None Dare Call It Theft

By Mar 21, 2013, 12:48 PM Author's Blog  

The euro elites don’t call it theft or robbery or even a tax, much less an outright default by the banks of Cyprus. They are calling it a “stability levy,” a plan that could lead not to stability, but a domino-style collapse of the banking system in Europe.

True to the nature of government propaganda, the Cypriot head of state, Nicos Anastasiades, says this “stability levy” is necessary to forestall “a complete collapse of the banking sector.” It’s the same kind of language we heard in the fall of 2008 — an intimidation tactic used to shove through TARP and unending bailouts.

More likely, the plan to tax all Cyprian bank deposits 6.75-10% will trigger one. Or maybe just the talk of it already has. We can’t know for sure, because the government of Cyprus has declared a banking “holiday,” a term that means that the robbers take a vacation from being held accountable for their actions.

What this plan signals is pretty clear: Your money is not in the bank. If you get there fast and withdraw what you can, you might survive. If you delay, all bets are off. That means an old-fashioned bank run — the ultimate check on the soundness of banking.

Another way to look at it: It’s a game of musical chairs, and the music has stopped. The purpose of the “holiday” is to tase people so they can’t find their chair.

The tax is part of a $10 billion bailout arranged by eurozone countries together with the IMF. So far during the long, slow, relentless, meltdown of the world’s banking systems over the last few decades, the idea of outright confiscation has been something that governments have generally tried to avoid.

It turns out that people don’t like to be robbed. They normally like to think that the money they put in the bank is accessible to them. So when Anastasiades demanded this, he got massive pushback from legislators and depositors.

Meanwhile, people were scrambling to get money from ATMs and trying to wire money out to safer havens. That’s when the rude surprise came: Their accounts were locked and transfers have been stopped. ATMs are marked “out of order.”

As I write, legislators have backed off the proposal to loot absolutely everyone equally, but instead will focus the most intense effects of the heist on only the very rich. This might make it more palatable for lawmakers, but no more so for the population at large. Politicians can promise that this is a “one-off levy” all they want, but anyone who believes that is an utter fool. Citizens can be pretty dopey in believing political promises in general, but when it comes to their own money in their banks, their gullibility certainly has its limits.

Americans can be forgiven for having spent most of their weekend ignoring news out of Cyprus, a country they last heard about when studying ancient civilizations in high school. A friend of mine from Cyprus who lives in the U.S. gave up trying to explain where he is from long ago and is now satisfied to tell people he is from Greece.

Actually, Cyprus is one of the world’s most prosperous countries, owing mainly to its status as a world financial hub. As Doug French put it to me, “This is a bank with a country attached.”

Its population is mostly tourists and fluctuates based on season. But its prosperity for the last 20 years is due mostly to the deposits it receives from all over the region, especially from Russia. This is why Vladimir Putin has become involved in the current controversy, denouncing it as unfair and unwise.

The trouble is that Cyprus has to raise the money. It has to come from somewhere. The core problem is that this proposal, especially the idea of taxing deposits that fall below the deposit insurance ceiling, undermines that elusive but absolutely essential thing called confidence.

If people no longer believe in the system and run on the banks, the whole thing can unravel very quickly. In most countries today, there is depository insurance that provides the illusion that people’s deposits are safe. The remarkable thing about the “security levy” is that it amounts to an open announcement that there is no assurance that the money must come from somewhere, so they might as well get from in the most obvious place.

There was a time when banks operated like normal businesses, performing a service in exchange for payment, while clearly delineating what part of people’s deposits were at risk (and, therefore, paid a premium) and what part were security (and, therefore, a service to be paid for). But central banking and fiat paper money have confused the issue to the advantage of the financial system, but to the disadvantage of depositors, especially when faced with a crisis moment such as this.

Still, it is an unprecedented move, one that harkens back to the days of the early New Deal, when FDR closed the banks, suspended the gold standard, and outright changed the definition of the dollar in order to bail out the banking system. This kind of thing is not supposed to happen these days. The bankers are supposed to be wiser and more sophisticated, using fancy tools of monetary policy to continually shore up confidence in the system.

The suggestion that the banking system just outright steal people’s money — even if it doesn’t end up getting through the legislature — has dramatically changed the psychology of banking throughout the eurozone. Over the coming weeks, Spaniards, Italians, Russians, and many others throughout the region are going to be quietly (or maybe not so quietly) testing the same, pulling deposits and finding other ways to secure their funds.

The word central bankers everywhere dread: contagion. It means the spreading of truth and actions based on that truth. Might Cyprus be the new bubble that breaks the world? It’s a good time to revisit our friend Garet Garrett’s 1932 classic that retains all of its explanatory power: A Bubble That Broke the World.

For banking regulators and politicians, this really amounts to an epic fail, even from their own point of view. They never want the veneer of stability and soundness stripped away. They want a population of depositors blissfully unaware of the vulnerability of the monetary and financial systems.

You might ask, “If you are so smart, what do you suggest?” That’s easy: default and bankruptcy.

Contrary to the conventional wisdom, the Lehman Bros. case is not a model to avoid, but one to follow. Let the Cypriot banks that are under threat die a quick death, even if that means not paying those who believe they are owed. Under the conditions, there is accountability and there are permanent lessons learned.

This approach — yes, it is far-flung and stands zero chance of actually happening — might actually restore sound banking practices. Just imagine a world in which banks operate like honest, solvent, self-reliant businesses, not lying, not teetering on the brink, not depending on government and politicians and central authorities. Seems like a dream, but we can get there through a simple step: Allow the failure to happen.

But might that approach trigger a Euro-wide meltdown? Maybe. That seems to be something that is going to happen with or without this “one-time stability levy.”

Meanwhile, the banks are closed. No one in the eurozone is sleeping well at night. And it’s going to be a wild week.

The Euro crisis alone might account for why Bitcoin has moved from $15 to $48 in three months. Is it possible that Russia’s largest depositors saw this coming and have been slowly moving money out to the digital safe haven? We’ll never know, because the transactions are anonymous (thank goodness). But ask yourself this question: Where would you rather have your money? In Bitcoin or insured deposits in Cyprus?

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