The people of Iceland non-violently reclaimed their country. They demanded new elections and a new banking board. They also voted against paying back massive debts to the UK that they themselves had nothing to do with. Most importantly,
Iceland let their banks default.
Iceland took the pain and faced it head on and now, four years later, they are seeing signs of growth and recovery. Some Americans were on the same page back in the 2008. We defeated the initial Henry Paulson bailout plan when it first came to a vote. Then the following week Paulson resubmitted an updated version of his original three-page, 600 billion-plus request and forced it through. With this pushy, CEO-like move he ignored the will of the people.
The FDIC protects accounts up to 250K, if they honored this could we have also let poorly run banks fail? Was it time for the American people to force common sense on the banking industry? Though Iceland has a small homogeneous population they may have the answers America is looking for. Here’s a nice little page with an overview of how they returned from the brink.
I’m not a big regulation guy but here’s a few rules that I’ve learned from others that make a lot of sense.
1. Banks must hold loans for the life of the loan. No more wrapping up loser loans and selling them to others. The purchasers of these loser loans(and their Quants) soon realize they need insurance in the form of a credit default swaps. When these contracts fail what happens? It’s an unregulated cascade.
2. Banking should be a boring business. Reinstate the Glass-Steagall Act. If you can’t make a profit making loans you shouldn’t be a banker. With fractional reserve banking allowing a bank to lend 10 times its deposit base it should be a fairly easy thing to do. Many current large bank CEOs really want to be and essentially are hedge fund managers. Let them run private hedge funds and get all the glory and all the risk. This way if they fail the American public doesn’t have to bail them out and then be lectured to that it was necessary.