Lies That Iceland Tells Us?

Iceland heals amid Europe's malaise Inflation, which reached nearly 20 per cent during the crisis, is still running at 5.4 per cent, and even with the government's relief programmes, most of the country's homeowners remain awash in debt, weighed down by inflation-indexed mortgages in which the principal, disastrously, rises with the inflation rate. Taxes are high. And with the country's currency, the krona, worth between about 40 and 75 per cent of its pre-2008 value, imports are punishingly expensive. – New Straits Times

Dominant Social Theme: Hey, Iceland did everything right! It let its largest banks fail, made sure domestic depositors were made whole, provided funds for debt-laden homeowners and has repaid foreign loans early as a result. The economy is scheduled to grow at over 2 percent this year. Public banking rules!

Free-Market Analysis: Okay, wait a minute. We've grown increasingly skeptical of the Iceland story recently. Unlike the 'Net's alternative media appendages of public banking, we apply an arm's-length analysis to these "feel good" stories.

Sure, the country's inept legislators made some good moves. Letting the banks "fail" was one of them and slowing down on potential EU integration was another.

But the neo-national socialists in the worldwide public banking movement who are convinced (as pre-war Germans were under the Nazis) that unlimited government-owned money presses would provide a "magic bullet" have a ways to go before their arguments become credible.

Compared to Ireland, Iceland has done better but that is not saying much. This tiny country of 300,000 people (less than the hurricane-ravaged city of New Orleans) is still morbidly socialist in certain ways, has retained its central bank and as a result, suffers from aggressive currency controls.

It's kind of funny the way the current public banking proponents point to Iceland as an example of fiscal probity. What currency controls actually are is government's attempt to use monopoly power to force investors and citizens to use only one kind of money, in this case the krona.

It is said that the krona would collapse entirely if currency controls were removed. That's because people do not want their holdings in krona!

Iceland's maladroit government is trapped by its krona dilemma. Pegging the krona to, say, the Canadian loonie might provide a solution but then Iceland's currency is held hostage by the monetary policies of another country. And Canadian central bankers are no more sensible than Icelandic ones.

As for Iceland's largest banks, only one is state owned. The other two apparently are mostly owned by creditors who would love to get their money out in a currency other than the worthless krona. In fact, Iceland's stake in these banks is due to be privatized whenever possible, though that may take a long time. Not exactly a raging endorsement of public banking.

The best part of Iceland's stance when it's come to the financial crisis has been the willingness of the people to stand up to the pressure exerted by the power elite to take on the debts of the country's three largest banks. Also, the lack of enthusiasm for joining the EU is a positive development.

But to cast Iceland as a well governed place, or a country salvaged by the adoption of a public banking platform is ludicrous. The situation is still so unstable that Iceland's government and central bank are insisting on the inconvertibility of the krona.

Iceland's bureaucrats could simply let the krona collapse and allow people to choose the money they want to use. More to the point, those running Iceland's monetary policy could allow citizens to back the krona with gold or silver.

A convertible, gold-backed krona with a market-based ratio and citizen participation would make Iceland a monetary mecca. Iceland's monetary problems would be over the next day.

This will never happen, though, or not in the current climate, at least. Iceland will limp along with modern neo-national socialists singings the praises of its central bankers and "courageous" government officials even though the situation remains so bad that the krona must not be made redeemable.

It would take real courage to allow the krona to be redeemed in gold and silver. And even greater courage to let currencies compete in Iceland. Both of these remedies, applied together, would create a truly prosperous Iceland.

The "courageous" bureaucrats who run Iceland would never consider such legitimate solutions. Better to take half measures while letting the more credulous parts of the media (alternative and otherwise) build up Iceland as if those running that tiny country had actually taken radical measures to re-establish the freedoms that Icelanders once enjoyed.

As always, we find in this sort of reporting the triumph of rhetoric over reality. The neo-national socialists who believe in paper money solutions will do anything to keep their standard aloft.

For the current mainstream media take on Iceland (for what it's worth) see this video:

(Video from VOAvideo's YouTube user channel.)