From the Spectator:
In many ways, Iceland is in better shape than Ireland or Greece, both of which may well be stuck in recession for a decade. It may even be in better shape than Britain: we still don’t have much idea how much RBS or Lloyds-HBOS will end up costing us, or when we will be rid of them. There is an important lesson in that experience. Almost every government in the world has accepted the idea that they have to bail out their banks if they run into trouble. But Iceland suggests that isn’t necessarily true. In fact, governments could simply protect domestic deposits. After that, they could say they were very sorry, but there simply wasn’t enough money to pay back all the debts the bankers had run up.
It might be better financially. Bad debts would get written off immediately, rather than remaining a millstone around the neck of the country for years to come. More importantly, it would be better morally. Reckless, irresponsible behaviour would not be rewarded. Bankers would have to think a lot harder about what risks they were taking, and what their consequences might be. And depositors would have to be a lot more careful about where they put their money, rather than just lazily assuming the government would pick up the tab for any losses.
If Britain followed Iceland’s example, it’s possible the economy would survive and bounce back fairly quickly. Perhaps we could even put the prime minister who presided over the reckless expansion of the banks on trial for negligence, just as the Icelanders have. Come to think of it, that might not be a bad idea.