“Iceland’s reinvention from the poor cousin in Europe to one of the region’s wealthiest countries dates to the deregulation of the banking industry and the creation of the domestic stock market in the mid-1990s. Those free market reforms turned Iceland from a conservative, inward-looking country to one of a new generation of internationally educated young businessmen and women who were determined to give Iceland a modern profile far beyond its fishing base.

Entrepreneurs become its greatest export, as banks and companies marched across Europe and their acquisition wallets were filled by a stock market boom and a well-funded pension system. Among the purchases were the iconic Hamley’s toy store and the West Ham soccer team.

Back home, the average family’s wealth soared 45 percent in half a decade and gross domestic product rose at around 5 percent a year.

But the whole system was built on a shaky foundation of foreign debt.

The country’s top four banks now hold foreign liabilities in excess of $100 billion, debts that dwarf Iceland’s gross domestic product of $14 billion…”

More here.

Comment:

The usual muddled and dishonest blanket indictment of the free markets will begin. But look at the facts. It was massive deregulation of one sector – banking and finance, allowing it to become the target of what amounts to predatory lending. Debt. Speculation. Possible criminality.

“The krona is suffering in part from a withdrawal by a falloff in what are called carry trades — where investors borrow cheaply in a country with low rates, such as Japan, and invest in a country where returns, and often risks, are higher.”

Icelandic bonds? Remember those? Just a while back, every investment newsletter you read was urging you to get fantastic rates of return on those bonds. What you have is interest rate arbitrage, speculators making money off the difference between interest rates. They aren’t to blame, of course. Give people an incentive, and they will act on it. But that’s the result of unrestricted printing of paper money, artificially low interest rates, and artificially abundant credit. Don’t blame the free markets.

And this gem from Jim Willie:

REALITY CHECK, INVESTMENT ALTERNATIVE: If you had purchased $1000 of Delta Airlines stock one year ago, you would have $49 today. If you had purchased $1000 of AIG stock one year ago, you would have $33 today. If you had purchased $1000 of Lehman Brothers stock one year ago, you will have $0 today. However, if you had purchased $1000 worth of beer one year ago, drank all the beer, then turned in the aluminum cans for recycling, you would have received $214 today at redemptions. Based on the above, the best current investment plan is to drink heavily & recycle. It is called the 401-KEG Plan.