Comments on: Iceland currency collapses

By: DJ

DJ — Wed, 08 Oct 2008 04:34:28 +0000

“People know that inflation erodes the real value of the government’s debt and, therefore, that it is in the interest of the government to create some inflation.” — Ben Bernanke.

Note that when Bernanke took over as Fed chair, the Fed Funds Target Rate was a fairly reasonable 4.5%. It even went up over the next five months to a high of 5.25% in June 2006. Then, as inflation heated up, the Fed Rate (counterintuitively) began to plummet, creating an artifically low overnight lending rate– promoting inflation and bending the credit market all out of shape in the process.

By: Bob Morris

Bob Morris — Tue, 07 Oct 2008 23:14:39 +0000

Well, that bus company was started by Alan Greenspan, noted acolyte of Ayn “Greed is good” Rand.

They were all borrowing short-term cheap money and “investing” it long-term at higher rates. Unlike here though, Iceland has no real fallback position, major financial resources, or anyone to prop them up.

By: DJ

DJ — Tue, 07 Oct 2008 22:33:01 +0000

“All Things Considered” just interviewed the Finance Minister of Iceland. The coiuntry has nationalized one bank and may nationalize the rest. They’re on the verge of bankruptcy. But here’s the interesting part: they got into this trouble because they were borrowing “cheap, short-term” money on the international market and lending it out at higher rates.

Think about this: Lehman was lending them cheap money thanks to the Fed’s artifically low interest rates. The Icelandic banks were lending it out again at market rates which were much higher. That’s a no-brainer– until the market siezes up due to lack of funds. Then they have to pay back the short-term loans but can’t borrow any short-term money to do pay them with. And voila: meltdown.

Once again, I submit to you that Bernanke was driving this bus.