Let Banks Fail Is Iceland Mantra as 2% Joblessness in Sight

[pampango]

8. We could, but FDR chose not to.

Right after taking office as President, FDR shut down all of the banks in the nation and Congress passed the Emergency Banking Act which gave the government the opportunity to inspect the health of all banks. The Federal Deposit Insurance Corporation (FDIC) was formed by Congress to insure deposits up to $5000.

These measures reestablished American faith in banks. Americans were no longer scared that they would lose all of their savings in a bank failure. Government inspectors found that most banks were healthy, and two-thirds were allowed to open soon after. After reopening, deposits had exceeded withdrawals.

http://www.fdrheritage.org/new_deal.htm

One big difference between Cyprus and Iceland is that the Mediterranean island - as part of the eurozone - cannot devalue its currency as the Nordic island did. "Our recovery (Iceland's) is a typical case based on currency devaluation. Then the exports get more competitive on fish or aluminium sold abroad, also services and tourism got a boost as prices dropped in Iceland," the former spokesman said.

"But we can't forget who's paying for all that - it is the citizens in Iceland, because inflation doubled while salaries stayed the same. We don't pay with high unemployment, but with lower salaries," Omarsson added.

http://euobserver.com/economic/119718

It is clear that there was a spike in inflation (the annual rate went from 3.4 per cent in August 2007 to the peak of 18.6 per cent in January 2009 as the Krona depreciated. Since the economy resumed growth, the inflation rate has averaged around 4 per cent per annum.


Statistics Iceland also publish a Real Wage Index which is shown in the following graph (from 2000 to 2011). It peaked at 120.2 in January 2008 and then reached a trough in May 2010 at 103.9 (down 13.6 per cent on the peak). It has now recovered some of the loss and in December 2011 was standing at 111.1 (down 7.6 per cent on the peak).

This is a predictable pattern. The exchange rate depreciation erodes the real wage as import price rise.



http://bilbo.economicoutlook.net/blog/?p=18609