Tuesday, November 29

Believe the Hype? Eurozone Collapse Fear-mongering Kicks Into Overdrive

Munchau gives the Eurozone at most 10 days to fix its problems before it implodes.

DeLong argues that "the Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash”.

But Johnson and Boone say such measures are basically pointless and have declared "The End of the Euro".

All of the above are respected thinkers with loads of experience and credibility, so clearly we are on the precipice of financial apocalypse.

But are we?

The Icy Silence

One country has taken a completely different path to the government and central bank financed bailouts urged by many of the Econoratti as the only way to save the Eurozone (and global economy) from economic catastrophe. That country is Iceland.

Iceland committed financial heresy when it decided to let its three formerly pygmy-sized banks, which rang up a remarkable $100 billion+ in losses, go bankrupt.

And how have things turned out for Iceland? So far, not too shabby.

Sound intergalactic advice
Iceland, an approximately $12 billion GDP economy, is small and none of its banks were Too Big to Fail. So it's an open question whether the example set by Iceland can be repeated by a larger country with a much more important banking system (i.e., Spain or Italy).

Having said that, one of the remarkable things about the current crisis debate is the near complete lack of contemplation of that very question. Instead an almost unanimous call is being made for the Germans to unleash the ECB money printing 'bazooka'. But that is just one of several different options.

As we contemplate Eurogeddon let's keep Iceland in mind. Contrary to what financial scaremongers would have us believe economic life does not come to an end when banks are allowed to fail and countries are allowed to go bust.

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