Why iceland went bust – and why the US went bust

The usual answer, of course, is the evils of capitalism:

this country’s banks – virtually unregulated – to borrow more than 10 times their country’s gross domestic product from the international wholesale money markets. Watch as a Graf Zeppelin of debt propels its self-styled “Viking Raiders” across the world’s financial stage, accumulating companies like gamblers hoarding chips.

In fact, of course, the government regulators made lots of easy money available to ordinary Icelanders. 100% down no deposit, with easy payments – payments that failed to cover the interest, so that the debt grows every year. This was worse than the the loans that the US regulators made available to Hispanics – the Hispanics got no money down loans, but their payments had to cover the interest, plus the Icelandic loans were for everyone, while the US easy money loans were mostly to favored voting blocks.  Most US loans were not negative amortization, while all Icelandic loans were “indexed” – the equivalent of negative amortization.

The Financial Times reports

Easy access to 100% mortgages …

Iceland is the only country in the world that indexes its loans in addition to charging interest. This means that when Icelanders borrow IKr1,000 from the bank and inflation increases by 5 per cent, the bank increases their debt to IKr1,050 at the end of the year. A great deal for the bank and fine for you, too – so long as the property’s value and your salary are increasing by inflation and more.

The collapse of Iceland illustrates the “Micawber Principle”

Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Around the world, politicians promised voters they could live above their means, and created the pretense that it could be done.  And now the bill is due.  The bust is worse in Iceland, because the lie was bigger.