Debunking Economics - the podcast Learning from Iceland
Feb 4, 2026
Steve Keen, economist and author known for work on financial instability, explains how Iceland’s banks ballooned, fueled by carry trades and high rates. He recounts the krona crash, inflation‑indexed debt amplifying pain, and why Iceland refused to socialise foreign losses. They explore recovery through new banks, capital controls and a tourism boom, and contrast Iceland with eurozone bailouts.
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Public Protests Forced A Different Path
- Icelanders surrounded parliament and forced a political reversal when the government tried to guarantee foreign bank debts.
- The president refused to sign repayment and the country let foreign depositors take the losses instead.
Banking Sector Ballooned To Dangerous Size
- Iceland's banking assets grew to about 11 times GDP, driven by foreign deposits and carry trades.
- Such extreme financial sector expansion made total collapse nearly inevitable without capital controls.
Inflation Indexing Amplified Borrower Pain
- Iceland indexed private debts to inflation, so rising prices increased borrowers' real liabilities.
- Inflation combined with devaluation and indexation amplified the crisis severity for households.
