Do pardon my cynicism, please, but I believe there's a strong element of fear mongering in the "article."
However bad things may or may not be in Iceland, the overall impression I got from the article is the badness has been heavily accentuated. Could every word of it be entirely factual? Yes, but in the first place, a great deal could well have been left out, and in the second, the New York Times has been a leftist extremist propaganda rag for decades, and has a well known propensity toward supporting the cause of radically expanded government. Was Iceland's banking industry founded upon sand? I have a hunch it was; I have a further hunch the solution to the problem will be still greater government intervention, which will most probably result in a temporary patch and still worse problems in due time.
Free markets necessarily include ups and downs, booms and busts. Government-controlled markets inevitably end up stealing wealth from those who create it and handing it to those who control it, as well as severely limiting economic improvement for the vast majority of those governed. Do you doubt me? Look at Zimbabwe.