By Detlev Schlichter
I, too, was shocked yesterday morning. Not so much by the news that
depositors at Cypriot banks would face a haircut, or a ‘levy’ or a ‘tax’, 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 ‘austerity’ on innocent citizens in small and troubled countries. The
Daily Telegraph on its front page spoke in usual hyperbole of a ‘EU raid on
savings’ and, naturally, of another ‘threat to the recovery’. What agitated
most commentators was that the ‘sanctity’ of deposit insurance had been
carelessly violated as even deposits of less than €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 ‘guarantee’ that magically shields them from
the harsh reality of bankrupt banks and bankrupt states. Undermining this
‘guarantee’ 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 systems’
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 ‘deposits’ 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. – Yes, but only so that the banks can take even more risks and
become even more leveraged. State ‘protection’ 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 naïve
believe that bank deposits are always ‘money good’ 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 didn’t do the math and
didn’t realize how big that guarantee was going to be. Well, he was found out
by the markets – 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 €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 –
one that for years and, by now, very publicly had been investing in Greek
government bonds! – your government had the resources to protect all
depositors? The bailout of Cyprus’ 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 “Hands off”. One could see such placards at demonstrations in Cyprus
yesterday: “Hands off Cyprus”. 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. Don’t forget that Cyprus and its banks and its
depositors are still being bailed out with other people’s money here.
That is also
what some of my libertarian friends don’t seem to get when they speak, as some
of them did yesterday, of another incident of the ‘the state stealing from its
citizens’ 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
– of the expropriator simply doing nothing – would mean that the ‘victim’ keeps
his property. But if the EU did nothing in this situation – “hands off”,
laissez faire – it would mean that most depositors, including those under
€100,000, got wiped out completely. The choice is not between keeping
everything and paying a ‘levy’, but between paying a ‘levy’ 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 €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 – all measures that defraud the domestic saver. All those who
persistently argue against ‘austerity’ 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 the rentier class, whether
the rentiers are big or small. And now they claim to be the
advocates of savers?
Of course,
there are notable exceptions. In today’s Telegraph, Jeremy Warner does a good
job explaining how costly the bailout of British banks has been – and still is
– to British savers, not least via higher inflation, zero interest rates and
endless quantitative easing. I also thought that Simon Nixon’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 – ‘austerity’, letting Greece
default, at least partially, bailing in depositors – 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
.
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