It's entirely true that Iceland has successfully been jailing bankers for their part in the Great Crash of the financial markets and then of Iceland's economy. And this is leading, as of course it would, to people on the left shouting about how if Iceland can do it then why can't the US? And it's a useful question too. Why is that an icy social democracy can jail people and a great democracy like the US cannot or does not? The answer being given is that it's all about that social part of the democracy. The US is too in hock to the Wall Street interests to actually take action against them. This isn't, however, how it is. The truth is that those bankers jailed in Iceland did things that would get them jailed in the US too. And the bankers in the US did not do things that would have got them jailed in Iceland.

There is, you see, a difference in doing something criminal to make money and simply getting things wrong in the pursuit of making money. Sure, there's criminals in every part of every system but the problems of the Great Crash in the US were brought about not by bankers being criminal but by bankers being wrong. And thankfully, otherwise we'd all be in jail for we all make mistakes, being wrong isn't a criminal offence.

Here's one such complaint about the disparity between Iceland and the US.

Nearly all the financiers who headed powerful American firms in the run-up to the 2008 economic crisis remain wealthy, powerful, and free. Not so in Iceland, where jail sentences handed out last week bring the number of bankers imprisoned over the meltdown to 26. Combined, the bankers will spend 74 years behind bars. While critics of such stringent treatment of the business community often warn that cracking down on finance hurts the economy, Iceland’s experience has shown it’s possible to pursue corporate accountability and broad growth at the same time. The American form of justice for banking titans has been rather less robust. Prosecutions for all white-collar crime are at a 20-year low. Criminal prosecutions of corporations dropped 29 percent from 2004 to 2014.

The fairly obvious subtext to that is that we should be jailing rather more American bankers to punish them for the crash. Yet a quick look at what those Icelandic bankers were jailed for is instructive:

Bjarni Ármannsson, President of Glitnir Bjarni was sentenced to 6 months in prison by the District Court of Reykjavik for major tax noncompliance. His sentence was suspended and he was additionally ordered to repay nearly 36 million ISK of unpaid tax. The Supreme Court of Iceland increased his suspended sentence to 8 months.

Tax dodging in the US puts you in jail as both Wesley Snipes and Leona Helmsley found out.

Friðfinnur Ragnar Sigurðsson, Managing Director of Markets of Glitnir Friðfinnur was sentenced to a mandatory 1 year in prison by the District Court of Reykjanes for insider trading. The ruling also subjected him to a 19.2 million ISK asset confiscation The Supreme Court of Iceland decreased his sentence to 9 months in prison and 7.1 million ISK in asset confiscation on the ground that Friðfinnur was a first-time offender. Out of the 9 months, 6 were suspended for 2 years.

Insider trading in the US puts you in jail, plus coughing up the gains made, as all too many people find out each and every year.

Magnús Guðmundsson, President of Kaupthing Bank in Luxembourg Magnús was sentenced to mandatory 3 years in prison by the District Court of Reykjavik for his involvement in the Al-Thani case; following an appeal, the sentence increased to four-and-a-half years on 12 February 2015 by Iceland's supreme court.

Just to explain the Al-Thani case. The bank announced that a Sheikh had bought 5% of the bank. What they didn't say is that the bank had lent him the money to do so. That is behaviour that would get you jailed in the US too.

So in Iceland, committing crimes that normally lead to jail sentences led to jail sentences, as it would have done and as it does in the US.

But the crash in the US wasn't caused by the same set of criminal actions. In fact, it wasn't caused by criminal actions at all (although there were undoubtedly, as above, criminals in the system and no doubt they committed some crimes). As I explained here, the American crash was simply because bankers got it wrong. The basic error was to think that while there could be, probably would be at some point, regional declines in US house prices there would never be a national decline. Thus being regionally diversified meant that all those MBS, CDOs and the like were safe enough. And this was absolutely true up to that point: there never had been a national decline in US house prices and regional diversification protected investors. Until 2007 and onwards, when there was a national decline in US house prices.

Now, if bankers were luring people in just to profit from mortgage issuance and so on then behaviour would have been reprehensible at best. But if they believed that this really was true, that there was no problem, then this was a case simply of the bankers being wrong: not a criminal offence. And the evidence we have is that they were simply wrong. In the mortgage market:

A forthcoming AER paper examines whether professionals in the mortgage securitization industry foresaw the housing crash. If these professionals knew that they were buying and selling toxic assets, they would betray this knowledge by their personal housing decisions. For example, if you thought that the housing market was going to crash, you wouldn’t rush out to buy a second home. However, the AER paper shows that securitization professionals were as aggressively invested in the housing market as comparable professionals. … Securitization professionals were less likely to divest from housing in every year from 2003-2006 — the prime “bubble period.” They were slightly more likely to divest in 2007-2009 during the bust. ... The housing portfolios of managers from companies that cratered during the crash (like Lehman and Countrywide) did worse than the portfolios of managers from companies that did relatively well (like BB&T and Wells Fargo ).

And of course this was true of the banks and the securitisations too. If they had thought they were all crock they would have sold all of the bonds they had. But the cause of the banking crash was that they all had stocks of those bonds, bonds they had not sold. So, obviously, they thought they were not crock but were good.

All of which leads us to this difference in the treatment of the bankers in the two places. American bankers were, by and large, simply wrong about the economics of what they were doing. They ended up doing things which are crimes in neither the US nor Iceland: therefore they are not in jail. The Icelandic bankers did things which are and were crimes in both Iceland and the US. And they ended up in jail in Iceland, just as they would have done if they had done the same things in the US.

Yes, obviously there is a public policy point here. We jail people who commit crimes, not people who get things wrong. And there's also an important economic point here too, about that very same public policy. If we're going to have a market economy of any type then we've got to leave room for people to get things wrong. Because that's how the system works. Technology marches on (those MBS and CDO issues could not have been done without the invention of the spreadsheet) and then people explore the new opportunities within that technological boundary. Many of these explorations will turn out to be wrong, painful, losers or even deluded. But it is that very exploration which turns up the winners that make us all progessively richer over time.

And do note that this is the only economic system which has ever raised the living standards of the average person substantially, for substantial periods of time, above the absolute poverty of peasant destitution. That is, allowing people to get things wrong without jailing them, saving that only for people who actually deliberately break the law. It's, in the end, a fine system: we should stick with it.