Too good to be true: What the Icelandic crisis revealed about global finance

Many papers discuss causes of Iceland’s financial crisis, but none has examined what the Icelandic crisis revealed about international financial markets prior to 2008. Global financial markets’ failure to recognize signs of an oncoming crisis reflects either an ignorance of international antecedents to Iceland’s financial liberalization and crisis, or a belief that Iceland was different. They also illustrate post-Keynesian theories about the instability of finance. This chapter reviews theories about financial liberalization and crisis, empirical evidence of that connection, and analyses of Iceland’s financial crisis. It comprehensively depicts Iceland’s macroeconomic fundamentals before 2008, and explains how positive reports by top macroeconomists and credit rating agencies strengthened views of Iceland’s financial and economic stability. It culminates with an explanation of why Iceland’s crisis surprised global financial markets, despite lots of evidence and reports by academics, policy makers, and private credit rating agencies that Iceland was destined for collapse.