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Comment by Pigo | Hacker News Reader

I can't help but wonder how much of this would have been fixed by letting them fail. This is way out of my ballpark, but it still bothers me a lot that they don't face the same consequences I do for making mistakes.

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Iceland let its banks fail and protected the taxpayers, and a few years later the economy recovered just fine. It's at a much smaller scale than the US or EU economy though, but still.

It's entirely unfair to use 'but still' as any sort of argument here. Iceland is not a large chunk of the world economy, nor does it have a premier position as the world's economic nexus to protect. It's well documented that cause/effect differs as your economy scales (just look at how behavior changes between a small startup vs a unicorn). While there might be some valid arguments for letting the banks fall, 'someone else did it and it worked' is not one of them.

Humans and their systems are very resilient. Personally I would have let a lot of the weaker US financial institutions fail after Lehman. It would have been much more painful in the short term, but I bet we'd be in a healthier recovery period now. Granted I understand why the Fed did what they did. The European equivalent is letting Portugal, Greece, Italy, and Spain go bankrupt, which could cause serious, irreversible structural problems...on that one, I'm not sure what I would have done.

Yeah, Iceland couldn't have pumped in enough money to keep the banks solvent because of the size of their balance sheets relative to its economy but they still made comparably significant interventions to protect domestic creditors.

It's unfair to compare the differing results of different national policies? What other option do we have? Should we just swallow the whole bill of goods that Hank Paulson drops on our desk, the same way that Bush the Lesser did?

You probably don't think we should look to e.g. Portugal to see alternatives to the drug war, either. It's a funny sort of exceptionalism, to imagine that we can only learn from similar-sized nations. Would that be Brazil and Indonesia?

Of course scale should be taken into account; it’s a sad state that this would count as exceptionalism.

Iceland and Portugal should be lessons for entities or similar size, like individual states of cities in the US.

Scale should certainly be taken into account. Still, differences in scale are no excuse to completely invalidate the data points without a good reason why it should matter this much.

The examples we have of countries letting their banks fail recovered¹. The onus is on anybody disagreeing to show how the US differences are relevant. Just pointing at them and screaming does not make it.

1 - AFAIK, all of them. What is interesting because it includes Brazil at the late 90's (the one single time Brazil grew in recent history).

Differences in scale are a great reason to throw data out.

Past experience gives us lessons for similar cases. The onus is on anybody using a model to ensure the use case is similar to the training data.

The US and Iceland are nations but it’s unreasonable to get hung up on that similarity of category. The nation is not a label for grouping economies that are comparable.

I don’t like bailouts either, for the record. My gripe is only with the scale question.

Is there a better word for "here's a reason that things work differently in USA than in the rest of the world, that totally legitimizes our habit of ignoring any lessons we could learn from them"? I mean, when I imagine Trump saying it, it really sounds like, "exceptionalism".

This whole size thing is a silly exercise in magical thinking anyway. Money is divisible, across all relevant scales. Pick any random nation, and its economy is larger than USA's was, some number of years ago. Would you say that we weren't exceptional back then, but we are now? When did that transition occur? What happens if some other nation's economy grows to our economy's current size, sometime in future? Will we no longer be exceptional?

The day when China is the size of the US there will be lessons to learn from China. I bet there are many lessons today.

But if Iceland remains its current size, neither superpower should treat it as comparable for scenario analysis.

I get a sense this is a political question for you; it’s not for me. It’s just an example.

Amazon is a company. I have a company of my own. Say my servers went down, and a few days later things were alright. Would it be Amazon Exceptionalism if they refused to learn from my experience?

That's the whole basis of social science. As much as HN shits on social science for being unverifiable, the entire point of the domain is that some things (namely, economic understanding) are not verifiable through observation and comparison. The only way to really understand potential impacts are through economic concepts and modelling. Sure, there is plenty of bias thrown in, but there's also a million different economic models to choose from. There's a lot of noise, and it actually takes specialized knowledge and domain expertise to wade through all of it. I don't get why there's the misapprehension that economics is inherently intuitive.

The social science you're describing is not the same as that I learned at university. Maybe it doesn't often admit experimentation, but it sure as hell uses observation and comparison. In fact you're sort of insulting economists here, implying that they practice a sort of solipsistic philosophy. Lots of them really deserve it, but still!

The secret unacknowledged religious dogma you might not even know you've swallowed (although golly are Goldman glad you did!) is the proposition that banks are difficult to replace. This notion is preposterous on its face (which is why no one ever says it out loud) because of course anyone who owns capital is quite capable of purchasing financial instruments with that capital. If they weren't, they wouldn't own it in the first place. In the absence of "bailouts", there might have been some temporary confusion as legitimate profitable uses of capital switched from the old banks to the new (and presumably as the new bankers upgraded their executive suites to the level of opulence required in their new positions), but the history of recessions in 19thC USA makes clear that when we just let weak banks fail, the economy quickly recovers.

Sure - you use observation and comparison to validate against your existing models, not directly against other countries. To apply the model to other countries, you have to tweak your model for additional factors that vary between the countries. It's preposterous to assume that you can straight up draw a conclusion from Iceland and apply it to, say, China.

19th C banks are wholly different creatures to what we have today - we weren't even on fiat currency in the 19th Century, much less using banks as extension of monetary policy. The entire point of defending banks is that there is an immense amount of built up regulations that would not transfer over to the 'new banking system'. And while it's debatably whether or not existing regulations are good, the current regulatory environment makes it unlikely that any sort of similar consumer protection would be re-built in this day and age - just look at the modern ICO, which is wholly built on smoke and mirrors.

I didn't mention a "new banking system". I suggested rather that anyone with the money to do so could provide short- and medium-term liquidity to firms that require it. Apple, for example, would be just as capable of buying bonds as Goldman Sachs is, and for the right yield they would.

It's not the same but it shows it can be done, that letting the banks fail doesn't necessarily translate to economic collapse. If the Iceland economy had collapsed there would be a case that bailing out the banks was the right decision, but as it is there's no clear proof.

Bailing them out lead to all kind of problems too. 8 years later the economy hasn't quite recovered, and in the meantime the lack of trust caused by all this gave us Trump, Brexit, etc. I guess we can't really know what would have happened if these banks had failed, but the alternative is definitely not great.

>It's entirely unfair to use 'but still' as any sort of argument here. Iceland is not a large chunk of the world economy, nor does it have a premier position as the world's economic nexus to protect.

A "premier" position based on bullshit ain't so premier.

Iceland effectively did bail its banks out, but only bailed them out for domestic depositors and screwing foreign creditors and depositors, which had severe foreign policy effects on Iceland.

More severe than electing the current USA president? "Foreign policy effects" actually are size-dependent.

Or, bail them out (emergency liquidity, QE1, etc) but also nationalize them at least on a temporary basis so that as they recover, the profits do not go to private pockets but rather are socialized.

I'd be satisfied with dissolution.

Not that I've researched it, but I've read the auto manufacturers turned things around and repaid the bailout because they are in the business of producing things. It seems like the business of banking has it's own culture, if we don't recognize what they're about and say no next time I will be out rioting.

Exactly right. There has to be real consequences or else you get what we have right now which are these entities that are so powerful they can shift accountability away from themselves and thereby socialize all their losses while profiting to the tune of hundreds of billions of dollars.

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