Is Britain going the same way as Iceland? Iain Dale says that my reference in my political column to senior economists referring to London as “Reykjavik on Thames” is “terrifying, if true.” Cheeky wee monkey. ‘Course it’s true. The phrase I can attribute directly to Willem Buiter, one of Brown’s first appointments to the MPC and a pro-Euro enthusiast (but that doesn’t make him bad and wrong). He makes the Iceland case, and coins the phrase, in this rather technical but sobering FT blog post. Now you could argue he’s just one maverick. But I’d make three points in defence. 1) Buiter was denounced as a maverick when he said Iceland would go pop. He was right, his critics wrong. 2) I’ve heard his case echoed by other serious economists, who I can’t name. And 3) Patrick Hosking of The Times – no maverick, but a first-class journalist – spells it out in this excellent piece that Gordon Brown will not want you to read.
The risk of a new banking crisis, exploding on the public books, is a real one – albeit (at present) an unlikely one. In times like these, when the unthinkable happens with alarming frequency, you can’t afford to dismiss anyone as a weirdo. We’re going through a rare paradigm shift in understanding the economy, similar to that of the late 1970s. The old analytical tools which helped us understand the post-ERM era (ie, inflation fixation) are no use. They weren’t any use in post-globalisation era, hence the bubble (and the bust). A new era is upon us now, so until we understand it we can’t dismiss anyone as a maverick.“Like Iceland, we boast a huge banking industry out of all proportion to the overall economy. Like Iceland, we have an unfunded depositor lifeboat scheme totally unequipped to grapple with failing banks. Like Iceland, our national output is dwarfed by the vast liabilities of our banks. Like Iceland, our banks for years scoffed at relying on domestic depositors to fund their activities and developed a dangerous addiction to wholesale money. Like Iceland, our Government is poised to go on a borrowing spree to try to soften the pain. Like Iceland, our currency is on the skids as foreign investors pull out.”
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