[anpalton]

The analogy is false. One of the problems with what Icelandic banks were doing was this:

"The rules prevent banks from posting their own debt as collateral (Central bank of Luxembourg). The three banks circumvented this rule by posting each other’s collateral at the CBL. This process is known as issuing ‘love letters’. However, CBL later restricted this type of funding. This, however, continued in other places such as Central Bank of Ireland (CBI)."

From: http://financetrain.com/how-icelandic-banks-funded-their-ris...

[notacoward]

It's a funny thing about analogies and metaphors: they don't have to be absolutely perfect in every detail to have explanatory power. What actually happens is slightly more subtle (as I said) but the principle still applies. Thank you for providing an example.