[LINK] Drezner on Iceland

[rfmcdonald]

After making a couple of posts (1, 2>) critical of what Daniel Drezner sees as the reluance of Iceland and Icelanders to take responsibility for their economy's existential troubles, it turns out that he was working on a book review of Ásgeir Jónsson's new book Why Iceland? for the Wall Street Journal.

Mr. Jónsson often likens Iceland to America, even observing at one point that "the Icelandic dream is similar in character to the American dream." The ­differences are many, however. Although blessed with sound fundamentals, Iceland's size—its population (320,000) is roughly equivalent to Cincinnati's—helps to make its economy more volatile than America's, and its ­financial liberalization included greater risks. Kaupthing alone held a book value equal to 2½ times Iceland's GDP—thus the country's central bank did not have the capacity to act as a credible lender of last ­resort in the way the Federal Reserve did in the U.S. By the peak of the bubble, 85% of Iceland's equivalent of the Dow Jones Industrial Average came from the ­financial sector alone. Mr. Jónsson eventually ­acknowledges that "Iceland's bubble had its own way of doing things."

Later, Mr. Jónsson advances a "canary in the coal mine" argument, saying that Iceland is a harbinger of bigger countries being brought low. But, again, the country's size and the incompetence of its political leadership—watching obliviously as things grew out of control and then fell apart—made it especially ­vulnerable to global shocks. It is telling that, by the end of 2008, Iceland was the only country in Western Europe that failed to secure a currency swap line from the U.S. Federal Reserve, guaranteeing official access to hard currency. What happened in Iceland will probably stay in Iceland.

The greatest value of "Why Iceland?" is the window it may open on the country's mind-set. Mr. Jónsson ­devotes page after page to the international culprits that allegedly helped to scupper the economy. In one chapter it is hedge funds. In another, rating agencies, aiming their malice at Iceland in ­particular. Finally, it is a cabal of central bankers who, it is claimed, froze Iceland out of the help they could offer and forced it into the arms of the IMF. None of this is convincing. In the end, Icelanders who want to find someone to blame for their woes may want to look at themselves.