Could the Icelandic Banking Collapse of 2008 have been Prevented? The Role of Economists in its Unfurling

In 2008 the three main banks in Iceland collapsed. The proximate cause\r\nwas the freezing of the short-term international money markets, initiated by the\r\nsubprime crisis, on which the Icelandic banks depended. However, concern about the\r\nIceland banks and their rapid growth was expressed by, amongst others, the\r\ninternational rating agencies and the IMF a couple of years earlier, causing a\r\ntemporary mini-crisis. Moreover, there is strong evidence that the banks would have\r\nbecome insolvent even without the subprime crisis. The Icelandic parliamentary\r\nSpecial Investigation Commission came to the conclusion that 2006 was the last date\r\nby which the excessive growth of the banks could have been curtailed and the\r\ncollapse possibly averted. Yet there was a marked difference in opinion at the time\r\nabout the viability of the Icelandic banks. A clean bill of health was given by two\r\ninfluential reports by Mishkin and Portes, just prior to the collapse. However, severe\r\nreservations about the Icelandic financial system were expressed by Wade. These\r\ncontrasting views were widely debated in the media and elsewhere and may well\r\nhave influenced foreign potential and actual depositors in the banks. This paper\r\nanalyses the disparate arguments put forward and contrasts it with the actual\r\noutcome. It considers the influence of economists in public policy debates and\r\ndraws some methodological conclusions.