Faced with a banking system that was broke, Iceland simply let their major banks fail. This happened three years ago as the US and Western Europe were busily fashioning government rescue plans. No rescue plan for Iceland! Nope!
They just let them fail.
So, what happened? Did their civilization end? No. Iceland today is the one of the fastest growing countries on the globe. Business is booming, unemployment has cratered, and good times are back. This, in just three short years after Iceland let nature take its course. (A pattern very similar to what happened in Asia after the 1997 collapse of Asian financial institutions).
This story is laid out in detail in today's Washington Post in an article by Brady Dennis with the fetching title: "Could US and Europe Learn a Thing or Two from Iceland's Financial Collapse?"
All of those who say that the TARP and other government bailouts were essential should take note of what happened when governments stepped aside (which doesn't happen often, but it does happen occasionally). Take heed of the aftermath of the Asian crisis in 1997 and what happened in Iceland in the past three years.
Economic growth, prosperity and recovery are critically dependent upon government inaction. Activist policies just guarantee slow growth and massive economic dislocation. A generation of stagnation will be the reward for the US government activism in 2008 and 2009. Fortunately, for Iceland, they chose a rational road and are prospering mightily for their own government's inaction.