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Monetary Turbulence and the Icelandic Economy

In: Preludes to the Icelandic Financial Crisis

Author

Listed:
  • Robert Z. Aliber
Abstract
The financial turbulence centres on three sets of events, including several waves of financial crises; the credit crunch now under way in the United States and Britain and Iceland and Ireland is one of these waves. The term ‘crisis’ means that the decline in the market value of certain classes of assets — in this case both residential and commercial real estate — is so large and so extensive that lenders are sceptical of the solvency of a large number of banks and other lenders. The term ‘wave’ means that similar market phenomena are observed in several different countries at about the same time. Countrywide Financial, the largest US mortgage lender, was on its way to insolvency in August 2007 before being rescued by the Bank of America. Northern Rock, the largest British mortgage lender, would have closed if credits had not been available from the Bank of England; Northern Rock has been nationalized. Both Countrywide and Northern Rock experienced runs on their IOUs in the commercial paper market. Bear Stearns, the fourth largest US investment bank, failed in March 2008 because the counterparties in the wholesale financial markets would no longer accept its commitments; Bear was subject to a run on its shares as well as a run on its IOUs. Bear would have failed if the Federal Reserve had not agreed to buy up to $29 billion of its dodgy assets so that JPMorgan Chase would acquire Bear.

Suggested Citation

  • Robert Z. Aliber, 2011. "Monetary Turbulence and the Icelandic Economy," Palgrave Macmillan Books, in: Robert Z. Aliber & Gylfi Zoega (ed.), Preludes to the Icelandic Financial Crisis, chapter 15, pages 302-326, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-30714-8_15
    DOI: 10.1057/9780230307148_15
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    Cited by:

    1. Gylfi Zoega, 2017. "Nordic Lessons from Exchange Rate Regimes," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 45(4), pages 411-428, December.
    2. Thorvaldur Gylfason & Gylfi Zoega, 2017. "The Dutch Disease in Reverse: Iceland's Natural Experiment," CESifo Working Paper Series 6513, CESifo.
    3. Hamid Raza & Gylfi Zoega & Stephen Kinsella, 2015. "Capital controls, financial crisis and the investment saving nexus:Evidence from Iceland," Working Papers 201518, Geary Institute, University College Dublin.
    4. Thorvaldur Gylfason & Gylfi Zoega, 2014. "The Dutch Disease in Reverse: Iceland’s Natural Experiment," OxCarre Working Papers 138, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.

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