Global Economies, Regulatory Failure, and Loose Money: Lessons for Regulating the Finance Sector from Iceland’S Financial Crisis
2 MORRISS PETURSSON 691 - 799 (DO NOT DELETE) 5/3/2012 1:26 PM GLOBAL ECONOMIES, REGULATORY FAILURE, AND LOOSE MONEY: LESSONS FOR REGULATING THE FINANCE SECTOR FROM ICELAND’S FINANCIAL CRISIS Birgir T. Petursson* & Andrew P. Morriss** ABSTRACT Iceland was the first developed economy to fall into crisis in 2008, with the collapse of its banking sector, currency value, and economy. The collapse threw Iceland into a political crisis and provoked a serious international dispute between Iceland and Britain and the Netherlands over responsibility for the failed banks. Prior to 2008, Iceland had been treated as the poster child for deregulation; since 2008, it has been held up as the poster child for the dangers of financial liberalization. Neither is accurate. Rather, Iceland presents a cautionary tale about the interrelationships between fiscal and monetary policy and regulatory measures. Excessive liquidity fostered by central banks around the world, expansionary fiscal policies in Iceland, and inadequate understanding of fundamental * Partner, Laekjargata Lawfirm, Reykjavik, Iceland & Co-Founder and Director, Centre for Social and Economic Research, Reykjavik, Iceland; Cand. jur., University of Iceland, 1998. The authors thank the University of Alabama School of Law, and Law and Economics and Business Law Programs at the University of Illinois College of Law for financial support that made their collaboration easier; Liberty Fund, Inc. and the Searle Center at Northwestern University facilitated the collaboration by assisting with Petursson’s travel in the United States in 2009; the Regulatory Studies Program at George Washington University hosted us in 2011 and participants at a seminar there provided helpful comments.
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