The ascertain here is that during the housing/derivative/financial crisis, bailing out the banks was NOT the ONLY solution. It was merely the best solution for banks that by-and-large caused the crisis. The victims of the crisis, the home owners, did not benefit from the bank bailout. Their debt remained essentially the same.
Iceland took a different approach. Instead of bailing out the bankers, Iceland bailed out the home owners. Instead of giving money to failing banks, Iceland charged the bankers with crimes and got convictions. Instead of letting home owners have their homes foreclosed on, Iceland (after taking over the banks?) forgave the excess balance on the mortgages–anything above 110% of the house’s value was forgiven.
To solve this crisis, debt was going to be forgiven one way or another. The question was, who’s debt was going to be forgiven? The banks, the home owners, or some combination? Our solution was to or bail out banks by paying the derivative payments (debt) the banks owed as housing values fell. Iceland chose to bail out or forgive the debt of home owners. Which choice yielded better economic results?
Outcome: Initially, things were bad for everyone. But Iceland’s economy has recovered in a big way since their response to the crisis was put in place and is doing better now than most of the other affected countries. The U.S. economy remains weak and in the doldrums.
