Handbook of Critical Issues in Finance
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Handbook of Critical Issues in Finance

Edited by Jan Toporowski and Jo Michell

This vital new Handbook is an authoritative volume presenting key issues in finance that have been widely discussed in the financial markets but have been neglected in textbooks and the usual compilations of conventional academic wisdom.
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Chapter 22: The Iceland crisis

Robert H. Wade and Silla Sigurgeirsdóttir


They [the Icelandic banks] shouldn’t be worried about the fundamental soundness of their business model. I think it is very sound and very good. Any market turmoil is just prompted by some misplaced misunderstandings of market analysts. (Richard Portes, Professor at the London Business School, May 2008) It was absolutely obvious … that its banking model was not viable. (Buiter and Sibert, 2008) The small island of Iceland (population 310 000, area 42 per cent that of the United Kingdom whose population is 60 million) has lessons for the world. It is an unusually pure example of the dynamics that blocked regulation and caused financial fragility across the developed world for 20 years. In 2007, just before the financial crisis, the country’s average income was the fifth highest in the world, 60 per cent above US levels; Reykjavik’s shops were stuffed with luxury goods, SUVs choked the narrow streets, and its restaurants made London seem cheap. Icelanders were the happiest people in the world according to an international study in 2006 (World Database of Happiness, 2006). It also had one of the two or three least corrupt public administrations in the world, according to Transparency International.

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