Wow that sucks for anyone that wasn't holding mortgage debt. Imagine you were so proud of yourself for being responsible and paying off your loans then your neighbor that bought more house that they could afford and was mortgaged to the hilt just gets handed a free house from the government. Ouch.
To put Iceland into perspective, it's population of just over 300,000 is roughly half the size of the smallest U.S. State Population, Wyoming at 570,000 or so.
Policies such as this may work on the small scale of an Iceland, albeit at the cost of those who did everything right and responsibly (who get screwed hard). Working on the vastly larger scale of the United States, or even a moderately-large U.S. State.....thats a whole nother ballgame.
But I'm open minded, and a fan of State Sovreignty. If we have a State that wishes to try this idea out, and do so with ONLY State funds (no Federal), then by all means, give it a go if you can find the support. We could see how it works in a Vermont, for example, a State who (typically) would support such socialist ideas and policies.
Once again irresponsibility gets rewarded. Hell, in America, it got a dude elected president in '08.
How many rich people can they tax in Iceland?
Professor Steve Keen has been arguing quite successfully that debt foregiveness would be an appropriate measure to take for most developed economies. Iceland's GDP growth has basically returned to normal since it refused to pay back the debt owed by its own banks (debt run up by a few individuals in those banks) - you won't be able to say the same about Ireland, Greece, Spain etc etc, who will likely (along with places like the USA) be in for a deflationary period of many decades, a la Japan.