Ponzi: The morning after

Abstract

This paper analyses the effects of the rise of the Icelandic bubble economy and the subsequent collapse of the financial sector on several asset markets and the domestic wealth and income. It is shown that the effects of the asset price bubble are in many ways similar to those of a Ponzi scheme, where net profits accrue to those that enter and exit early but others lose. Since the Icelandic economy was to a large extent financed by foreign creditors they end up with the bulk of the losses but domestic parties, including the government, escape on average surprisingly well. Such averages do however not tell the whole story since several segments of Icelandic society sustain heavy losses.