Spinning out of control, Iceland in crisis
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Abstract
Within few days in October 2008 some 85% of the Icelandic bank-sector collapsed, as did the Icelandic króna. Many non-financial firms declared bankruptcy or decimated their workforce. Inflation skyrocketed as did unemployment, the other ingredient in the misery index. This paper records how well-intended policies aimed at making life easier for house-owners, people living in de-populating areas, and taxpayers turned into misfortune. The mixture of lax fiscal policy, tight monetary policy, inflation targeting, and running the smallest floating currency in the world with inadequate foreign reserves proved to be dangerous.