Monetary Turbulence and the Icelandic Economy

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.