Cyprus and the EU: nobody seems to know…
…what to do about Cyprus. And yet today something—that is, the seizing of a certain percentage of the assets of depositors who have put more than 100 thousand Euros in Cypriot banks—has been decided on:
European leaders reached an agreement with Cyprus early on Monday morning that closes down the island’s second-largest bank and inflicts huge losses on wealthy savers.
Those with deposits of less than €100,000 (£85,000) will be spared, but those with more than €100,000 ”“ many of them Russian ”“ will lose billions of euros under draconian terms aimed at preventing the Mediterranean tax haven becoming the first country forced out of the single currency.
The deal is expected to wreak lasting damage on the Cypriot economy, which has grown reliant on offshore banking and Russian money. Analysts said Cyprus could see its economy contract by 10% or more in the years ahead.
“On the Cypriot economy”? I don’t see how this isolates the damage to that arena. As I wrote at the very beginning of my very first post on the Cyprus crisis:
To save the Cyprus banking system, they have to destroy people’s faith in it.
Of course, they think they are saving their own political skins, and the glorious experiment that is the EU (sarcasm intended).
Merkel said that although smaller accounts should have been excluded from that proposed “one time tax”:
On Friday morning, Merkel defended the levy once again, saying that interest rates on savings accounts are much higher in Cyprus than they are in Germany and that such a one-time tax was thus acceptable.
Oh, so now it’s okay to rob from a bank depositor because he/she is rich and is also earning good interest? I wonder; is it okay because the person has deep pockets and can afford it? Or is it okay because the interest it is earning in this case is “unfairly” high, because other people elsewhere are earning less? Or is it okay because people think the rich should be handing over their money to the rest of us on moral grounds? Or okay because most of these particular rich people are Russians, and some of them have even made their money doing something shady?
I’d love to hear a reason—other than the pragmatic “because the money’s there and we want it and we need it and because we can”—why this should be okay.
Merkel said something else interesting:
Europe, she said, must not abandon its principles, otherwise “the whole thing” will be in doubt. She was referring to the principle that she has followed as the euro crisis has progressed: Europe will offer countries solidarity and aid, but only in exchange for efforts to improve fiscal responsibility.
How about the principle of preserving the trust that underlies the entire banking system? Bankers seem aware of that:
A Paris-based trader said: “The loss of confidence in the European banking system stemming from the Cypriot crisis will not only weigh on the banks but also on the economy of the region.”
So, what about the Cyprus legislature, which nixed an earlier scheme to take everyone’s money no matter how modest? The legislature was finessed this time:
The bailout deal does not need approval from the Cypriot parliament because it has been achieved by restructuring the country’s two largest banks, rather than levying a new tax on citizens.
Clever, eh?
One of the many motivations for these moves is to preserve the EU and keep Cyprus from leaving it:
The ECB had threatened to cut off funds propping up Cypriot banks on Monday, which would have precipitated the island’s exit from the euro if the emergency meeting had not reached an agreement.
Cyprus politicians had thought Russia would bail them out, but talks last week with Moscow failed to yield a solution, and Cypriots were left holding the (mostly Russian?) bag:
Alexandra Salmani, 32, moved to Cyprus eight months ago to escape the financial crisis in Greece. She said: “We came here to find a better life, and it’s exactly the same thing as in Greece. Everywhere I go there’s crisis ”“ I’m telling all my friends that I’ll go to Germany next. Someone has to learn to say no to Merkel. They saw a rich country, decided to take their money, and destroy them. They are not human.”
I beg to differ: they are all too human.
[NOTE: I’ve written before about the EU and its origins (see this, this, this, and this).]
When the US falls into civil strife once more, it’ll be interesting to see what the world does without the police on the borders telling them no.
I know little about banking and finance. However, the plan that has made the most sense to me is that advocated by the Economist magazine–a plan they had little hope would be used. Their plan, as I understand it, is to bypass the Cyprus government and work with the banks directly, imposing the losses on the stockholders first, then the bond holders, then the unsecured depositors, and only last on the secured (small) depositors.
In one of your earlier posts, you also asked where the money would eventually come from, and I responded something to the effect it would be Germany who footed the bill. Not a good guess on my part, but hey, the Russians should be used to this stuff. The revolution is the modern day model for stealing from its citizens in the name of the greater good. But it will be interesting to see if the Russians take it laying down.
I am still puzzled at why it’s so important for the EU to retain these states that are financial disasters, and will continue to be, forever. There must be some benefit for retaining the welfare states (relative term in this case) or I would think they’d ditch them.
Yes, trust in the E.U.’s regulators has to be a mortal casualty of anyone able to see past the end of their nose. Investors have to be nervous as hell and one more episode will precipitate a massive flight of private wealth from EU banks. Switzerland and other non-members of the European Union can expect that a lot of wealth will flow into its coffers. Russia is furious over this and they will respond.
In fairness to the EU’s regulatory bureaucrats they’re caught between the proverbial “rock and a hard place”.
Current revenue’s can no longer sustain the entitlement state Europe has created and fiscal collapse threatens. They either increase taxation and/or seizure of assets or cut benefits. Cutting benefits will, as it did in Greece, result in rioting and massive social upheaval. As Cyprus demonstrates however, seizure of assets also results in massive protests. And as France recently demonstrated, increased taxation of the rich results in the rich seeking ‘warmer climes’.
Reality has arrived for Europe and, “King Bidgood’s in the Bathtub and No One Knows What to do!” (fantastic children’s book)
Only a 10% loss? they would be so lucky if it is only 10%.
I think the Russian investors will do the wise thing and make a run on the Cypriot banks and take their money elsewhere.
This will likely cause the collapse of the banks that this whole thing was supposed to prevent. Whoops. Back in your court, Merkel.
First, I’m not a banker.
Second, I never worked in the realm of finance.
But I am self-taught, and have some assets.
The more I delve into this Cyprus/EU matter, the more nervous I become about fractional reserve banking. Did you know that Laiki bank was 84% owned by the Cyprus gov’t before the crisis?
Did you know that Wiki has a “Too big to fail” entry?
Or that the FDIC’s financial ability to protect all deposits to $250K is false?
Now, Cyprus is left with just one bank. Is that too big to fail? The uninsured deposits in the Laiki bank will go to a soon-to-be-created Bad Bank that will also get the Laiki banks underwater investments; and, it is suspected, none of these depositors will ever get any of their money back, ever.
Fractional reserve banking is good in theory, but it seems to rest on the prudence of bankers’ decisions. I seem to be becoming a Paulista !
Well, as I see it, there are bad options, terrible options, horrendous options and TEOTWAWKI options; and ‘bad’ was skipped.
I take this as less than residual ‘trust’ and more as a torpefied populace suffering from a WTF shock.
How it is that anyone still exists who thinks the rules matter, the law constrains, and the courts will set things right, is beyond me. How it is that a run on the banks and financial institutions of the EU and US has been stayed in beyond me. How it is that the political leaders of the EU and US remain smug, brazen, and conspicuous in their aiding and abetting such thievery (and taking their cut off the top) and yet feel no heat is beyond me. Without vent the pressure gets greater. It’s going to be one fine mess when it blows.
George Pal said “How it is that the political leaders of the EU and US remain smug, brazen, and conspicuous in their aiding and abetting such thievery (and taking their cut off the top) and yet feel no heat is beyond me.”
Good question. My uneducated guess is the receivers greatly outnumber the contributors; which gives further justification to the thieves, that income is unfairly distributed. As 10% of Americans pay 90% of the taxes, it’s a pretty small group to reckon with, as opposed to the other way around.
‘She was referring to the principle that she has followed”
Everybody knows the principle politicians follow is expediency.
One of the many motivations for these moves is to preserve the EU and keep Cyprus from leaving it
i wish you were more exact in your phraseology
One of the many STATED motivations for these moves is to preserve the EU and keep Cyprus from leaving it
the prior sentence and others like it that don’t qualify, imply they are valid, and not in question.
do you really think tey dont want Greece to leave, or do you think that they want it to leave, but not take others with it?
but your not looking at the OTHER Big thing in the room
oh, you give a hat tip.
but your hat tip does not reveal the nature of the Russian oligarchs and the death of a key one and no one knows if it was suicide with no note suddenly… or someone did it.
he had begged Putin to forgive him and let him come back to his country… and died. (and only ignorance of prior history keeps most from wondering, while others who know, have no way to be so sure of events, and so never know)
Boris Berezovsky R.I.P.
[so many deaths around leaders, even obama… ]
here is the economist, that hot den of tin hat analysts
The making of a neo-KGB state
http://www.economist.com/node/9682621
so what you just saw was a European soviet, seize the money of the Russian soviet, and used Greece as a proxy to obtain it, so Greece gets slammed, and Brussels pays their bills with Putin money!
Do you think the siloviki are going to sit still like westerners when socialist takes their stuff like in venezuela, and others places?
i suggest you read the article above from 2007
(hearing the plink of the recomendation falling on deaf ears)
because last year..
Siloviki Run Wild
The daily “Vedomosti”:
assassinations, poisonings, shootings in the head at the door, over 300 journalists…
what EU did using Greece was akin to taking a billion from la cosa nostra at their peak…
so while people here imagine whats going on…
which is what they are doing, given that their ideas do not concur with the history, the news, the outcomes, the animosity, and the players.
SOME of us actually get what happened
Tambov Gang
Siloviki Clan
Izmaylovskaya Gang
Solntsevskaya Brotherhood
Can you tell your siloviki from your civiliki? MVD, FSB or GRU? The breeds of dog underneath those Churchillian carpets? If not, maybe this will help.
ВЛÐСТЬ-2010: 60 биографий
(Power in 2010: 60 biographies)
Russia’s Phantom Tandem, Real Triumvirate and the Kremlin Clan Wars
[its from before the latest elections putting putin back in the presidency]
you get the idea..
what you see is not what it is on the surface
the document source is a lot larger and there are more translations that make graphs and things
but…
the larger point is what just happened has been part of a big tussel between Brussels and putin… this war has been going on now for about 10 years, and mostly has the brussels court seizing money from russian companies for violations…
now the same group has just used the excuse of Greece to seize the money of the Russia oligarch clans and if you did read above, you might notice that they ARE the state…
you can be sure they WILL retaliate…
but you can also be sure, you might not notice it
or you might not attribute it to the right players
if litvenenko being poisoned by a material that only a state with access to a nuclear reactor that makes bombs can have… wasn’t enough to point out the intrigue outright, then nothing i say will either.
though i am hoping hte lefts attempt to remove the calling of opponents hitler will backfire, as the reason its backfiring now is that their policies dove tail a lot and so their past 30 years is now getting int he way… they kept it fresh in mind, and so kept the similarities in mind, and now we are seeign it, and they are trying to rewrite it.
now hitler loostened gun laws just like the american right wing… so even when they are sayign stop comparing, they are only adjusting the comparative from them, who it matches, to the others they been yelling at it doesnt match, so that it mathces, without the label.
southpaw,
the receivers greatly outnumber the contributors
This is true and comprises the quid pro quo arrangement that exists but at some point the great middle has to realize something’s badly amiss and the old arrangements no longer apply.
When MF Global went under it was the clients who took the loss and the former governor who walked scott free and 1.6 billion remains missing. MF Global was a commodities institution, not securities. In that capacity the clients (holders of positions in commodity x) had first claim in case of insolvency due to the fact that contracts involve futures and delivery. But the court ruled MF a securities institution thereby removing first claim status from MFG’s clients. No one is safe.
When GM went under senior bondholders, that is bondholders were told to take a hike and the UAW pension fund moved to the head of the line — without any legal standing — but the government made it happen and the courts permitted it.
Even the mobs could do no more than to skim casino takes off the top – they hadn’t the government, the law, and the courts to allow them more. There’s more at work here than a quid pro quo arrangement gone wild, a wink and a nod, and scratching each other’s itch. This is outright lawlessness. There was a time when a posse would be gotten together and the culprits hunted down and hanged. But we happen not to live in so enlightened an age — sheep are difficult to enlighten it seems.
artfldgr: yes, I think that somewhere in the comments section of a previous post on Cyprus there was some discussion of the fact that it is highly likely that the Russian “oligarchs” who are the targets of this are highly likely to retaliate. Why wouldn’t they?
Someone please explain why a bank collapse would have pushed Cyprus out of the Euro–meaning out of the EU apparently.
If California goes broke, declares bankruptcy, does that mean it leaves the Union? Of course not.
We (I) see the game, but I don’t understand the rules. Maybe artfldgr is right, but that imputes too much power by the slivoviki. Retaliation? Of whom? By whom? To what effect?
The Russian Mafia evolved from the Soviet Mafia; itself being an extension of the KGB. To be a Soviet Mafia man required KGB status — or a member of the KGB to function as a ‘roof.’
And, of course, Putin was and is a KGB man — and corrupt as any — but much more powerful.
The Russian Mafia used control fraud against
Nauru, Iceland, Ireland and now, Cyprus.
The RM has a patent on the process. The Clouseaus running the audits of such small islets are only able to figure out that somethings up after all the cash is missing from the till.
The credulous press is awaiting official comments — which scarcely dribble out — being so embarrassing — self-indicting, in fact.
Even the term Control Fraud is novel to most readers. It’s not portrayed on film — usually — the best being the Bust-Out fraud portrayed in Goodfellas.
Fraud = a con job.
Control Fraud = attaining legal financial control of resources — especially depository institutions — and then shamelessly directing those assets into nefarious hands.
Control fraud can be conducted as coercion upon the officials. This was portrayed by the old Untouchables plot that had villain Ace Banner compelling a thieving banker into including his own gang in on an existing control fraud.
Warrants have already been issued over the Irish frauds, unserved warrants.
As for the trust fund of Nauru: it seems a tad short, these days.
IceSave has made the news. The money is in Moscow. Only the small fry are available for prosecution.
Ultimately, such cons function as mega-embezzlements. The panics only set in AFTER the damage has been done — and the cure begins.
Which brings us to Cyprus. The word is that most of the adult population of Cyprus was employed by their banking sector. Its sole reason for being was avoiding taxes and regulation — and the cops.
One of the single most popular control frauds — going back into the mists of time — is using the victim institution as a buyer of sick securities — always interest bearing.
Eighty-years ago, the favorite was preferred stocks, particularly those of utility conglomerates. Due to existing tax and corporate laws, preferred shares were the preferred way to raise risk money for corporate buy-outs. If worst came to worst, their dividends could be skipped.
For fraudsters, they had terrific appeal because they rarely traded. Anyone desiring to get out ‘in size’ would be willing to take quite a haircut to get out. So, the players would purchase massive blocks of junk headed for bankruptcy court — for peanuts — and unload it at the ‘tape’ value onto the books of the victim banking institution. The idea being to have a perfect defense when it blew up: whocould’veknown?
This appears to be the case with Cypriot banks buying astounding amounts of Greek sovereign debt — right into the teeth of mounting troubles. Such securities are legal to trade off any exchange — and usually are.
==========
Rough estimates coming from officials peg Mafia money at 40% of all the Russian deposits! Since the Mafia is the party in power of Russia, it really is one big seamless operation — with Putin at the top.
One must conclude that Berlin is shutting down Putin’s candy store. Further, Berlin/ ECB is going to audit all of the EuroZone financial institutions from now on — with emphasis on control fraud.
====
I like the touch about pensioners living in Britain, or perhaps Moscow. Next thing you know, the media will be screaming about the children.
=====
BTW, the capital controls regime now to be invoked will illustrate all of my prior points about the Euro — with the Cypriot Euro being the first out of the closet.
It’s increasingly becoming apparent to me that governments around the world are little more than organized crime syndicates. It’s just more obvious in some countries than in others.
The Obama Justice Department ran guns to Mexican drug cartels. Politically-connected individuals such as Jon Corzine and Turbo Timmy Geithner committed crimes that would get us lesser people prison sentences.
Maybe it’s always been this way and I’m just slow on the uptake. What was the War of the Roses if not a glorified turf battle between rival street gangs?
George Washington said, “Government is not reason, it is not eloquence, it is force.”
Mao Zedong said, “Political power grows from the barrel of a gun.”
This scene from the movie Goodfellas unintentionally illustrates the current financial crisis. (NSFW, language warning)
http://www.youtube.com/watch?v=ZPtjyqgZAUk
It’s really not that far off. The world’s wealth is being stripped by a tiny number of high-placed individuals who are, apparently, above the law.
Fractional reserve banking will devour the global economy. Estimates of the amount of derivatives on their books range from 800 to 1,200 trillion USD. Cyprus may be the match that lights the fuse as trust in the global financial system rapidly erodes.
The central bankers will not come to the rescue of you and me. http://tinyurl.com/crq9b5t
blert,
Thanks for the tutorial.
Parker,
Off topic–your late post of a number of days ago was not in vain.
What is needed is a bridge builder between Putin and Cypriots, someone who knows how to overturn law and gets away with it by an easily discernible and deliberate lie.
I wonder who that could be.
According to Zero Hedge and Reuters the Russians (and Brits) have already siphoned off billions from supposedly closed Cypriot banks. If true, there is little left to steal. The average Cypriot probably has a few hundred to a few thousand euros in his bank account. Back to the drawing board ECB-IMF. Hint: demand rights to the off shore natural gas.
I remember some fools from back in 2003, who conveniently lived in Canada, telling me that the EU was a natural extension of the world seeking to balance the over expanding American superpower.
Yea. That worked out great.
hmm. While I don’t have much money in the bank, and certainly none in Cyprus, this does make me wonder if the safest place for my money should be stuffed into my mattress.
Or, perhaps, I should “invest” in canned goods and ammo?
Ref Charles @ March 25th, 2013 at 10:13 pm
“Or, perhaps, I should “invest” in canned goods and ammo?”
= = = = =
One wag at a financial blog put it this way: “I’m investing in lead, and related delivery systems”.
Cute.
blert-
Thanks.
Pingback:Instapundit » Blog Archive » BUT IS IT LEGITIMATE THEFT: The Morals of Cyprus and the EU….
Didst thou never hear
That things ill got had ever bad success
“Or, perhaps, I should “invest” in canned goods and ammo?”
Don’t forget dehydrated/freeze dried foods that have a shelf life of 10+ year and water, plenty of water and the means to purify more water. Ammo is bit scarce right now, unless you reload and have plenty of components on hand. For the last 20 years I have lived under the assumption that the SHTF was coming. I live for me and mine. Grandchildren are my strategic reserve.
You guys are a little off the mark on this one.
In the US, all banks pay a “tax” as part of their FDIC Premiums. I think there was even talk about increasing the premiums banks pay to cover all the banks the FDIC has taken over. FDIC premiums banks pay are based on a percentage of deposits.
How is this any different than what Cyprus wanted to do? It’s the same thing, but somewhat like the employer portion of your payroll deductions every week where you don’t see the cost in the US, and in Cyprus you would.
Second, when you deposit money in a bank you are loaning money to it. If the banks go under, then it makes sense that the lenders to that bank (i.e. its depositors) should be the ones who take the loss.
Not a great situation if you are taking a 40% haircut, but why should a depositor at another bank have to chip in to make your uninsured deposits whole?
First Cypress. Then Europe becomes Argentina. The US then becomes Europe. When doe the US become Argentina?
what did the banl laiki lose all their money on????
answer here:
hint – it rhymes with solyndra:
http://astuteblogger.blogspot.com/2013/03/laiki-bank-of-cyprus-closed-billions.html
Hint: The Russian money left long ago. That’s why the banks are staying closed.
Danny K: deposits of individuals are insured by the FDIC against banks going under, and people who put their money in banks are usually last in line to take the loss. The FDIC guarantees exactly the opposite of what you’re saying—it guarantees that the depositor gets his/her money back intact. That’s the point of FDIC insurance, and that’s why people put their money in banks rather than riskier investments that have a potential for greater return, such as stocks.
The banks pay premiums for the insurance, but the premiums are based on the amount of risk in the banks’ assets. The premiums are not taken from each depositor’s bank account based on whether it’s a large account or not. See this, for example, as well as this.
“Not a great situation if you are taking a 40% haircut, but why should a depositor at another bank have to chip in to make your uninsured deposits whole?”
In the USA the FDIC has around 25 billion to pay how many trillions of ‘insured’ depositors? Can you say Fanny Mae and Freddie Mac? Helicopter Ben to the rescue for infinity?
The spitting into the wind contest is all losers with no winners.
http://www.youtube.com/watch?v=KRvYSZNyo8M
@neo-neocon – I agree with everything you said in principle. Depositors should be the last ones to take a haircut after bondholders and shareholders.
In the case of Laiki, it is 84% owned by the Cypriot government, so they are indeed losing their investment as the bank ceases to exist. As to the bondholders? I don’t know the answer to this. I do know that both Cypriot banks bought a lot of Greek bonds, which I understand was the primary reason for failure as they have had to take a big loss.
I think this is a tough situation. On one hand grabbing 7% to 10% of depositor money through a “tax” on all deposits in all banks (not just the failing ones) didn’t seem quite fair. On the other hand, all depositors did benefit from the fact that Cyprus was an offshore banking center. The Cypriot banking industry was lucrative for all citizens and depositors and at a cost of about one and a half years’ interest, I could also argue that it was a small price to pay to shore up their only profitable industry.
I’m a conservative-libertarian at heart, but desperate times call for desperate measures. Remember, long before the auto bailouts there was the Penn Central Railroad and Conrail, created at the behest of a Republican Congressman. So do you bend on free-market dogma, or do you allow freight rail traffic all over the Northeast to seize up during choppy economic times in the 1970’s since Penn Central basically controlled the Northeastern corridor? No real good answers.
What we have now are 40% to 100% haircuts at Cyprus’ two largest banks. That, of course, is the right answer. But if you’re Cyprus and don’t have anything else going for you, the right answer killed your golden goose.
In America, we have this 40% haircut which warms the cockles of every a nanny’s heart.
http://news.msn.com/us/immigrant-wins-dollar338m-powerball-jackpot-in-nj
“What we have now are 40% to 100% haircuts at Cyprus’ two largest banks. That, of course, is the right answer. But if you’re Cyprus and don’t have anything else going for you, the right answer killed your golden goose.
”
You ARE CLUELESS of the consequences. Keep your nose close to Krugman’s behind.
neo-neocon @ March 25th, 2013 at 4:49 pm to artfldgr
That sentiment is almost exactly what I said to my wife this morning, albeit phrased somewhat less obliquely.
Me: “…the Russian mafia doesn’t play nice. There’s going to be a bunch of bankers in Cyprus turning up dead.”
Horribly painful & gruesomely “instructive” deaths probably. With “collateral” damage.
These are bad men. Violent bad men. With long memories.
Some families will be lucky to have descendants left.
…now I think on’t, wouldn’t be too surprised if they don’t send a few well-placed Brussels bureaucrats who pushed this to live with the fishes too.
@n-nc
With the current proposal, bondholders, shareholders and uninsured accounts are wiped out, while insured accounts are protected. Which is the normal procedure in bank bankrupcy and should have been put in place from start instead of that ridiculous tax thing.
What’s your issue with this, exactly? No banking investments should ever be allowed to fail and no matter how bad business decisions banks made, the taxpayers should always bail bank investors out?
Good comment by “Ribbit” at Ticker Forum, which hearkens back to my comment here last night:
Parker referenced a Zerohedge article awhile ago. Here is the link:
Have The Russians Already Quietly Withdrawn All Their Cash From Cyprus?
There do indeed seem to be different sets of rules for the big boys vs. the small fry.
“The world’s wealth is being stripped by a tiny number of high-placed individuals who are, apparently, above the law.”
This is inaccurate at best.
In regard to Cyprus and the EU, the unelected bureaucrats who run the EU may have the legal right to steal from depositors. Neo is IMO correct in that the greatest repercussion from Cyprus will be the loss of trust.
And this morning, the EU took the next step, which shall complete that destruction of trust.
Savings accounts in Spain, Italy and other European countries will be raided if needed to preserve Europe’s single currency by propping up failing banks. Jeroen Dijsselbloem, the Dutch Chairman of the Eurozone, announced that the heavy losses inflicted on depositors in Cyprus would be the template for future banking crises across Europe.
“…heavy losses inflicted on depositors in Cyprus would be the template for future banking crises across Europe.”
Now that the Rubicon has been crossed by the EU, it’s just a matter time before the propaganda campaign to make it a reasonable and fair plan is launched here.
“Now, legal plunder can be committed in an infinite number of ways. Thus we have an infinite number of plans for organizing it: tariffs, protection, benefits, subsidies, encouragements, progressive taxation, public schools, guaranteed jobs, guaranteed profits, minimum wages, a right to relief, a right to the tools of labor, free credit, and so on, and so on.”
― Frédéric Bastiat, The Law
As clearly as the mechanisms and purpose of socialism were understood 200 years ago, it did not prevent or curtail the plundering from occurring.
Does that mean that Americans’ money is safe in banks? Yes and no.
The U.S. government is very unlikely to just seize money wholesale from people’s bank accounts, as is being done in Cyprus. But does that mean that your life savings are safe?
No. There are more sophisticated ways for governments to take what you have put aside for yourself and use it for whatever the politicians feel like using it for. If they do it slowly but steadily, they can take a big chunk of what you have sacrificed for years to save, before you are even aware, much less alarmed.
That is in fact already happening. When officials of the Federal Reserve System speak in vague and lofty terms about “quantitative easing,” what they are talking about is creating more money out of thin air, as the Federal Reserve is authorized to do — and has been doing in recent years, to the tune of tens of billions of dollars a month.
When the federal government spends far beyond the tax revenues it has, it gets the extra money by selling bonds. The Federal Reserve has become the biggest buyer of these bonds, since it costs them nothing to create more money.
This new money buys just as much as the money you sacrificed to save for years. More money in circulation, without a corresponding increase in output, means rising prices. Although the numbers in your bank book may remain the same, part of the purchasing power of your money is transferred to the government. Is that really different from what Cyprus has done?
-Thomas Sowell
http://townhall.com/columnists/thomassowell/2013/03/26/can-it-happen-here-n1548498/page/full/
@Parker – Not at all clueless. When your only profitable industry is offshore banking, it seems logical that you would take reasonable steps to protect it. We do that under a different name in this country, it’s called tax incentives here.
I could argue a 10 percent tax to keep the Golden Goose from going bust is something a logical person would swallow. Swallowing the 10 percent tax would mean the banking industry continues. The way things are going now under the so called “free market” Cyprus is expected to be in economics Siberia for the next generation.
A rational person would take a 10 percent haircut to insure prosperity for the next 30 years.
I used to be like you guys. I bought all the Republican dogma until I started looking around and decided that there never was any such thing. Like I said, go back to Conrail in the 1970’s, to the free land given to homesteaders and the railroads, to Farm price supports beginning in the 1800’s. You could even consider the policy to put people in single family homes be getting in the 1930’s as anything but free market economics.likewise, For Cyprus to protect an important industry isn’t that much different from the examples I have cited above.
When you look at the big picture, it’s hard not to come to the conclusion that free market economics is just something they throw out there for us rubes to swallow. Throughout the history of our government there’s never been any such thing.
Thomas Sowell: “There are poor nations with rich natural resources, which are not developed because they lack either the sophisticated financial institutions necessary to make these key transfers of money or because their legal or political systems are too unreliable for people to put their money into these financial intermediaries.”
So true. Africa has many. So does South America. Banking is a way of bringing capital together to create larger enterprises that can work the magic of economics of scale. The most important ingredient in banking and financial systems is trust/confidence. My maternal grandmother, shaken by the Depression, had a rather large stash of cash in a safe. She didn’t trust banks but with just enough money for day to day living. She missed earning interest on the money, but in her mind it was safe.
Many here will not agree with me, but in 2009, the TARP was necessary. Not to rescue the banks, but to restore confidence. Most of that money has been paid back. (And immmediately spent by the Obama government.) If the banks had been in really dire straits, they would not have been able to pay it back so soon – if ever. The FDIC insurance was extended to money market accounts and increased to $250,000 per account for the same reason.
The best thing Congress could do at this point is to pass a law prohibiting such government confiscations as we see in Cyprus. If we had a Republican Congress and President, that would be done. As things stand now, the dems have their eyes on our IRAs and 401ks. It follows that they don’t want to pass such a law.
The problem is, where does Joe Sixpak, Albert Average, or Mary Middleclass put their money? For the wealthy there is Switzerland or the Caymans, or gold/silver/diamonds, or farmland, or??? The U.S may benefit from the European chaos for a time as a safe haven. But if confidence in our banks fails, things will really go in the toilet. And all because European governments and our democrat dominated government since 2006 refuse to keep their fiscal houses in order.
These are perilous times because governments worldwide are overspending and cannot seem to see the problems that creates. It is to weep.
@J.J. formerly Jimmy J. – “Many here will not agree with me, but in 2009, the TARP was necessary. Not to rescue the banks, but to restore confidence. Most of that money has been paid back. (And immmediately spent by the Obama government.) If the banks had been in really dire straits, they would not have been able to pay it back so soon — if ever.”
I hate to keep responding here, but I have completely changed my way of looking at things after 2007. These were all necessary evils, including the auto bailouts, necessary to help otherwise viable industries get over the hump. The key distinction here is that they were viable operations as opposed to keeping money-losing operations on life support.
I don’t like the sweetheart deal the UAW got either, but if you look at how the closure of GM and Chrysler would have reverberated through the economy, and if you look at the military implications of having manufacturing capacity, saving the Big 3 was a necessary evil.
I would analogize letting otherwise industries go under by virtue of fealty to free market dogma as not much different than bombing a city to rubble and then saying the rebuilding process is good for the economy.
My understanding is that the banks in Cyprus are/were still paying 5% interest in savings. In the larger scheme of things, clawing back some of that interest to save the banking system from being bombed to rubble? Would that have been such a bad thing for Cyprus, its citizens and its economic prospects for the next generation?
I would analogize letting otherwise industries go under by virtue of fealty to free market dogma
Couple of problems here.
First, industries weren’t going under; some companies in some industries were going under. Big difference.
Second, “going under” sounds so … final. It isn’t. Companies go bankrupt all the time, restructure, and come back out of bankruptcy. The problem for the Dems in GM’s case was that that restructuring – which God knows was necessary – would have entailed breaking the UAW’s contract, which is indefensibly rich (the basis for this statement: the compensation offered to autoworkers in non-unionized factories).
On bailing out the banks, I’m of two minds. I appreciate the argument that failure to do so would cause the financial life of the country to seize up. OTOH, I think at a minimum, everyone in upper management of those institutions should be banned for life from the financial industry, and should have had the last five (say) years of their compensation clawed back, as a condition of the bailout. Those with responsibility for avoiding catastrophe should pay a personal price for their failure to do so. Banks “too big to fail” should have been broken up into a series of small banks, each a small fraction the size of the original one.
Notwithstanding the above, part of me also thinks that more banks should have been allowed to fail. The Japanese have suffered from 20 years of stagnation largely because they failed to unwind the incredibly incestuous dealings of their big banks, which basically agreed not to liquidate collateral on which they loaned each other money. As a consequence, no one knows what anything is actually worth, which undermines confidence and itself causes an economy to seize up.
Nihilism is called for. Or drink. Or comedy.
http://www.breitbart.com/Breitbart-TV/2013/03/26/Grumpy-Cat-The-Forbes-Interview
Danny K: “clawing back some of that interest”? Give me a break. That is not the proposal. This is not about interest, it’s about principal. And it’s not a fraction of 5% either. It’s a lot more, potentially as much as 30%-40%. And (unless there’s some fine print I don’t know about) it is not based on how long the account has been receiving interest, or how much. Not does “clawing back” interest ordinarily occur in a case in which the interest was gotten lawfully according to normal bank practices, as opposed to in a Ponzi scheme (fraud) such as Madoff ran.
Kostas Atreidis: I would have no problem with following normal bank practices in bankruptcy. That’s not what’s happening here, or this agreement wouldn’t have been necessary. The earlier “tax” on both small investors AND large, regardless of insurance status, certainly did not follow those procedures, either—that’s for sure. The fact that the original agreement included all depositors, including insured ones under 100K euros, shows that nothing is protected (at least potentially; government was willing, ready, and eager to take from those accounts, too), and it has made people extremely jittery.
If you read articles such as this, it seems fairly clear that depositors over 100K euros will be taking a bigger hit than they would in normal bankruptcy proceedings.
What I would like to see, by the way, is for the EU to go the way of the dodo. Not gonna happen, though, at least not unless things get much worse.
What I would like to see, by the way, is for the EU to go the way of the dodo.
Me too, and it will happen. The EU is like Wile E. Coyote after running off a cliff: it hasn’t crashed yet, but it inevitably will.
The whole premise behind the EU was risible, viz., that economic integration would ultimately lead to political integration too, notwithstanding the wildly different cultures and languages involved, or the last few millennia of history.
Yeah, like, hey man, the EU is awesome, man, because it’s all about ecology, and the brotherhood of man, and we’re all 99.9% the same DNA, man, so, it’s like the science says we’re the same. Man is evolving, because, the mother goddess is telling him, like, hey man, get your act together, you know.
The Russian Mafia should think of their Cypriot
holdings not as deposits but as investments,
not as promises but as bets, which they lost.
Danny K. said, “I don’t like the sweetheart deal the UAW got either, but if you look at how the closure of GM and Chrysler would have reverberated through the economy, and if you look at the military implications of having manufacturing capacity, saving the Big 3 was a necessary evil.”
The auto companies should have been allowed to go bankrupt and restructure. Of course, the UAW would have taken a hit along with the stock and bond holders. The bailout that Obama provided did not follow the law. It was just a giveaway to the unions. Plus, many dealers and auto company suppliers also got screwed.
Under a straight bankruptcy restructuring we would not have lost any military manufacturing capabilities other than those that were affected (some of the suppliers) under the bailout. It was a backasswards thing to do. That said, it was also a confidence builder for uninformed among us (the sheeple) and helped break the back of the short sellers who were trying mightily to trash the banking system and the Big Three.
@neo-neocon – Listen, I get it. Completely. Nobody wants to pay anything if they don’t have to, especially to cover someone else’s loss. But my understanding is that Cypriot banks were paying 5% interest, unlike American banks which are paying 0%. If you are a resident of Cyprus and the only thing standing between you and a return to a peasant economy is a fat and happy banking system, don’t you think a one-time 7% – 10% tax is worth it as opposed to a 40% to 100% loss on select depositors that essentially kills off the golden goose?
For the record, my parents come from Macedonia and I am as Reagan-esque politically as they come (I get it from them, by the way). The flip side of things, however, is that I can see what happens when you have virtually nothing going for you economically, that it would be important to preserve the golden goose … if you can. We do it in this country (for example, we throw a lot of money into medicine) and from what I can see, it works.
During the fires in Greece a couple of years ago, there was a story about a brother and sister that perished because they wouldn’t leave their prized possession, their donkey, behind. Arkansas, Alabama and West Virginia aren’t too far behind. It’s easy to bleat on about the free market from the comfort of your and my McMansions in the northeastern part of a prosperous country, but the reality is that we also have an abundance of natural advantages here that make it easier to prosper here than elsewhere.
This is a complicated subject that is hard to get into on these boards. But the bottom line is that, I am on board with conservative-libertarian economics for the most part, but during extreme situations I think you have to bend the rules. When your most important industry is the only thing that separates you from being returning to being a society of goat herders and lobbing bombs at the Turks, in extreme situations like this it is appropriate to bend the rules.
M. Report: and what should those depositors with accounts over 100K euros who are NOT Russian mafia think? Or do you believe there are no such people?
If people come to think of banking their money as an inherently risky investment, what will happen to the banks? Why put one’s money in a bank at all? Why not invest it in ways that pay off more handsomely, if the risk is no greater than in a bank?
Danny K: bending this rule is not a good idea.
And as I’ve said before, the EU is a very bad idea. Why, for example, was Cyprus allowed to give 5% interest if it’s so out of line with the other countries in Europe? If there were not sound financial reasons for its doing so, Cyprus should have been drummed out of the EU for it. I don’t know the details of how the EU is structured, but if individual countries have responsibility for each other they should follow the same rules. Otherwise, they should be on their own.
The EU is a farce, IMHO.
The Russian Mafia should think of their Cypriot holdings not as deposits but as investments, not as promises but as bets, which they lost.
Yes, I’m sure they will listen to reason. Maybe a “Coexist” bumper sticker will help them see the light and just shrug off any losses.
@J.J. formerly Jimmy J. – “The auto companies should have been allowed to go bankrupt and restructure. Of course, the UAW would have taken a hit along with the stock and bond holders.”
Under normal circumstances, I would agree. But remember, nobody was willing to lend debtor-in-possession financing in 2007 other than Uncle Sam. Furthermore, people forget that all the Wall Street propeller heads had written off Chrysler as worthless and said it should be liquidated back then. So much for the “free market” as the Wall Street types are the very definition of that term.
I don’t disagree with anything you say except that given what was going on then, there was a good argument for what the government did. Restarting GM and Chrysler after two years of not making cars would probably not have been a very successful endeavor.
A few other points people miss:
1. GM and Chrysler dealers going under = a lot of unemployed $50,000 a year mechanics and a lot of dealership properties in foreclosure.
2. Did the UAW really get sweetheart deal or did the cost of having the PBGC take over their pensions (which is what would normally happen) render it a wash?
3. The untold story (via a seemingly well-connected in defense circles University of Michigan (?) professor I saw interviewed on a car show) is that there was intense lobbying from the Pentagon to save GM and Chrysler. The reason is obvious: manufacturing capacity in the event of another war.
More to this than meets the eye in my opinion.
Wow! actually i hate comments that begin with Wow! but what else can i say when a purported “conservative” makes Paul Krugman look almost like a true fiscal conservative?
Don’t misunderstand me, i know that you mean well, or at least i am happy to give you the benefit of the doubt. However there are a few basic realities that you fail to take into account:
A. there is no free lunch.
B. when a bank collapses, depositors lose all their money.
C. the insured amount of deposits is refunded by the government IF, and ONLY IF, the government can afford it.
D. in the case of Cyprus, the government could not afford it, so ALL the money in the banks was lost.
E. nonetheless EU leaders agreed, without legal obligation, to a partial bailout of 10bn euros financed by TAXPAYERS. The EU _taxpayers_ did NOT get to vote on this.
I would expect a true economic conservative to say that EU _taxpayers_ should not have given a single euro to Cypriot bank depositors. Instead, you (and many other purported “conservatives”) say that the EU should have given out even more _taxpayers_ money!
Truly this is the sort of blog post that makes me despair for America.
BTW it is quite possible that US taxpayers will pitch in, by way of the IMF. Your blog post suggests that you’d be happy to pay even more.
If you want a realistic take on this mess (based on Austrian economics, of course) see the relevant posts in
http://detlevschlichter.com/
4. The only division of GM that was making money – Saturn – was shuttered. It was also the only division that was not unionized. What a coinky-dink, no?
@neo-neocon – Again, I completely agree with you philosophically including the high rate of interest paid by Cypriot banks.
I’m just looking at this from the standpoint of the Cypriot people and even from the Russian depositors. A one-time 10% tax to save the golden goose would not have been such a bad deal given what they were living like 15 years ago. Two years of interest you have to give back? This was a deal even to the Russian depositors who probably evaded far more in tax than they would be forced to pay to maintain their haven.
Win some, lose some, but overall I think they would still be winning.
A prosperous economy takes the edge off people and their hatreds. With the ultimate return to their peasant lifestyle, the Cyrpiots are going have a lot of time to while away in cafes getting mad at the Turks and figuring out how to start warring with them again.
@Snorri Godhi – “Truly this is the sort of blog post that makes me despair for America.”
2007 changed my opinions on these things.
When a city gets bombed to bits in a war, there used to be a common fallacy that this was good for the economy because of all the economic activity being created in reconstruction. This is the mentality of a spender/consumer and not a saver/investor. Someone like me looks at that as a tremendous loss due to the destruction of assets.
I look at what we did to save industries in the same light. We printed money, which essentially is like printing more stock certificates, to get viable (and very profitable) industries over an economic hump. It seems to me that if these industries are viable, they are an asset. If they are an asset, you try to save them … if you can.
What does Cyprus have without offshore banking? Squat.
It seems to me that if Cypriots had to pitch in to save the banking industry via a 10% deduct, that it’s not that much different than when South Carolina gives Boeing hundreds of millions of tax incentives to get them to locate there.
You can stand on principle all you want, but once you start looking at things closely it is simply not the way things get done.
Danny K: It’s not about a pragmatic decision for today. It’s about creating a very dangerous precedent that undermines trust in the banking system in general.
Snorri Godni: I never said any such thing.
You are arguing with a strawman.
Neo said
“…That’s the point of FDIC insurance, and that’s why people put their money in banks rather than riskier investments…”
—————
Cyprus does not have the money to cover its guarantees. If the ECB had not given them cash the accounts would be worth nothing.
If there is not enough money to cover losses then there is not enough money to cover losses. Bank accounts everywhere are unsafe when the system fails.
The only way FDIC will work here when the Black Swan crosses the road is to print/devalue. What then. Things ARE different now. No deposits can be considered to be safe.
Snorri Godni: also, to understand my position better, read some of my comments in this thread.
What does Cyprus have without offshore banking? Squat.
Which is what they’ve got now, since no one – especially a foreigner – in his right mind would put his money in a Cypriot bank from this point forward.
Danny K. said, “Restarting GM and Chrysler after two years of not making cars would probably not have been a very successful endeavor.”
No such thing would have happened. My old employer (who shall remain nameless) went through bankruptcy and never missed a day of doing business.
Danny K. also said, ” Did the UAW really get sweetheart deal or did the cost of having the PBGC take over their pensions (which is what would normally happen) render it a wash?”
If the pensions had been taken over, as they were in my employer’s case, the PBGC would have taken the money in the fund and applied actuarial computations to what was actually there. So, no, it wouldn’t have been a wash. The new, lower pensions would reflect those computations. And the UAW would have screamed long and loud. Because reality’s a b###h. That’s exactly what happened in my case. My union’s screams fell upon deaf ears because it wasn’t associated with any of the major thuggish unions with tentacles into the democrat party. The UAW got a sweetheart deal from the Obama administration.
Danny K. also said, “The untold story (via a seemingly well-connected in defense circles University of Michigan (?) professor I saw interviewed on a car show) is that there was intense lobbying from the Pentagon to save GM and Chrysler. The reason is obvious: manufacturing capacity in the event of another war.”
I would like to see a citation on that one. Yes, GM builds tanks and some other military vehicles. Does anyone believe that even if GM and Chrysler had gone completely belly up, that there wouldn’t have been investors willing to take over the military asembly lines and keep them running? This is a country where enetrepeneurs do that sort of thing all the time.
Danny K. also said, “But remember, nobody was willing to lend debtor-in-possession financing in 2007 other than Uncle Sam.”
True, but the bankruptcy could have been accomplished according to regular bankruptcy laws, just with the government as the lender of last resort. Mitt Romney talked about this a lot during the campaign. Apparently you and many others weren’t listening.
Danny K , JJ Jimmy, Neo, et. al,
Throwing the moral and philosophical arguments aside –
The problem I see with bailing out banks that I’ve not seen mentioned here is that it leads to more bad fiscal decisions and risk taking. Once they have learned that they are too big to fail, and that malfeasance goes unpunished, there’s nothing to deter the same things from happening again. And from what I am hearing, the banks are in fact engaging in the same types of things that precipitated the last crisis. Their incompetence will be rewarded with taxpayer money, and we will all celebrate because nobody has lost confidence in a system deserves little. Proponents of bailouts to promote confidence in the banking system are promoting confidence in the taxpayer to bend over, not confidence in the banks.
The problem I see with bailing out banks that I’ve not seen mentioned here is that it leads to more bad fiscal decisions and risk taking. Once they have learned that they are too big to fail, and that malfeasance goes unpunished, there’s nothing to deter the same things from happening again.
I agree. It was kind of implicit in my comment of 1:25.
Sorry Occam. Missed yours.
There seems uniform agreement that government bailings-out of banks constitutes moral hazard.
There are so many unanswered questions:
1) Why does the EU want to keep its Southern fringe in? What/Where is the tipping point?
2) Why do the Cypruses of the EU want to stay in the EU? “Those who give up liberty for security shall have neither.”
3) How was Cyprus to better itself? An island with <1 mill citizens and no resources (except the recently proposed and as yet undeveloped carbon fuel deposits). Seems to me that becoming a banking center was not inherently a bad idea, like the Caymans, Bermuda, the Channel Islands, etc. Lotsa islands.
southpaw said, “Proponents of bailouts to promote confidence in the banking system are promoting confidence in the taxpayer to bend over, not confidence in the banks.”
2008 was supposed to be a one time thing. You would think that almost going over the abyss would have injected some measure of rationality into the banksters and the progressives. Alas, humans are often unable to appreciate what might have happened. I once took a long fall while rock climbing. You would think that the fall would have scared the crap out of me. Instead, when the rope saved me, endorphins flooded through my body – I felt a sense of elation. And I kept on climbing and pushing my limits. I think we are seeing a lot of that in the banking industry. In my case it was only my butt (and my partner’s butt) that was on the line. Unfortunately, the bankers and pols are putting us all at risk.
In “the Ascent of Money: A Financial History of the World” Niall Ferguson describes how many nations have risen to the peaks of prosperity and fallen on hard times as a result of financial overreaching. This statement from Frank Holmes at the Daily Reckoning describes it well: “Since the global financial crisis began, there’s been a rash of poor economic decisions from socialist policymakers scrambling to bring in more revenue to cover their overspending. Rather than streamline regulations to facilitate trade and flow of funds or cut back on welfare programs, they’d rather maintain the status quo and increase taxes.”
The struggle to keep overspending and walking close to the edge will probably go on until it can’t. Then Lord have mercy on us all.
There are so many unanswered questions:
1) Why does the EU want to keep its Southern fringe in? What/Where is the tipping point?
2) Why do the Cypruses of the EU want to stay in the EU?
Right on the money (?), Don Carlos. I don’t understand either of these either. The second I semi-understand; the Cypriots figure “free bucks,” and they’re small enough to be carried by the big boys, so they don’t need to be all that responsible. (Dear liberals: please note that that argument fails miserably for the U.S. If we screw the financial pooch, there’s no who can – never mind want to – bail us out.)
But why does the EU want to keep Cyprus in, or for that matter, Greece? Is it just pride? I can see why they’d want to keep Italy and Spain in, but Cyprus and Greece? You’d think they’d make a grisly example of one or both of them (pour encourager les autres) just to establish street cred. They’re small and insignificant enough to be written off, and thereby to motivate the other problem children (Spain, Italy, France) to clean up their act.
Neo-neocon: it would help if you clarified which “such thing” you never said. Specifically, which of my itemized points A to E do you disagree with?
And if you don’t disagree with any, do you think they are compatible with what you wrote?
But actually i can boil it down to just 2 items:
1. there is no such thing as a free lunch.
2. the EU has been spending too much taxpayer money on bailouts.
Other than denying one or the other, i don’t see how you can defend (SOME of what you wrote in) your post, and your replies to comments here.
So …let me get this straight.
Some of you seem to be arguing that the middle class takes a several trillion dollar haircut, and not one frelling bank, or banker, or politician, or friend of a banker, or friend of a politician, or anyone connected however remotely with any of the above, misses even a dimmed light bulb on their Christmas tree since then …and we should applaud this as a good and necessary and expedient thing for the future of the nation?
Uh.
Since when did outright theft and banditry translate into one for all and all for one?
Jeezus.
We should have had violent reaction against politicians and the thieves of the moneyed classes on the level of Gotterdammerung by now.
…I’m not entirely convinced that’s not what a helluva lot of people who seem to be stockpiling guns and ammo are kind of thinking, too.
Frell. I hope that politicians and the thieving classes are uneasy that their abject lies as parroted by their agents of the mendacious media propagandists don’t seem to be as effective as they’d planned.
When did the Hunger Games become the ideal model of constitutional governance, and the USA morphed into Panem?
O.B.:
thanks for sharing my concerns.
Perhaps EU members Spain, Italy, France are too big to fail (TBTF). Unless the EU fails, these will drag Deutschland down with them.
But somewhere, somehow the money will run out despite Central Banks money-printing mania. Merkel had better get serious about protecting her homeland and forget about the EU’s survival.
An ugly prospect.
Occam,
My turn now .. I asked the same question early in this whole discussion “I am still puzzled at why it’s so important for the EU to retain these states that are financial disasters, and will continue to be, forever.”
Did anybody come up with an explanation? The EU is supposed to be a union to improve trade and economies; they don’t make any pretenses about unity of culture or purpose so there must be some financial benefit to keeping the members that are bound to become welfare states.
southpaw asks, “The EU is supposed to be a union to improve trade and economies; they don’t make any pretenses about unity of culture or purpose so there must be some financial benefit to keeping the members that are bound to become welfare states.”
I think the answer lies in the same kind of mind set that says we must keep Head Start going even in the face of studies that show it is ineffective. The people who dreamed the EU up cannot let go of their dream, the facts be damned.
Southpaw, you ask:
“I am still puzzled at why it’s so important for the EU to retain these states that are financial disasters, and will continue to be, forever.”
But who says that it is important? what makes you think that “the EU” (whatever that means to you) wants to retain them?
I see plenty of evidence that Greeks, Cypriots, and other Southerners are much keener to stay in the eurozone than Germans are to keep them in. (BTW that shows that these Southerners are not Keynesians: they believe in real money, not competitive devaluation.)
Still, you got it right in your comment of March 26th, 2013 at 7:01 pm.
JJ:
“I think the answer lies in the same kind of mind set that says we must keep Head Start going even in the face of studies that show it is ineffective.”
This is at least part of the explanation, but note that it is not “the EU” that has this mindset: it is people in the EU ruling class: politicians and top bureaucrats.
Snorri Godhi:
The “such thing” I’m referring to was this quote from you, in which you say that I said something I never said [emphasis mine]:
Not only did I never say any such thing, but in one of my later comments on this post I explicitly said that I am against the existence of the EU itself (here).
In the present post I am objecting to taking the money from people who put their money in Cypriot banks. I never said I’m for taxpayers paying instead. And I never said I’m against letting the banks go into bankruptcy and following normal procedures (if Cyprus banks are like ours, the creditors are paid in a certain order, but shareholders and bondholders should take the biggest hit, although uninsured depositors—over the deposit insurance limit—also take a hit, but less of a hit. Instead, the present plan puts the burden squarely on the latter and not the former.) Letting a bank fail and not having the taxpayers bail it out—especially when the problems are as widespread as in Cyprus—leads to other problems, to be sure (see this article, for example). But of all the alternatives it seems to present the fewest moral hazards. But if there were no EU, at least people in other countries wouldn’t be on the hook for what happens in another country.
In short, I am in favor of a solution more like Iceland’s. I may end up writing another post about this, but for now that’s the short answer.
Snorri Ghodi – fair question, but if it isn’t important, why should the Germans, Finns, and fiscally sound countries agree to keep helping along the financial basket cases if there’s no upside? My point was the member states are not members united by a common heritage or desire to be governed by the same goverment, and they don’t think or act as a single country in the traditional sense. Their primary objectives are to promote economic growth, lower trade barriers between member states, have a common currency, and compete with larger economic entities like the USA , China, etc. Or that is my understanding. To that end, they have done some of those things, but if economic success is the main goal, then countries which are not contributing to that goal would seem to be expendable.
Off topic, but since you implied EU means something different to me than it means to the EU, I only have practical experience with “it”, and a lot of travel to member states. To me, the EU means another body of government that produces volumes of regulations which require us to produce mountains of documentation and spend loads of money for endless verfications and inpsections in order to export the stuff we design and manufacture. The standards and regulations the member states (the EU) have set which are required for sale of electrical equipment and machinery are vague, redundant, circuitous, and voluminous. They are simply trade barriers to products made outside the EU. And the regulations are not enforced on EU member companies and products anywhere near the extent they are for anyone trying to export to them. Outside of that, the EU doesn’t mean much to me, but I guess they have their reasons for sticking together, and it serve its purpose, or else it would dissolve.
http://www.zerohedge.com/news/2013-03-27/when-euro-not-euro
Even at this late hour, the press is still beating around the bush.
Even “informed” viewers haven’t figured out that there is no such thing as a single Euro.
The Cypriot Euro is the first out of the closet.
If all Euros are the same; pray tell why Cyprus doesn’t just print off a roll and staunch the bleeding?
Neo: thank you for your reply. Our main difference is: you assume that stockholders+bondholders (of Cypriot banks) do not stand to lose any money; i assume that stockholders+bondholders have already been wiped out, and what is left IN THE BANKS is not enough to pay back ANY of the uninsured amounts.
WRT stockholders+bondholders, you assume that something illegal has been done, without any evidence to back up your assumption.
In fact the evidence points in the other direction:
http://www.samizdata.net/2013/03/some-bondholders-are-more-equal-than-others/
(What do you think shares in Cypriot banks could be worth now, anyway?)
As a follow up, let me justify my claim that the unprotected amounts of deposits were already lost.
The EU has agreed to pay 10bn euros (of taxpayers’ money, never forget). That will limit the losses of depositors to little less than 6bn euros, which is about 40% of the unprotected amounts.
If 6bn = 40% of unprotected amounts, then 10bn = 66.7% of the uninsured amounts, ergo before the EU gave out taxpayers’ money, the total loss was over 100% of the uninsured amounts.
Since there is no free lunch, refunding the full uninsured amounts would require a further 6bn euros from EU taxpayers; hence my inference that you wanted even more taxpayers’ money to be doled out.
BTW you did not mention stockholders & bondholders in the main post, which post starts off with the proposition that “the seizing of a certain percentage of the assets of depositors [with uninsured amounts in their accounts] has been decided on”.
Since all the uninsured amounts had been already lost, that proposition is obviously false: you cannot seize money that is not there. Not only false, it is pernicious, because it gives depositors a sense of entitlement to even more taxpayers’ money. (NB: of course the insured accounts _are_ entitled to _Cypriot_ taxpayers’ money.) Scoring points against the EU does not justify abandoning true conservative principles such as TANSTAAFL.
You, of course, did not know that you were repeating what can only be called a pernicious falsehood, but note that i said nothing against you: only against your post.
Southpaw: i am sorry that my slightly sarcastic remark — “the EU” (whatever that means to you) — was confusing.
What i meant is that the EU does not have a mind of its own, so the EU cannot “want” to retain member states. Some EU citizens want to stay in, others want out, or want the EU destroyed or at leas cut down to size. In general, the ruling classes (politicians, top bureaucrats, crony capitalists) like the EU more than the rest of us do.
The present crisis is even more complicated, because there is this (Keynesian?) assumption that, if a Club Med country goes bankrupt, then it “must” leave the eurozone, and possibly the EU. (Some of us anti-Keynesians don’t think leaving the eurozone would be necessary, or even desirable, for a bankrupt country: on the contrary, the bailouts, not bankruptcy, make eurozone exit desirable for solvent, not insolvent, countries.)
Hence the bailouts are justified as a means to keep the EU together. A more likely reason for the bailouts is more trivial: Sarkozy threw a fit when Greece needed a bailout, and Merkel did not have the backbone to stand up to him.
Snorri Godhi: I’m beginning to think you’re some sort of troll.
First of all, you provide no citation for your assertions that the uninsured amounts were already lost and why, etc., and it’s certainly not something commonly discussed in articles on this subject, so if it’s the case it’s not something most people are aware of.
Secondly, I’m not talking about what the EU has decided to do or not to do. I’m talking about how this situation should work, or should have worked.
And thirdly—no, of course I did not write an original post that contained every concern you might have (didn’t spell out exactly how bankruptcy works, and who gets what in the event thereof). I wrote a post about one particular proposal and one particular aspect of this Cyprus thing, and why I think it’s a bad idea.
“First of all, you provide no citation for your assertions”
http://detlevschlichter.com/
see the latest 2 posts.
But really, if you haven’t seen any article with the figures that i gave, what business do you have writing a post like this?
“Secondly, I’m not talking about what the EU has decided to do or not to do.
[…]
Anf thirdly, […] I wrote a post about one particular proposal and one particular aspect of this Cyprus thing, and why I think it’s a bad idea.”
Uh?
Snorri Godhi: this is my last communication with you, because you seem not to understand the purpose of a blog.
Bloggers write articles every day. Some are specialists and write about only one subject on which they are experts. Others are generalists, and write in order to discuss, stimulate discussion, and get their ideas and opinions out to whomever might want to come and read and discuss the issues.
No one forces anyone to come here and read. Nor do I hold myself out as an expert on Cyprus or banking—anyone who reads my blog knows that. And I welcome anyone who comes here to discuss, and to offer his/her own specialized knowledge in that spirit rather than an abusive one.
I have done my homework and read tons of articles on the subject in order to learn about it. I am writing based on those articles, not based on some sort of all-knowing expertise, articles which have not mentioned the figures you cited. In addition, I have just quickly read the two articles to which you linked, and I don’t see the figures you cited in there, either. I see a generalized discussion of the limits and problems with the concept of deposit insurance, and that’s certainly relevant, but nothing that contradicts my assertion that the banks should have been allowed to go into bankruptcy and normal bankruptcy practices followed, instead of this special deal that focuses on depositors (and especially instead of the original deal that included small depositors with insured deposits).
Whether or not the deposit insurance system in Cyprus is viable is a different question. I am not conversant with how it works in Cyprus, but in the US monies are collected from banks based on their assets and not a tax on each depositor’s assets. The idea is that the entire banking system as a whole is not going to fail (I assume that would strain and overburden the system, obviously) but that certain banks will fail and the fund would cover it. I think people realize that in the event of a failure of the entire system their money would be at risk, but short of that they expect their deposits to be insured and covered, and at any rate they do not expect to be the special targets rather than the bondholders and shareholders.
This sort of approach is what I would advocate.
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