakes.
30 mins: An IMF deputy director actually says: ‘Capital controls were probably the best thing that could be done at the time’. Remember that when the Asian crisis broke in 1997 the IMF was trying to change its articles of association to make a battle against capital controls a centre-piece of its mandate.
57 mins: Martin Wolf talks about the ‘new, cuddly IMF’.
62 mins: The point is made that the lessons of Latin America 1982 and south-east Asia 1997 have were finally learnt such that they could benefit a country (Iceland) whose population is the size of a mid-western town in the US. Roughly speaking, bad US, IMF and World Bank policies were used on approximately 1 billion people in order to learn positive lessons that have been applied to 300,000 people.
89 mins: Martin Wolf talks about the Vickers plan for UK financial sector reform, which he refers to as ‘modern Glass Steagall’. I think it would be fair to say he hopes that this is what it will turn out to be, since the ring-fencing strategy put forward by the final Vickers report has not in fact been tried before.
Final thought: the very moment when the IMF is said to have become ‘cuddly’ may be the one when it needs to not be cuddly. Italy, which I continue to believe will require IMF intervention, cries out for the toughest and most invasive kind of IMF action if it is to remain in the Euro area. This includes intervention in institutional areas like legal system reform where the Fund has never previously (to my knowledge) been active. Just when the IMF decided to be nice and listen to Icelandic policy makers, it needs to be Mr. Bad Cop to have any chance with Italian ones. In saying this, I stand by my own preference for Italy to be pushed out of the EU and forced to confront its problems itself — because only that will really force the country to grow up.