The gist of this post is that while Iceland may never reach its bubble prosperity levels it is still a prosperous country with 6% unemployment. Ireland is still a relatively prosperous country with high unemployment, though it is still richer than it was in the 90’s. What is the difference between Ireland and Iceland besides switching the letter “r” for “c”? Iceland let its banks fail, while Ireland is drowning under the debt created by bailing out its banks.
In order for the business cycle to do its magic, business have to be allowed to fail. When businesses fail, their demand for inputs leaves the system causing prices to fall. This decrease in costs allows the surviving businesses to begin growing again with cheaper labor, capital and commodities. Cheaper inputs also encourage people to start their own firms, which have a greater chance of success due to lower costs. By artificially keeping prices “stable,” we are merely forestalling the inevitable crash and keeping the economy from entering a recovery.