Iceland’s Financial Iceberg: Why Leveraging up is a Titanic Mistake without a Reserve Currency

Schwartz, H. (2011). Iceland’s Financial Iceberg: Why Leveraging up is a Titanic Mistake without a Reserve Currency. European Political Science, 10(2), pp. 292-300. doi: 10.1057/eps.2011.28

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Abstract

Iceland's boom and bust replicate in miniature the causes, development and trajectory of the absolutely larger but proportionately smaller American boom and bust, except for Iceland's costly lack of a reserve currency and its banks’ preference not just for speculating in but also overpaying for shaky assets. In the aggregate, both the US and Icelandic economies sold short-term, passive, and liquid assets to the world, consumed part of that borrowing, and reinvested outward in fixed, long-term and active investments. The key differences between Icelandic and US banks are that Iceland's banks made their titanic gambles without the benefit of an international reserve currency. The United States survived its catastrophe and continues to have access to global credit markets without much penalty because the dollar is the international reserve currency. By contrast, Iceland has mortgaged its economy and economic independence for decades to bail out banks that had overpaid for dodgy assets.

Item Type: Article
Additional Information: This is a post-peer-review, pre-copyedit version of an article published in European Political Science. The definitive publisher-authenticated version Schwartz, H (2011). Iceland’s Financial Iceberg: Why Leveraging up is a Titanic Mistake without a Reserve Currency. European Political Science, 10(2), pp. 292-300. is available online at: http://dx.doi.org/10.1057/eps.2011.28
Uncontrolled Keywords: deregulation, privatisation, financial speculation, insider trading
Subjects: H Social Sciences > HB Economic Theory
J Political Science > JN Political institutions (Europe)
Divisions: School of Social Sciences > Department of International Politics
URI: http://openaccess.city.ac.uk/id/eprint/5347

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