The Central Bank of Iceland welcomes the monetary reform resolution

In February we’ve reported here on the great news from Iceland that the Monetary Reform resolution, calling for the establishment of a special commission to “carry out a review of the arrangements of money creation in Iceland and to make recommendations for improvements”, was put on the parliament’s agenda.

Since then reviews by several organisations and economists have been submitted (including one from Positive Money and a few from other members of theInternational Movement for Monetary Reform).

Now, after a bit of a technical hickup, nine reviews have been published on theIcelandic Parliament’s (Althingi) website. 

The following seven were unsurprisingly supportive:

• Betra peningakerfi in Iceland,
• Ben Dyson of Positive Money in UK,
• Klaus Karwat of Monetative in Germany,
• Lars Alaeus of Positiva Pengar in Sweden,
• Professor Joseph Huber,
• Professor Victoria Chick,
• The Homes Association in Iceland

The eighth supportive review was from theCentral Bank of Iceland (here in Icelandic).

This is a cause for celebration, as the Central bank was critical in its review on similar resolution three years ago at Althingi. Now, in its 3rd paragraph of the review, it states:

„The Central Bank of Iceland sees the discussion on the arrangements of money creation as generally beneficial and therefore does not propose any amendments to the resolution.“

The only review criticising the resolution came from the Icelandic Financial Services Association (IFSA) – in an lengthy 4 page discussion. Following are some key comments on it:

• The largest part of its review IFSA spends on describing the deposit insurance scheme of the US and EU. IFSA seem to hold in great affection this bandage of the fractional reserve banking system from the 4th decade of last century.
• IFSA admits to its lack of insight by stating „To The Icelandic Financial Services Association it seems these are the ideas first promoted in 1933 by a group of economists at the University of Chicago in the US lead by Henry Simons.“ This is only to admit to their guesswork by saying: „This is actually not stated in the resolution.“
• The review is concluded by stating that „The structure of the financial system in Iceland must follow what‘s developed in the European Economic Union.“ However, IFSA does not refer to any European directive or regulation stating Iceland must assume the same process of money creation. In fact, inspection of Betra peningakerfi have not showed that any such requirements exists.

This sole critic of the resolution and its content shows that the opposition to further research of monetary reform is very limited. This gives raise to further optimism towards the matter within Althingi‘s Commission of Economics and Trade going forward and it will be interesting to see its opinion on the matter.

We‘re now to step 5 into establishing a parliamentary committee on reviewing arrangements of money creation in Iceland (according to the procedure of Iceland’s parliament):

1.      Agenda setting: The Speaker of Althingi puts the resolution in the agenda

2.      First reading: the resolution is debated in plenary

3.      Discussion in committee: the resolution would probably be passed to the Committee of Economics and Trade, headed by Frosti Sigurjónsson

4.      Review: the committee calls for reviews of the resolution

5.      Opinion of the committee: the committee delivers its opinion to Althingi and proposed amendments.

6.      Second reading: the resolution is debated at a second plenary reading

7.      Voting: Minimum of 50% participation is required. Resolution is passed if majority of votes are „Yes“.

WRITTEN BY POSITIVE MONEY ON APRIL 1, 2016

Iceland put bankers in jail rather than bailing them out — and it worked

Yesterday, Iceland's prime minister, Sigmundur Gunnlaugsson, announced a plan that will essentially close the books on his country's approach to handling the financial crisis — an approach that deviated greatly from the preferences of global financial elites and succeeded quite well. Instead of embracing the orthodoxy of bank bailouts, austerity, and low inflation, Iceland did just the opposite. And even though its economy was hammered by the banking crisis perhaps harder than any other in the world, its labor didn't deteriorate all that much, and it had a great recovery.
How great? Well, compare the evolution of Iceland's unemployment rate with what happened in Ireland, the star pupil of the Very Serious People:



Or compare it with the United States:

How did Iceland pull it off?

Let the banks go bust

For starters, rather than scrambling to mobilize public resources to make sure banks didn't default on their various obligations, Iceland let the banks go bust. Executives of the country's most important bank were prosecuted as criminals.

Reject austerity

Trading Economics

Iceland was nonetheless hit by a very serious recession that caused its debt-to-GDP ratio to soar. But even after several years of steady increases, the government didn't panic. It prioritized recovery. And when recovery was underway and the ratio began to fall, the government let it fall gently.

Devalue and accept inflation

Trading Economics

There's no free lunch in life, and no country recovers from a severe recession without some bad things happening. But while most developed countries have gone through years of grindingly high unemployment paired with super-low inflation, Iceland did the reverse. It let the value of its currency tumble, which naturally brought about higher prices.

But as a result, the country's export industries rapidly gained ground in international markets. Unemployment rose, but maxed out at a modest 7.6 percent before falling steadily to a very low level. In the US and Europe, the priority has been on low inflation to protect the asset values of the wealthy. Iceland prioritized jobs, and it worked.

Impose temporary capital controls

In the context of bank defaults and a plunging currency, the government felt it was necessary to impose an additional measure — capital controls, regulations restricting Icelandic citizens' ability to take their money out of the country. This is a serious violation of free market orthodoxy. More importantly, it can be a major hassle to ordinary people's lives and an impediment to starting new businesses. In some countries, like Argentina, capital controls become a breeding ground of corruption and mischief.

That leads some to believe that no matter how well heterodox policies workeconomically, they're ultimately doomed to political failure.

Iceland shows that's not the case. Getting policy right is difficult, but it can be done. And the upside to doing the right thing — devaluing the currency massively, then imposing capital controls to contain the fallout, then ending the capital controls once the economy recovers — can be enormous. Iceland has had a rough time over the past seven or eight years, but so have a lot of other countries. Things are looking up there now because the country's leaders had the wisdom to reject elements of the self-satisfied conventional wisdom that have proven so harmful elsewhere.

Source: http://www.vox.com/2015/6/9/8751267/iceland-capital-controls

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