Republished fromÂ detlevschlichter.com
I, too, was shocked yesterday morning. Not so much by the news that depositors at Cypriot banks would face a haircut, or a â€˜levyâ€™ or a â€˜taxâ€™, on their deposits as a contribution to yet another Eurozone bailout package funded by taxpayers in other counties but by the reaction in the press. Here was, according to the majority of the international commentariat, yet another example of the ineptitude or outright meanspiritedness of the Eurozone policy elite, another example of imposing needless and counterproductive hardship and brutal â€˜austerityâ€™ on innocent citizens in small and troubled countries. The Daily Telegraph on its front page spoke in usual hyperbole of a â€˜EU raid on savingsâ€™ and, naturally, of another â€˜threat to the recoveryâ€™. What agitated most commentators was that the â€˜sanctityâ€™ of deposit insurance had been carelessly violated as even deposits of less than â‚¬100,000 were, at first at least, supposed to be subjected to a reduced haircut as well. Those types of deposits are supposed to enjoy a â€˜guaranteeâ€™ that magically shields them from the harsh reality of bankrupt banks and bankrupt states. Undermining this â€˜guaranteeâ€™ could have wide-reaching consequences beyond tiny Cyprus as it has the potential to undermine the trust in banking systems in Greece, Spain and Portugal.
I agree that this move is risky. The international banking system is highly levered and in large parts has been teetering on the brink of disaster for many years. Anything that affects depositors can have grave consequences. But given the state of affairs, any meaningful attempt to deal with the banking systemsâ€™ problems must inevitably entail risks. The questions are the following: Are the right type of risks being taken? And what would the alternative be?
Banking is a risky business because banks are highly leveraged enterprises. (Sorry to break that news to you.) In a fractional-reserve banking system â€˜depositsâ€™ are not deposits (i.e. contracts for safe-keeping) but loans to banks and thus loans to highly leveraged businesses.
Most people in developed countries have become used to not worrying about the health of individual banks. They have, over the course of decades, been conditioned to believe that all banks are regulated by the state and ultimately protected by the state. â€“ Yes, but only so that the banks can take even more risks and become even more leveraged. State â€˜protectionâ€™ has now created a banking monster that is swallowing up the resources of the state itself. And this can hardly come as a shock surprise in early 2013!
The naÃ¯ve believe that bank deposits are always â€˜money goodâ€™ because they are backed by the state and the state, after all, is an endless cornucopia, was maybe understandable, or at least excusable, until about 2008, when then Prime Minister of Ireland, Brian Cowen, in the middle of the Irish banking crisis, had the genius idea to simply declare a state guarantee for all deposits at Irish banks. Hey, problem solved! Obviously, Cowen didnâ€™t do the math and didnâ€™t realize how big that guarantee was going to be. Well, he was found out by the markets â€“ and Ireland, the country, went bankrupt.
After Lehman, after Ireland and Iceland, and after Greece, I think you must have lived in a cave for the past 5 years to really think that banks are safe because they are guaranteed by their governments. Come on! Please get real.
Excuse me but my sympathies for Cypriot depositors is somewhat limited. If you are a depositor in a Cypriot bank, whether of deposits of more or less than â‚¬100,000, who did you think was guaranteeing your deposit? The Blue Fairy? Did you really think that in such a small place with such a bizarrely bloated banking system â€“ one that for years and, by now, very publicly had been investing in Greek government bonds! â€“ your government had the resources to protect all depositors? The bailout of Cyprusâ€™ two largest banks will cost the equivalent of 60% of GDP! And after what happened in Greece, did you really think that the Germans were willing to cover the whole bill?
I am a free market guy. I am in favor of laissez faire so I always like to see placards that read â€œHands offâ€. One could see such placards at demonstrations in Cyprus yesterday: â€œHands off Cyprusâ€. That is great. But be careful what you wish for. A proper hands-off policy means letting the chips fall where they may. That would certainly mean no bailout and thus total collapse of the Cypriot banking system and the Cypriot economy. Donâ€™t forget that Cyprus and its banks and its depositors are still being bailed out with other peopleâ€™s money here.
That is also what some of my libertarian friends donâ€™t seem to get when they speak, as some of them did yesterday, of another incident of the â€˜the state stealing from its citizensâ€™ or of confiscating their property. As much sympathy as I usually have with these views, in this instance they are simply mistaken. If this were expropriation it would mean that the act of abstaining from this expropriation â€“ of the expropriator simply doing nothing â€“ would mean that the â€˜victimâ€™ keeps his property. But if the EU did nothing in this situation â€“ â€œhands offâ€, laissez faire â€“ it would mean that most depositors, including those under â‚¬100,000, got wiped out completely. The choice is not between keeping everything and paying a â€˜levyâ€™, but between paying a â€˜levyâ€™ and losing almost everything.
Some commentators will object here and say that, for the sake of a more cheerful public sentiment and for the sake of the nascent recovery, the bailout should be more generous and protect more Cypriots to a larger degree. But that would mean either more expropriation (and now the word is indeed appropriate) of taxpayers in Nordic countries, or more money-printing by the ECB. And this is where many commentators are either short-sighted or indeed hypocritical.
Using the printing press to cover any excess committed by banks and governments, no matter how outrageous, must mean inflation and this certainly hurts all savers, including those with savings of less than â‚¬100,000. I found it particularly galling that many of the commentators who are now posing as defenders of the small saver are usually among the loudest proponents of exiting the euro, issuing new and weaker currencies and using debasement to gain short-lived competitiveness â€“ all measures that defraud the domestic saver. All those who persistently argue against â€˜austerityâ€™ and for more stimulus, more debt, weaker currencies, higher inflation, do not care at all for savers. As Keynes famously suggested, they want to kill theÂ rentierÂ class, whether theÂ rentiersÂ are big or small. And now they claim to be the advocates of savers?
Of course, there are notable exceptions. In todayâ€™s Telegraph, Jeremy Warner does a good job explaining how costly the bailout of British banks has been â€“ and still is â€“ to British savers, not least via higher inflation, zero interest rates and endless quantitative easing.Â I also thought that Simon Nixonâ€™s piece in the Wall Street Journal yesterday was informative and balanced. But they are the exception.
I am no friend of the EU and I feel uncomfortable finding myself in a position in which I have to defend their policies but I feel that those elements for which the EU gets most viciously attacked in the media â€“ â€˜austerityâ€™, letting Greece default, at least partially, bailing in depositors â€“ are most sensible to me as these policies are, in principle at least, based on an acknowledgement of the underlying problems and as they do not seek near-tem comfort in the deceptive and damaging policies of endless fiscal transfers and money-printing.