Cyprus: does this make sense?
To save the Cyprus banking system, they have to destroy people’s faith in it.
Does that make any sense to you? It doesn’t to me.
Ah, but they promise they won’t do it again—just this once! But why would anyone believe them?
And while I don’t often agree with Kevin Drum, I’m in complete accord with this piece of his.
By the way, the whole thing reminds me a bit of what Obama did during the Chrysler negotiations (see also this).
The Cyprus bottom line is that you can’t build faith in a system by breaking the promises underlying it. It’s sort of like strengthening your marriage by having an affair.
And please remind me what’s so great about the EU.
I guess this is a wealth tax aimed at Russian billionaires who use Cyprus to park money. The idea is to not fund the bailout with German money, but it has backfired.
The idea that banks of any kind are immune to risk is new. I read the new book “Coolidge” where I found the Calvin Coolidge and his father had put their family funds in close to 20 separate banks in VT and MA to lower their risks. Bank runs did happen when confidence was shaken which was a key factor in placing financial prudence high on both government and private agendas.
“The Cyprus bottom line is that you can’t build faith in a system by breaking the promises underlying it. It’s sort of like strengthening your marriage by having an affair.”
This is a bad idea and come Thursday it will be taken off the table unless the IMF-EUP-ECB are dumber than I think. If this does come to pass it will have dire consequences for banks in the PIIGS. Anyone who still has money in a bank will wisely begin closing their accounts.
Putin was quick to jump on this and he’s not happy. There will be some sort of retaliation on the part of Moscow if this out right thief occurs.
“Bank runs did happen when confidence was shaken which was a key factor in placing financial prudence high on both government and private agendas.”
Prudence was left behind decades ago. I only trust local banks and credit unions. The big multi-national banks, along with central banks, have become criminal enterprises.
When a run on a bank begins, be among the first to run.
A bit of a sticky wicket. The Germans want to stick it to the Russian oligarchs. Okay, but what about the unintended consequences? If they can do it in Cyprus, can/will they (the European Central Bank) do it to other banking systems? The ECB is slowly destroying confidence in the financial markets of Europe. Not intentionally, of course.
The Cypriots have a way out. There is a large offshore shale deposit of natural gas that the Russian firm, Gazprom wants to develop. Gazprom has stepped in and made Cypress an offer. They will make the banking system whole for the rights to develop the gas field.
See here: http://tinyurl.com/bnfwgw6
The Cypriots are, of course, suspicious. Should they flaunt the ECB and accept the golden handcuffs offered by the Russians? Aiyeee, it is a dilemma!
Maybe gold and the Yankee dollah will profit in the short term. In the long term – I’m not betting on any rational solutions on either side of the Atlantic.
“It’s sort of like strengthening your marriage by having an affair,” or solving the deficit/debt crisis by borrowing and spending even more mney.
See the pattern here?
This is the worst thing that can happen to any banking system, and it undermines confidence in banks WORLDWIDE, including our own country. If this “tax” is allowed to continue, then a precident will have been set and nobody can be confident that their money is safe.
With banks paying 0.1% interest on your money, the risk/reward ratio for keeping your life savings in the bank may not look so good anymore. But what’s the alternative? Bury your savings in a coffee can? Buy a big safe, a big gun and a big Doberman Pinscher?
“With banks paying 0.1% interest on your money, the risk/reward ratio for keeping your life savings in the bank may not look so good anymore. But what’s the alternative?”
There is no incentive to park money in a bank beyond ones monthly operating expenses. This is the curse of ‘easy money’. There is no incentive to save and in fact savings are destroyed by inflation. Thank you Federal Reserve for creating an economy built on debt instead of capital formation.
Alternatives? It will vary for each of us depending on age and income stream. Metals, real estate, farm land, commodities, bonds, or equities all have the potential for loss; although I think some investments are more sound than others. Considering the rising cost of food, certain types of food have become an investment of sorts for you can always eat it later.
PS – I like big guns. 😉
I see no reason why the German people should give more money they won’t get back to anyone.
Unique? This is a case where that word is inappropriate. Wrong, completely, even.
The banking and world currency systems are built primarily on trust. The banks have almost blown through that currency, and inflation/debt will erode the other.
The banking and world currency systems are built primarily on trust.
Quick quiz for the geniuses who devised this policy: why do banks traditionally favor the image of massive marble columns and edifices?
I first learned about Cyprus at Karl Denninger’s Market Ticker early Saturday morning. I soon saw it being discussed on numerous sites that I read. In fact, I linked Denninger’s post in a comment at Ace of Spades, then discovered that another commenter had beaten me to the punch by one minute! A couple hours later, AoS had a featured post about it.
I quickly realized that this was the most important story around. Drudge didn’t mention it until Sunday afternoon. Since he links articles from major media sources, I had to assume that they weren’t talking about it.
This goes far beyond Cyprus and Europe. Everybody in the world who is paying attention now must assume that this can happen to them. The Rule of Law has become a sick joke, and governments are being revealed as nothing more than organized crime syndicates. There are plenty of Americans who are now thinking about taking their money out of the banks. Cyprus definitely has the potential to be the fuse that lights the powder keg.
In the short run, I wouldn’t be surprised to see the American stock market go up, as panicked Europeans move their money here. However, that is not likely to last.
But when governments abandon the Rule of Law and cease to protect private property, they lose their legitimacy. The Declaration of Independence has a thing or two to say about what happens after that.
OB,
“why do banks traditionally favor the image of massive marble columns . . . .”
You reminded me that George Carlin had a routine about names and naming and asked, “would anyone keep their money in a place called “Frank’s Bank”?”
“What’s so great about the EU?”
Well, it keeps a bunch of drastically overpaid incompetents who are totally out of touch with the people in their home countries from starting WWIII. Seriously, the bubble these people live in should be filled with helium so we could send them off to the lala land they dream of.
rickl:
Correction; I saw story on Drudge Saturday.
It troubles me greatly that a bunch of idiot-savants, appointed to serve as Euro-zone finance ministers, could come up with the deposit forfeiture plan from a thousand miles away from Cyprus, and insist the Cypriot gov’t pass this in order to get the rest of the bailout money for PRIVATE banks.
This is a warning shot. The WSJ opined the deposit tax would be ‘cleaner’ than the alternative, as if we were shopping for the best detergent, principles and morality be damned.
See this, written months ago, about a functionally similar proposal for New Zealand: http://www.navigator-consulting.com/articles/cypriot-bank-exposure-to-the-greek-debt-crisis/17
As many have already pointed out here, the keystone holding banking systems together is trust that “bankers” and banks will not just steal whatever money is deposited with them and run away, and it is secondarily based on the Rule of Law, and trust that the laws as regards banks and financial transactions will be adhered to, and once that trust is lost it will not be easily, or perhaps ever, really be fully regained.
According to news accounts, the deposits in smaller Cyprus bank accounts containing fewer than 100,000 Euros were “insured” by their government, and now that government is proposing to, in essence, void the insurance and flat out steal 6.5% of each and every account in the form of a (supposedly) one time “tax” to meet EU requirements for bailing out the country, with larger accounts to pay a 9.9% tax.
Moreover, a several day bank “Holiday” has been declared in Cyprus, to block depositors from withdrawing any more than the small sums of their total deposits they can from ATMS. Thus, with one blow destroying any possible confidence Cyprus depositors had in those banks and/or the government “guarantee” and “insurance” of their deposits; by this act unmasking the government as nothing more than a gang of thieves. This event, of course, makes all other depositors in the EU question the safety of their banks and their deposits, as it should us here, too, in the U.S.
Well, we used to have a very carefully-crafted, centuries old legal structure here in the U.S. that allowed our Republic and capitalist system to function as well as it did, called the Rule of Law and, as one part of that Rule, long-standing bankruptcy laws in place that required that in any bankruptcy proceedings the bondholders, having legal priority to the assets of a company before stockholders of various classes, were to be paid out of the company’s liquidated assets first, but, with the GM and Chrysler bankruptcies, the Obama administration just ignored the law, in essence stiffed the priority bond holders and paid them, if anything, pennies on the dollar, and used their interpretations of laws, regulations, and procedures to gave a huge chuck of these companies assets to the non-bond and stock holding Unions–Obama supporters all. Thereby destroying any confidence that businessmen had had in the safety of their assets, to the grave and continuing damage to our economic system and economy, and creating widespread uncertainty that has and is today inhibiting commerce generally. For why hazard any investment if the government can come in and, by fiat, just take your investment or take control of your company?–see Economic Fascism, Mussolini, and Italy in WWII.
This action was a direct strike against the property rights that are the absolute, bedrock foundation of our capitalist system and Republic. For, if you cannot be sure that what you have earned will be protected by the Law, will not be stolen by another or “appropriated” by the government, well, then you are really not free at all, but a slave to whoever is stronger, or has more power or influence than you do.
Moreover, in recent months some members of our wildly spending, totally out of control Congress and especially people in various Leftist think tanks have floated various ideas for raising large amounts of additional revenue to throw into the maw of Moloch, among which have been the idea of “federalizing” i.e. stealing some or all of the tens of trillions of dollars in individual IRA’s by requiring individuals (i.e. forcing them)—under the guise of “protecting” them from supposedly potential large losses in the stock market and other “risky” investment vehicles (such risky swings and declines having been largely, if not exclusively, caused by the Administration’s ill-informed and suicidal monetary and economic policy and actions)–to put some fraction of their investments into supposedly “safer” and “guaranteed by the full faith and credit of the U.S.” (but declining in value and very low interest) government bonds and Treasury bills. Thus, transferring massive amounts of these individual citizen’s funds into Treasury accounts, and meanwhile, that formerly and supposedly rock steady “full faith and credit” continually undermined by Administration spending, economic, and financial policies, and looking more and more shaky by the day.
As in Cyprus, our FDIC supposedly “insures” each bank account here too, and our totally mismanaged, not to say gang-raped economic and monetary structure has now massively inflated our money supply, and provided us with artificially low, very nearly 0.0% interest rates on individual savings accounts, continually winding up the mechanism that will launch an ever more severe blow-back to come–see hyperinflation and/or deflation, Zimbabwe, Argentina, and Weimar Germany.
How long, with such thinking about IRAs in the air, the Rule of Law ignored, and government spending at insane and catastrophic levels–the graph line headed straight up, before various administration officials and think tank “experts’ decide to try the same type of “haircut,” the same type of theft targeting bank accounts or other such measures, here in the U.S.?
As various canny survivalist writers suggest, perhaps now may be the time to pull out money from such apparently increasingly precarious bank accounts–while those dollars still have some value left, and are accessible–keep some fraction as cash, and use the rest to buy concrete things, like precious metals, land, weapons and ammunition, vehicles, luxury items, and even various stocks of foodstuffs that can be directly useful, and bartered if need be.
Europeans used to have the reputation of stuffing their money in their mattresses or burying it because —given their long and turbulent history, and especially economic history–they didn’t trust banks. Now, after many decades of patient, knowledgeable work to make banks–in Europe and here, too, in the U.S.–safe and acceptable, with just a few blows that edifice has, in effect, cut its own throat, is tottering more and more may, perhaps, be dying, and it is more and more likely that it is the mattress or the field again, but this time for many more of us.
Sorry, I posted the wrong link. But as posted, clarifieas Cyprus.
Wolla Dalbo: actually, it appears it was not the Cyprus government who proposed it, it was the feckless EU “leaders” and the Cyprus president agreed.
Cyprus appears to be poised to reject it. See this.
At the end of my above post I also likened this Cyprus thing to the Chrysler negotiations Obama was in charge of, something that shocked me at the time but which passed under the radar screen for most Americans. I wrote about it a great deal when it happened, but like a lot of what Obama has done it’s either been ignored or forgotten by most people; there’s been so much to be concerned about!
You can bet that big-time creditors remember it, though.
You can bet that big-time creditors remember it, though.
Yep, in fact, they have to remember it. IANAL, but it would seem that any money manager who invested in, say, a struggling unionized company (pardon the pleonasm) would not be exercising his fiduciary duty to his investors. After all, after the GM fiasco, what “prudent man” would ever put his money into a similar situation? Barry’s still got that pen.
Explore OBR in New Zealand. Start here:
whttp://rbnz.govt.nz/finstab/banking/5175857.pdf