Iceland & US: Worst Financial Crisis in Recent History - Essay Sample

Introduction

The financial crisis that faced Iceland and the US is the worst ever experienced in the recent past. Icelandic financial crisis marked a major economic event in the country's history. The crisis occurred almost at the same time both in Iceland and the US. In both countries, the banking sector was largely responsible for the collapse in the economy. The financial crisis in the US which culminated in 2008 was the worst experienced since the great depression. The signs of the collapse started at the time when the housing prices started to fall, and the number of mortgage default began. In 2007, the lenders allowed too many people take subprime mortgages who later defaulted and that credit default swaps insurance companies like the AIG which ran into bankruptcy collapse (Amedeo 2019).

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The Icelandic financial crisis occurred in 2008 after the country nationalized Kaupthing bank, Glitnir, and Landsbanki banks which were the three major banks and had a foreign debt of $62 billion. This default ended up sending foreign investors away from Iceland since the bank had already collapsed. As a result, the stock market fell by 95 % with businesses going bankrupt, housing prices falling and doubling of mortgage costs. Iceland banks lured investors from the Netherlands and UK whereby the depositors were promised interests rates of 15%. These financial institutions invested deposits in a soccer team, real estate, and foreign companies. The GDP of Iceland was $ 14billion in 2008 (Jonsson, 2009). The global financial crisis in 2008 resulted in the shutting down of the ban lending. These three major banks went bankrupt, and the government was unable to bail them out due to lack of money which led to the collapse of the country's economy to banks financial collapse (Amedeo 2018).

The two major causes of the financial crisis in US and Iceland was mainly the deregulation of banks and the nationalization of the three major banks in Iceland that had already defaulted to pay the depositors and interest of 15%a s they had promised. In the US, the banks were permitted to participate in the hedge fund. The rates of the subprime mortgages increase from 10 % to 20% of the mortgages that had been taken from 2001 to 2006. At this time, the mortgage-backed security had grown to $1.3 trillion industry. Fannie Mae and Freddie Mac guaranteed 90 percent of all mortgages. Further, the deal made between Bear Stearns and JP Morgan Chase led to the creation of $30 billion federal guarantees on top of $ 182 billion that had been used as a federal bailout for AIG. This great recession was costly since the treasury had spent $439.6 billion through buying banks and car stocks. It was a great recession that had not been experienced before in the US (Reinhart & Rogoff, 2008).

The nationalization of the major banks in Iceland in 2008 marked the start of the financial crisis. The banks already had a foreign debt amounting to $62 billion since that had expanded all over Europe. This act contributed to falling housing prices and the doubling of the mortgages. These banks went bankrupt during the 2008 global financial crisis and yet the government did not have money to bail them out which resulted in the collapse of the Iceland economy (Bardoloi, 2018). The banks had invested $100 billion of the foreign deposits in real estate and foreign companies which was more than the Iceland GDP in 2008 which stood at $14 billion during this time. The cost of living rose to lead to massive unemployment which led to a series of street protests (Amedeo, 2018).

Conclusion

In conclusion, the financial crisis in Iceland and US are the major events in the 21st century. The primary contributors of the crisis were the deregulation of the banking sector in the US and the nationalization of the banks in Iceland. The bailout of big firms like the AIG proved to be costly to the government hence worsening the economic situation of the US. Similarly, the foreign debt by banks in Iceland was huge such that the government was unable to pay hence leading the collapse of the economy.

References

Amedeo, K. (April 16, 2019). What Caused the 2008 Financial Crisis and Could It Happen Again? The Balance. Retrieved 28 April 2019, from https://www.thebalance.com/2008-financial-crisis-3305679

Amedeo, K. (December 07, 2018). "Iceland's Economy, Its Bankruptcy, and the Financial Crisis: How a Volcanic Eruption Helped Iceland Recover." The Balance, 2019, https://www.thebalance.com/iceland-financial-crisis-bankruptcy-and-economy-3306347.

Bardoloi, Y (January 04, 2018). The rise, fall, and rise of Iceland post the 2007 global financial crisis. Young Post | South China Morning Post. Retrieved 28 April 2019, from https://yp.scmp.com/over-to-you/columns/article/108261/rise-fall-and-rise-iceland-post-2007-global-financial-cris

Jonsson, A. (2009). Why Iceland? How one of the world's smallest countries became the meltdown's biggest casualty. New York: McGraw-Hill. https://www.amazon.com/Why-Iceland-Smallest-Countries-Meltdowns/dp/0071632840

Reinhart, C. M., & Rogoff, K. S. (2008). Is the 2007 US sub-prime financial crisis so different? An international historical comparison. American Economic Review, 98(2), 339-44. http://dx.doi.org/10.1257/aer.98.2.339