Video: Protests in Iceland (updated)

By Reuters Staff
November 25, 2008

For all of you asking: “Why all these bailouts?” Below is why.

The Iceland economy is at a standstill after the implosion of its banking system.  What caused the implosion?  A ridiculously overleveraged banking system, not unlike our own.

The bailouts are our government’s attempt to avert the kind of banking collapse that would reduce accumulated wealth to near zero (via a sudden nationwide bank run). My fear is that the banks are going to blow up anyway, and that if the Fed goes down with the ship, government will be powerless to help us out of this mess.

(Dare I say it?)  I wonder if Andrew Mellon’s infamous advice to Herbert Hoover might actually have been correct: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate . . . purge the rottenness out of the system.”

Folks, especially those of you who are so vociferously against these bailouts, understand that without them, our banks would have collapsed by now, making a Depression more or less inevitable. That’s what’s happening in Iceland and that’s what would happen here.

My concern, and the reason I oppose the bailouts despite possibly Icelandic consequences, is that the long-run alternative is worse. Inflating a PUBLIC credit bubble to replace the imploding PRIVATE credit bubble solves nothing. A crash will come, the business cycle can’t be banished. By committing itself to guarantee all of the liabilities of the private financial system, the government will have little ammunition left once the downturn gets going in earnest.

(Thanks to Michael Y.($20) for his donation)

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