Or the free market at work?  FreedomPolitics has a post about an article in Vanity Fair that examines Iceland’s economic crisis. You may remember its government’s collapse last January.

Iceland’s Pseudo-Capitalist Collapse

The key to Iceland’s temporary success was massive inflation. As asset prices shot upwards, Icelanders borrowed cheap money from abroad, lent it to themselves, and bought assets like mad. Michael Lewis, in Vanity Fair, had it described to him in simple terms.

“Yet another hedge-fund manager explained Icelandic banking to me this way: You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets. “They created fake capital by trading assets amongst themselves at inflated values,” says a London hedge-fund manager. “This was how the banks and investment companies grew and grew. But they were lightweights in the international markets.”

Predictably, when the global bubble burst, the Icelanders were the hardest hit, leverage to an insane degree, and the nation is now grappling with massive individual and collective bankruptcy.

But is this a failure of the free market, as the Huffington Post claims?

Unfortunately, it has become evident that these libertarian policies were not the panacea that Friedman claimed they were. In fact, economists are already using Iceland as a textbook case of how to ruin a nation’s economy. As Paul Krugman recently noted, there is an “almost eerie correlation between conservative praise two or three years ago and economic disaster today.”

Nope. It’s how a free market actually performs.

Among other mistakes, Erlingsdottir seems to be mistaking the economic freedom with a guarantee of economic success. Just because someone is free to invest their money in a given business in no way ensures that the business will not fail. Just because people are free to securitize mortgages doesn’t mean that housing prices won’t decline. And just because a small island nation is permitted to use massive leverage to profit from inflation, doesn’t mean that the bubble won’t eventually burst.

Economic freedom means just that: giving people the freedom to do with their money what they will. The flip side of freedom, however, is responsibility or, as R.C. Hoiles put it, self-control. The failure of Iceland is not a failure of capitalism, but a failure of the capitalists: the Icelanders who got caught up flipping assets themselves. Of course, they are precisely the kind of actors in a market that ought to fail, and invariably will if the market is left to itself.

Free markets promote equal opportunity, not equal outcomes. It is that second, unstated assumption that lies behind the criticism of free markets that must be challenged.  To expect capitalism to guarantee success is to doom the concept to failure, which I am convinced is the goal of a lot of people, including the President.