.. In 2008, the tiny island nation in the North Atlantic became a byword for both boom-time excess and recessionary disaster. After inflating its financial service sector with a pile of foreign-currency debt and risky combinations of short-term debt instruments with long-term loans, Iceland, which is not a member of the European Union, endured one of the most unpleasant recessions in recent memory.
The country’s three largest banks, whose total assets were 11 times larger than Iceland’s GDP, proved too big to fail and then too big to rescue, bankrupting the central bank that took them over and leaving foreign creditors empty-handed .. neither the government nor the private financial institutions had cash to redeem the large number of foreign-denominated loans ..
This international neglect turned out to be Iceland’s saving grace. The crisis ended almost as quickly as it had begun ..
So what’s causing the recovery? The plain-sight answer is the one nobody will consider. Iceland is coming back specifically because its banks went out of business. That happened in spite of strenuous public efforts, but the removal of the tiny nation’s colossally bloated financial sector turns out not to have eliminated all that much value.
It bears repeating that banks are not creators of wealth. They are places where you store the surplus value generated by productive enterprise. In very narrow circumstances that surplus value can be loaned out at a profit, but a financial sector is the icing, not the cake. This should be common sense, but apparently it is wisdom so rare it can only be learned in countries small and remote enough to avoid the deadly medicine of the global financial markets.