The point being -- the world economy can (and did) withstand the default and destruction of the Icelandic finance system.
Could it have survived the default and destruction of the American finance system? Or would our incredibly interlinked, globalized finance system bring down the world economy with it?
There is a book about that: "Too Big to Fail: The Hazards of Bank Bailouts"
http://www.amazon.com/Too-Big-Fail-Hazards-Bailouts/dp/08157...
or maybe better for most people a podcast with the auther:
http://www.econtalk.org/archives/2009/10/gary_stern_on_t.htm...
It was acctually the feds intervention (paying banks to hold reserves) not the fall of leeman that froze the holesale lending market.
Iceland acctually said (around 2001 I would have too look) that they will bailout there banks unlimted. They acctually tried to bail out there banks but faild, because knowbody was dumb enougth do currency swaps with them.
They would have been hit so hard if they would have made that garantee (there banks where so badly overleveriged its unbelivable).
The inflation they produced whas just because they tried to bail out with krona, it was not smart NGDP targeting that Scott would want.
They did good by accident but we can learn from it anyway.
What Im not sure about is if the default of the country itself was necessey if they would have helped the banks and other special intresst.
Iceland did almost everything right. They stiffed the bank creditors to avoid aggravating the moral hazard problem, just like the textbooks recommend. In the eurozone the bank creditors are being bailed out. They relied of fiscal policy to address S/I and debt issues, and let monetary policy address AD, just as the New Keynesians were recommending in the 1990s. In the eurozone they combined tight money with reckless deficits. And now Iceland is growing fast and the eurozone is stagnating. http://www.themoneyillusion.com/?p=14895