Banking in Iceland

In a normal country....the financial stability of civilization is built upon three simple ideas.

First....money is printed and coins are minted by the federal apparatus of the country.  They determine the size and build some security mechanism into the money so it can't be counterfeited.  This is the job of the government.

Second....the government will create a financial box of tools where they can manipulate the economy to some degree.  Pure capitalism no longer exists in any country on the face of this Earth.....it's a hybrid system where rules and balances are in place to help or hinder growth.  

Third and final....money is generated by commercial banks and loaned to the central bank of the country.....to push a line-of-credit out to the public.  This will create mortgages for private home owners, credit card usage opportunities, loans for business operations, and car loans.  These react with interest payments which pay the banks and ensure their growth.

This week, in Iceland.....a dramatic suggestion was put forth and will be strongly evaluated by the Icelandic government.

They are suggesting to remove private commercial banks from the three-step recipe, and making the state mechanism (the central bank)....the sole individual who can generate funds for the public.

This has stirred up a number of banking folks and finance journalists. But there's some history here.

Iceland went back and reviewed banking history since the mid-1800s.  What they found was that about every fifteen years....some type of banking bubble or crisis occurred.  There's been roughly twenty occasions where things didn't run correctly, and six of the crisis periods were fairly rough on the public....especially the 2008 episode.

The odd factor to all twenty crisis episodes?  Commercial banks and speculation by investors.

All of this research led folks to this one problem.....the central bank is not capable of controlling speculation and risky behavior on credit usage.  In each case.....some less.....some more....the state ended up stepping in and having to correct the faults and cover losses.  If you remove the commercial banks from this money control situation....they are basically there to act as a deposit point for accounts (you put your money in and you take your money out).  Under this concept, they would be the middle-man between lenders and credit-usage customers.

This leads onto a dozen-odd questions which weren't really asked or answered in this report to the Icelandic government.

Would there be a tougher set of rules for mortgage situations.....where the government laid down absolute rules on down-payments for homes?  Would some political party be able to step in and act like corrupted hedge funds....screwing up the process instead of commercial banks?  Would this really stop the cycle business of every decade or two of a crisis period?

All of this makes for boring reading for most folks.....but it generates some conversation.  Most folks have no background in banking and wouldn't touch this subject.  Iceland has seen a hefty fall over the past seven years and they seem to be wanting a better solution than you'd normally get.

It helps to have a population of roughly 300,000.  Fewer people lead to a situation where changes are more creative.  This type of solution in the US?  Impossible to get through Congress because of lobbyists and banking enthusiasts.

Bottom line?  Something might occur in Iceland and over the next twenty years suggest a better way of handling an economy.....yet be untouchable by most other countries.