Good riddance to deposit ‘insurance’

The risk of the occasional run on an individual bank has now been replaced with the acute and rising risk of a run on the entire system

by DETLEV SCHLICHTER

Once the public furor and shrill media coverage have died down it will become clear that events in Cyprus did not mark the death of democracy or the end of the euro but potentially the beginning of the end of deposit ‘insurance’. If so, then three cheers to that. It may herald a return to honesty, transparency and responsibility in banking.

Let us start by looking at some of the facts of deposit banking: When you deposit money in a bank you forfeit ownership of money and gain ownership of a claim against the bank – a claim for instant repayment of money but a claim nonetheless. In 1848 the House of Lords stated it thus:

“Money, when paid into a bank, ceases altogether to be the money of the principal; it is then the money of the banker, who is bound to an equivalent by paying a similar sum to that deposited with him when he is asked for it…The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in hazardous speculation; he is not bound to keep it or deal with it as the property of his principal; but he is, of course, answerable for the amount, because he has contracted.”

This is not legal pedantry or just a matter of opinion but logical necessity that follows inescapably from how deposit banking has developed, how it was practiced in 1848 and how it is still practiced today. If ownership of the money had not passed from depositor to banker than the banker could not lend the money to a third party against interest and he could not pay interest to the depositor. If the depositor had retained full ownership of the deposited money, the banker would only be allowed to store it safely and to probably charge the depositor for the safe-keeping of his property. Money stored in a bank’s vault earns as little interest as money kept under a mattress. It is evidently not what bank depositors contract for. If interest is being paid – or ‘free’ banking services are being provided – the depositor must have agreed –at least implicitly – that the banker can ‘invest’ the money, i.e. put it at risk.

For more than 300 years banks have been in the business of funding loans that are risky and illiquid with deposits that are supposed to be safe and instantly redeemable. When banks fail depositors lose money, although in former times, sturdier and more honest, no rational person claimed that the depositors were unfairly ‘bailed in’ or were the victims of ‘theft’.

Although the mechanics of fractional-reserve banking have not changed in 300 years the public’s expectations have evidently changed greatly.  Today banks are expected to lend ever more generously while depositors are supposed to not incur any risk of loss at all. This means squaring the circle but it has not stopped politicians from promising just such a feat: Enter deposit insurance. State deposit “insurance” is not insurance at all. Insurance companies calculate and calibrate risks, charge the insured party and set aside capital for when the insured event occurs. A state deposit ‘guarantee’, by contrast, is simply another unfunded government promise, extended in the hope that things won’t get that bad. When they finally do the state does what it always does: it will take from Peter to pay Paul. Cyprus is a case in point: Private insurance companies would have pulled the plug on a ballooning banking sector long ago while the Cypriot state, still the local monopolist of bank licensing and bank regulation, evidently looked on as the banks amassed deposits of four times GDP. In the end Cyprus’ government ran out of ‘Pauls’ to stick the bill to – and ‘Hans’ in Germany refused to get ‘bailed in’ completely (although he is still providing the lion’s share of the bailout).

Cyprus is just an extreme example of what the institutionalized obfuscation of risk and accountability that comes with state-protected banking can lead to. Deposit ‘insurance’ masks the risks and socializes the costs of fractional-reserve banking. Unlimited state paper money and central banks that assume the role of  “lenders of last resort” have the same effect. If the original idea behind these innovations was to make banking safer, it has not worked, as banks have become bigger and riskier than ever before, although I suspect that the real purpose of these ‘safety nets’ has always been to provide cover for more generous bank credit expansion.

Under present arrangements there is little incentive for banks to position themselves in the marketplace as particularly conservative. Depositors have been largely desensitized to the risks inherent in banking. They no longer reward prudent banks with inflows and punish overtly risky banks with the withdrawal of funds, and even if they do, the banks can now obtain almost unlimited funds from the central bank, at least as long as they have any asset that the central bank is willing to ‘monetize’. This is a low hurdle indeed as banks have become conduits for the never-ending policy of ‘stimulus’ and are thus being fattened further for the sake of more growth. Once a bank has ‘ticked the boxes’ and meets the minimum criteria of regulatory supervision, any additional probity would only subtract from potential shareholder returns. Our modern financial infrastructure has created an illusion of safety coupled with an illusion of prosperity thanks to artificially cheapened credit. The risk of the occasional run on an individual bank has now been replaced with the acute and rising risk of a run on the entire system.

This would change radically if we reintroduced free market principles into banking. Bankers would again be answerable to all their lenders, including small depositors, who would no longer be lulled into a false sense of security but, in their correctly understood role as creditors to the banks, would become ‘deposit vigilantes’ and would help keep the banks in check. The banks would again have to communicate balance sheet strategy and risk management to the wider public in order to gain and maintain the public’s trust, and not just to a handful of highly specialized bureaucrats at the central bank or the state’s bank regulator. Banking would become less complex, more transparent and less leveraged. Conservative banking would again be a viable business model. And the wider public would begin to appreciate how dangerous the populist policies of cheap credit and naïve demands for ‘getting banks lending again’ ultimately are. The depositors are underwriting these policies and carry a lot of their risks. 

Cyprus: dwarfs in a strategic geopolitical game

Is the abandonment of Cyprus part of strategy at play?

by Lenos Trigeorgis

Throughout history, economics drove politics. In Cyprus it seems the other way around. Are the world leaders going economically crazy? Or might it be grand strategy at play?

The CEO of PIMCO, El-Erian, argues that the harsh position of northern Europeans imposed through the Eurogroup and an intensification of the current crisis may push Cyprus to turn closer to Russia, just as Egypt turned to the Soviet Union when turned down by the West in the 1950s.  The greater the disappointment of the Cypriots with their European partners and the growing sense of desperation among Cypriots, the greater the pressure to turn to Russia for help. Such help would not be granted complementary, but would come with concessions on key strategic Cypriot assets, such as bank assets (Cyprus banks have successful operations in Russia and the Ukraine), gas reserves, strategic access to the Russian fleet etc. Naturally, Russia should be very willing and able to step in to fill the void and increase its strategic role in Cyprus and the Mediterranean region. Various links between the two nations make this attraction quite logical. Russia has a sizeable loan of €2.5 Billion to Cyprus that it hopes will be serviced; its own government agencies in addition to Russian oligarchs have sizeable bank deposits (estimated at about €24 Billion) -€2 Billion of which would be lost if the proposed haircut on bank deposits went through or Cyprus went bankrupt. There is significant real estate and tourism business, as well as interest in Cyprus’s undeveloped gas fields. Russia’s total economic interest in Cyprus is about €45 Billion.

So the European partners should be more careful, one would think, not to push things too extreme with Cyprus, as they might risk pushing Cyprus out of the euro zone and into the arms of Russia. That would not be in the interest of Europe, not least because Russia has monopoly control of the gas supply to Europe.

Many Cypriots’ hopes turned to Russian help following parliament’s rejection of the troika’s hard measures to ‘rescue’ Cyprus. But news of a helping Russian hand was nowhere to be found. After one week of pleading and desperate discussions, nothing came out! The Cypriot Finance Minister Michael Sarris said on March 20 that he would stay in Moscow for talks “as long as it takes.” But some days later: “I think we aren’t able to get the support that we wanted to get,” he said after checking out of hotel Lotte in Moscow. As Sarris was leaving, the “Russia and EU: potential for partnership” conference was starting in the same hotel, including meetings with EU’s Mr. Barozzo, Putin and Medvedev. Meanwhile, Cypriot Foreign Minister Kassoulides was still waiting to hear about his request to see his Russian counterpart. Ironically, they could all have met in the same hotel and easily sort out this trivial €5.8 Billion business. Except if they did not really want to help Cyprus, but to weaken it.

It’s not that Russia does not have the ability to help. One month ago, on February 22, in an official working meeting of a delegation led by Prime Minister Dmitry Medvedev to Cuba, it was announced that Russia would write off about $30 billion (€23 Billion) of Cuba’s debt. Russian Minister for Industry and Trade, Denis Manturov, told reporters after the Russian-Cuban talks: “More than $30 billion – this is the total amount of debt that will be partially written off and partially refinanced.”

Sorry No More

The old English politeness is harder to find today

by Peter Whittle

The queue—that is, standing in line—has long been valued as a characteristic of English manners, both by outsiders and by the English themselves. As an example of social cohesion, an illustration of that much-celebrated (and much-satirized) English sense of fair play, it’s pretty much unimpeachable. It’s been said that one Englishman standing alone is enough to constitute a queue.

That was then. Anybody visiting London today will wonder where the queue has gone. It might still exist in provincial towns and rural communities, but here in London, the once jealously enforced public tradition of “waiting your turn” is on life support. One can see this especially at bus stops, where the crocodile line of patient passengers has given way to a slow-motion scramble. And nobody seems to mind much.

Queuing gets only a cursory mention in Henry Hitchings’s new book, Sorry! The English and Their Manners, which aims to tell how the residents of the British Isles wound up with the civil codes and courtesies that govern—or once governed—the way we live. Perhaps he didn’t want to dwell too much on the negative, leaving it to those conservative commentators who, as he puts it, make a living out of mourning the death of our way of life, particularly the decline of day-to-day civility. Yet the disappearance of the voluntary queue (it thrives where enforced, such as in banks and supermarkets) perfectly encapsulates how much the English have changed in recent decades.

Hitchings provides an elegant, well-researched history of the influences that have shaped the English sense of what was right and proper. Covering everything from the Italian Renaissance and Castiglione’s Book of the Courtier to postwar America and Emily Post’s Etiquette, he explains the importance of outside influences on England’s sense of itself as a civil society. He’s cool-headed, but not so detached that he can’t share examples of his own experience of rudeness and socially crossed wires. He recounts how, when helping an elderly woman with her heavy groceries, he was surprised by the remark of a woman cycling past: “Don’t think you’re something you’re not, you sexist prick.”

Developing Nations Put Nuclear on Fast-Forward

Fast reactors can shrink nuclear-waste stockpiles, but can designers tame the inherent hazards?

By Peter Fairley 

Fast reactors, whose high-speed neutrons can break down nuclear waste, are on the road to commercialization. That message has been advanced forcefully by Russia, China, and India.

At a global conference sponsored by the International Atomic Energy Agency last week in Paris, Russia and India described large demonstration plants that will start operating next year and further deployments that are still in the design phase. China, meanwhile, described a broad R&D effort to make fast reactors comprise at least one-fifth of its nuclear capacity by 2030.

By breaking down the longest-lasting and hottest components of spent fuel from light-water reactors, fast reactors would need only 2 percent of the space required by a conventional reactor to store spent fuel. Fast reactors would also reduce the time that the waste must remain in storage from roughly 300,000 years to just 300. “Are they going to eliminate the need for geological repositories? No. But it will reduce the burden,” says Thierry Dujardin, acting deputy director general for the Organization for Economic Cooperation and Development’s Paris-based Nuclear Energy Agency.

Despite that enticing promise, however, the inherent hazards of today’s state-of-the-art fast reactors also loomed large at the Paris confab, which concluded a few days before Monday’s two-year anniversary of the Fukushima accident in Japan. At the conference, Dujardin said that fuel safety and prevention of severe accidents need to be “high priorities” for fast reactor research.

The problem with most fast reactors in construction or development is the molten sodium that cools their cores. Molten sodium is highly corrosive and explodes on contact with water and oxygen. Most dangerous, however, is that the sodium-cooled fast reactor, or SFR, exhibits what physicists call positive reactivity. Unlike conventional reactors, which experience their fastest possible chain reaction when operating at full power, the SFR’s chain reaction is capable of further acceleration than its equipment is designed to handle. This puts such reactors at greater risk of a runaway reaction that could cause a core meltdown or breach its steel containment vessel.

Many technical presentations at last week’s meeting focused on improved materials and designs intended to protect SFRs from the most extreme accidents imaginable. But alternative core designs were also well represented, and some countries are hedging their bets by testing the alternatives. A U.S. company, Transatomic Power, recently revealed designs for a new kind of molten salt reactor, which has different safety characteristics than a reactor cooled by molten sodium metal and should be compact and cheap to manufacture (see “Safer Nuclear Power at Half the Price”).

A bailout for Cyprus, a geopolitical failure for Russia

Nothing succeeds (optional comma) as planned

By Max Fisher

Cyprus and the European Union have reached a bailout deal for the tiny and troubled euro-zone economy. That’s good news for Cyprus (even if the deal turns out to be bad, at least it’s an end to the uncertainty) and good news for the European Union. But the resolution of the entire Cyprus bailout saga, in the terms described, would be bad news for Russia: it would signal a failed bid by Moscow to reassert some of its once-vast power in Europe and to stand up as an alternative to the European Union.

Russia has a few interests at stake in the European Union bailout for Cyprus. The first and most obvious is that Russian citizens stand to lose billions of dollars worth of savings in Cyprus’s banking sector, which serves as a low-tax haven for Russian oligarchs. Those oligarchs, remember, wield outsize political power within Russia. The second is that Cyprus is a political client state of Moscow’s, a helpful little ally on such matters as sending arms to Syria. The third is symbolic, and doesn’t actually have that much to do with Cyprus itself, but with Russia’s standing in Europe.

The bailout deal-making was a sort of stand-off between Moscow and the European Union. Which of Cyprus’s two major benefactors could get a better deal?

Last week, as Cypriot lawmakers tried to hash out the bailout with the E.U., they also tried to negotiate for a loan extension and line of credit from Russia. The idea was that the more they got from Russia, the less they’d need from the E.U., and the less painful the bailout would be. Cyprus wanted this so badly that it even offered Russia stakes in its recently discovered natural gas reserves.

This was an opportunity for Russia to make a client state even more loyal and to present itself as the alternative to the E.U., part of a decades-old effort to pull Eastern Europe into Moscow’s orbit and thus lessen the relative power of the West. During negotiations, Russian Prime Minister Dmitri Medvedev publicly criticized the E.U., calling it “an elephant in a china shop.”

Cypriots Mourn Collapse of Livelihoods as Banks Crash

Cypriots are now looking ahead to a less distinguished period of their intertwined history

By Tom Stoukas

For Cypriots trying to make sense of the past 10 days, the worst is yet to come.

While they may be staying in the euro for now, people on the island are lamenting the demise of an economy built on the banks that ended up sinking it. Cyprus sealed an agreement with creditors overnight that will shut one of its largest lenders in return for 10 billion euros ($13 billion) of aid.

“The problem is not solved and some bad things are going to happen in the next six months,” said Maria Philippou, 45, a civil servant in Nicosia and a mother of three. “The leaders are to blame in Cyprus and the European Union. They let the bankers do whatever they wanted.”

Cyprus is the fifth country to tap international aid since the European debt crisis erupted in Greece in 2009. The accord, revised after a March 16 deal was rejected in the Cypriot Parliament because of a tax on smaller depositors, exempts bank accounts below the insured limit of 100,000 euros. It doesn’t spare people’s livelihoods, locals said.

“We will have even more people unemployed,” said Epifanos Epifaniou, 50, who used to drive a delivery truck in Nicosia and has been jobless for six months. “It’s a huge problem. Nobody knows where we are heading.”

Cypriot President Nicos Anastasiades agreed to shut Cyprus Popular Bank Pcl, the second biggest, under pressure from his euro partners and the International Monetary Fund as negotiations stretched into the night.

Protesting

Hundreds of protesters massed outside the floodlit presidential palace in Nicosia late yesterday, shouting for the bailout “troika” of the EU, European Central Bank and IMF to leave Cyprus, a country of 862,000 people.

The streets in Nicosia were quieter today because of a national holiday to celebrate Greek independence, with school children parading to the Greek embassy. Lines remained at Popular Bank’s cash machines after the daily limit was lowered to 100 euros yesterday from 260 euros.

Anastasiades was running out of options after failing to get help from the Russians, whose holdings in Cypriot banks Moody’s Investors Service estimated at $31 billion.

The deal imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank (CPB) as it’s wound down.

Destruction

“I’m not happy with the agreement because it will be a destroyer for the Cyprus economy,” said Yannis Emmanouilidis, 50, a chemist. “Because if our bank system is destroyed, the whole economy will be destroyed.”

Bank assets in Cyprus swelled to 126.4 billion euros at the end of January, seven times the size of the 18 billion-euro economy, from 78 billion euros in 2007, data from the ECB and the EU’s statistics office show.

The Great Recession Has Been Followed by the Grand Illusion

Don't be fooled by the latest jobs numbers. The unemployment situation in the U.S. is still dire

By MORTIMER ZUCKERMAN

The Great Recession is an apt name for America's current stagnation, but the present phase might also be called the Grand Illusion—because the happy talk and statistics that go with it, especially regarding jobs, give a rosier picture than the facts justify.

The country isn't really advancing. By comparison with earlier recessions, it is going backward. Despite the most stimulative fiscal policy in American history and a trillion-dollar expansion to the money supply, the economy over the last three years has been declining. After 2.4% annual growth rates in gross domestic product in 2010 and 2011, the economy slowed to 1.5% growth in 2012. Cumulative growth for the past 12 quarters was just 6.3%, the slowest of all 11 recessions since World War II.

And last year's anemic growth looks likely to continue. Sequestration will take $600 billion of government expenditures out of the economy over the next 10 years, including $85 billion this year alone. The 2% increase in payroll taxes will hit about 160 million workers and drain $110 billion from their disposable incomes. The Obama health-care tax will be a drag of more than $30 billion. The recent 50-cent surge in gasoline prices represents another $65 billion drag on consumer cash flow.

February's headline unemployment rate was portrayed as 7.7%, down from 7.9% in January. The dip was accompanied by huzzahs in the news media claiming the improvement to be "outstanding" and "amazing." But if you account for the people who are excluded from that number—such as "discouraged workers" no longer looking for a job, involuntary part-time workers and others who are "marginally attached" to the labor force—then the real unemployment rate is somewhere between 14% and 15%.

Other numbers reported by the Bureau of Labor Statistics have deteriorated. The 236,000 net new jobs added to the economy in February is misleading—the gross number of new jobs included 340,000 in the part-time, low wage category. Many of the so-called net new jobs are second or third jobs going to people who are already working, rather than going to those who are unemployed.

The number of Americans unemployed for six months or longer went up by 89,000 in February to a total of 4.8 million. The average duration of unemployment rose to 36.9 weeks, up from 35.3 weeks in January. The labor-force participation rate, which measures the percentage of working-age people in the workforce, also dropped to 63.5%, the lowest in 30 years. The average workweek is a low 34.5 hours thanks to employers shortening workers' hours or asking employees to take unpaid leave.

Since World War II, it has typically taken 24 months to reach a new peak in employment after the onset of a recession. Yet the country is more than 60 months away from its previous high in 2007, and the economy is still down 3.2 million jobs from that year.

Bailout Strains European Ties

Cyprus Deal Preserves Euro but Sows Mistrust Between Continent's Haves, Have-Nots

A deal reached Monday in Brussels may have saved Cyprus from becoming the first country to crash out of the euro, but it came at the cost of widening the political mistrust between the strong economies of Europe's north and the weaklings of the south.

By GABRIELE STEINHAUSER , MARCUS WALKER,MATINA STEVIS 

Several officials familiar with talks in Nicosia and Brussels over the €10 billion ($13 billion) rescue for the island described more than a week of chaotic negotiations. European officials cited Cypriot foot-dragging, reversals and dropped communications, a situation one European Union official called "terrifying." Cypriot officials described their European opposites as demanding and inflexible.

The fresh bitterness over the Cyprus mess—which appears deeper than at similar points during Greece's extended financial turmoil—could hamper future attempts to fix the bloc's flaws. Germany, the euro zone's biggest economy, prevailed as it typically has in the negotiations, but at the price of growing resentment over what some Europeans saw as its bullying of a tiny nation.

The accord will see big depositors and other creditors lose large sums following the radical downsizing of the country's biggest bank and the shuttering of its second largest—the first time such a "bail-in" has been seen in the three-year euro-zone crisis.

On Monday, Cypriots waited nervously for banks to reopen after their March 15 closure, wondering whether there would be further deposit flight. The country's central bank said late in the day that all of the country's lenders would remain closed until Thursday, after saying earlier that all but the two largest would reopen Tuesday.

Markets greeted the deal with an optimism that quickly faded when Dutch finance minister Jeroen Dijsselbloem suggested in an interview that big bank depositors and senior creditors may be expected to contribute to future euro-zone bailout packages. Later, after bank shares and other euro-based assets fell on the remarks, he appeared to backtrack in a message from his Twitter account: "Cyprus [is a] specific case. Programmes tailor-made to situation, no models or templates used."

A Better Cyprus Deal

The discipline of failure and loss makes a comeback

by WSJ

Practice still makes imperfect, but Sunday's overnight deal to save Cyprus is a big improvement over the last attempt. Brussels and Nicosia have finally agreed to try an orderly, market-based solution to the country's financial mess—even if it did first have to exhaust every bad idea.

Under Sunday's deal, Laiki Bank, the country's second largest, will go bust immediately. All of its creditors will be wiped out, though insured deposits of less than €100,000 will be protected. Larger depositors will be given equity shares in a "bad bank" that will hold Laiki's more dubious assets. The bank's viable assets will be transferred to Bank of Cyprus, the less troubled of the country's terrible two.

Meanwhile, Bank of Cyprus's uninsured depositors and other creditors will take haircuts sufficient to ensure a 9% capital ratio, likely in the neighborhood of 35%. Not a cent of the EU and IMF's €10 billion rescue will go toward recapitalizing a Cypriot bank. The Cyprus government will be left with debt of 140% of GDP—worrisomely high, but lower than originally envisioned.

All of this doesn't go as far as our suggestion last week that both Bank of Cyprus and Laiki be put into resolution and that uninsured deposits be swapped for bank shares. But Sunday's deal gets most of the way there, while eliminating the worst features of the earlier deal.

By protecting insured depositors, the deal honors a government promise that is an implicit contract. The forced transfer of large deposits into equity is unfortunate, but then it is also a reminder that banks fail and that uninsured deposits are, well, uninsured. This is a useful lesson in the limits of government guarantees and a welcome blow against moral hazard.

The survival of Bank of Cyprus is a political sop to protect Cypriot jobs, though it also means the bank might eventually need another restructuring down the road. Bank of Cyprus will assume Laiki's €9 billion in emergency debt to the European Central Bank, and more borrowers are likely to default as property prices continue to fall. Don't be surprised if Bank of Cyprus needs to take another bite from creditors.

Can It Happen in US?

It already has

By Thomas Sowell

The decision of the government in Cyprus to simply take money out of people's bank accounts there sent shock waves around the world. People far removed from that small island nation had to wonder: "Can this happen here?"

The economic repercussions of having people feel that their money is not safe in banks can be catastrophic. Banks are not just warehouses where money can be stored. They are crucial institutions for gathering individually modest amounts of money from millions of people and transferring that money to strangers whom those people would not directly entrust it to.

Multi-billion dollar corporations, whose economies of scale can bring down the prices of goods and services -- thereby raising our standard of living -- are seldom financed by a few billionaires.

Far more often they are financed by millions of people, who have neither the specific knowledge nor the economic expertise to risk their savings by investing directly in those enterprises. Banks are crucial intermediaries, which provide the financial expertise without which these transfers of money are too risky.

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.

Whether in Cyprus or in other countries, politicians tend to think in short run terms, if only because elections are held in the short run. Therefore, there is always a temptation to do reckless and short-sighted things to get over some current problem, even if that creates far worse problems in the long run.

Seizing money that people put in the bank would be a classic example of such short-sighted policies.
After thousands of American banks failed during the Great Depression of the 1930s, there were people who would never put their money in a bank again, even after the Federal Deposit Insurance Corporation was created, to have the federal government guarantee individual bank accounts when the bank itself failed.

For years after the Great Depression, stories appeared in the press from time to time about some older person who died and was found to have substantial sums of money stored under a mattress or in some other hiding place, because they never trusted banks again.

After going back and forth, the government of Cyprus ultimately decided, under international pressure, to go ahead with its plan to raid people's bank accounts. But could similar policies be imposed in other countries, including the United States?

One of the big differences between the United States and Cyprus is that the U.S. government can simply print more money to get out of a financial crisis. But Cyprus cannot print more euros, which are controlled by international institutions.

Does that mean that Americans' money is safe in banks? Yes and no.

Cyprus: It’s not over yet

The price of “bailout fatigue”

By Felix Salmon

This was not a good weekend for Russian billionaires. First, Boris Berezovsky was found dead at his English country estate. Now, all the uninsured depositors (read: Russian plutocrats) at Cyprus’s two largest banks are going to be hit much, much harder than they feared they might be when the Cyprus crisis first erupted last week.

Back then — a long, long week ago — Cypriot president Nicos Anastasiades stood firm: there was no way he would allow uninsured depositors to lose more than 10% of their money. What a difference a week makes: now, if your uninsured deposits are at the Bank of Cyprus, you’re probably going to lose about 40% And if they’re at Laiki, you’re going to lose everything.

The agreement between the Cypriot government and the Troika of the EU, IMF, and ECB is a bold and brutal geopolitical power-play. There might be language in the official communiqué about how “The Eurogroup looks forward to an agreement between Cyprus and the Russian Federation on a financial contribution”, but given the billions of euros that Russians are being forced to contribute unwillingly, the chances that they’ll happily throw a bit more money into the pot have to be tiny.

In the Europe vs Russia poker game, the Europeans have played the most aggressive move they can, essentially forcing Russian depositors to contribute maximally to the bailout against their will. If this is how the game ends, it’s an unambiguous loss for Russia, and a win for the EU. For one thing, there won’t be any capital controls: that’s a good thing. (Some deposits at Bank of Cyprus will be frozen, which is a kind of capital control, but there aren’t corralito-style barriers on the general movement of euros in and out of the country.) On top of that, public markets have been left unruffled: there’s been no panic on Europe’s bolsas, partly because the biggest hit has been taken by private Russian citizens.

Who Killed the New Majority?

The GOP sealed its own fate with decades of support for war and immigration

By PATRICK J. BUCHANAN

The Republican National Committee has produced an “autopsy” on what went wrong in 2012, when the party failed to win the White House and lost seats in Congress.

Yet, the crisis of the Grand Old Party goes back much further.

First, some history. The Frank Lloyd Wright of the New Majority was Richard Nixon, who picked up the pieces of the party after Goldwater’s defeat had left Republicans with just a third of the House and Senate.

In 1966, Nixon led the GOP back to a stunning victory, picking up 47 House seats. In 1968, he united the Rockefeller and Reagan wings and held off an October surge by Hubert Humphrey, which cut a 13-point Nixon lead to less than a point in four weeks.

In 1972, Nixon swept 49 states. The New Majority was born. How did he do it?

Nixon sliced off from FDR’s New Deal coalition Northern Catholics and ethnics—Irish, Italians, Poles, East Europeans—and Southern Christian conservatives. Where FDR and Woodrow Wilson had won all 11 Southern States six times, Nixon swept them all in ’72. And where Nixon won only 22 percent of the Catholic vote against JFK, he won 55 percent against George McGovern in 1972.

What killed the New Majority?

First, there was mass immigration, which brought in 40 to 50 million people, legal and illegal, poor and working class, and almost all from the Third World. The GOP agreed to the importation of a vast new constituency that is now kicking the GOP into an early grave.

When some implored the party in 1992 to secure the border and declare a “timeout” on legal immigration to assimilate the millions already here, the party establishment repudiated any such ideas.

“We are a nation of immigrants!” it huffed. Well, we sure are now.

And when amnesty is granted to the 12 million illegals, as GOP senators are preparing to do, that should advance the death of the GOP as a national party by turning Colorado, Nevada and Arizona blue, and putting even Texas in play.

Have politicians had a mental blackout?

There’s a real risk of energy shortages in Britain, yet still the political class is obsessed with cutting fossil fuel use

by Rob Lyons 

‘Britain faces gas supply crisis as storage runs dry’, warned Reuters last week. Unseasonably cold weather has meant that demand for gas has shot up just as it should be going down with the arrival of spring. Just to add a little spice to the warnings, tens of thousands of homes were left without power as blizzards knocked out power lines in Northern Ireland and Scotland. A taste of things to come?

As it goes, the claim that gas supplies could run out by 8 April is very much a worst-case scenario. There is normally plenty of supply, from a combination of the North Sea, Europe and shipments of liquefied gas coming from countries further afield, particularly Qatar. Nonetheless, it is daft that a modern, highly developed economy like the UK should even be discussing such things. That we are is the product of years of inertia in central government and an obsession with self-imposed greenhouse-gas emissions targets.

So perversely, just as a set of circumstances was emerging that showed how close to the wind the UK is sailing on energy security, Britain has been closing power stations. For example, on Friday, Didcot A power station in Oxfordshire was disconnected from the National Grid after 43 years. The 2,000-megawatt plant got the chop because it burns coal. Older coal plants are being phased out under EU regulations. Indeed, according to Alistair Buchanan, the boss of energy regulator Ofgem, 10 per cent of the UK’s electricity generating capacity is due to be switched off this month.

Buchanan notes the speed at which plant closures will now kick in: ‘If you can imagine a ride on a rollercoaster at a fairground, then this winter, we are at the top of the circuit and we head downhill – fast. Within three years, we will see the reserve margin of generation fall from about 14 per cent to less than five per cent. That is uncomfortably tight.’ In fact, some of those coal plants are closing ahead of schedule because their remaining operating hours have been used up quickly to take advantage of low coal prices. At a time when complaints about domestic energy costs are getting louder and louder, we are turning our back on the cheapest form of power available.

We’ve known for quite some time that there was the potential for a major shortfall in energy supplies. Coal and nuclear stations have been shutting but alternatives have fallen short. Wind is expensive to build and intermittent in operation. At some of the coldest periods of the year, wind supply can fall to nearly zero. Renewable UK celebrated the fact that wind produced a record proportion of UK electricity in 2012 - but it was still just 5.5 per cent of the total. New nuclear stations should be being built now, but years of political indecision mean that not a single new plant has actually got agreement yet. Even now, suppliers are haggling with government over guaranteed prices, though planning permission for Hinkley Point C - a new station on the site of two older nuclear reactors - has at least been approved. Nonetheless, it will still take eight to 10 years to build the plant.

In Instanbul: The Rise & Fall of Society

Since the State thrives on what it expropriates the general decline in production which it induces by its avarice foretells its own doom

by Chris Mayer

It’s Istanbul, not Constantinople, as the song goes. In this history is an omen for any powerful state (read: the U.S.). A somewhat obscure essayist knew all about it back in 1959. His little book deserves wider circulation. Below, we’ll take a look.

Constantinople was once the seat of a vast, rich empire. The successor to Rome, it ruled over a land that stretched from the Caucasus to the Adriatic, from the Danube to the Sahara. The Dark Ages were dark only if you ignore the flourishing civilization on the Bosporus.

Historian Merle Severy writes: “Medieval visitors from the rural West, where Rome had shrunk to a cow town, were struck dumb by this resplendent metropolis.” There were half a million people here. Its harbors full of ships, “its markets filled with silks, spices, furs, precious stones, perfumed woods, carved ivory, gold and silver and enameled jewelry.”

This civilization lasted for a thousand years.

Actually, it lasted for 1,123 years and 18 days after Constantine the Great made the city his new Christian Rome. On May 29, 1453, Constantinople fell to the Turks.

Renamed Istanbul, the city would serve as the seat of yet another great empire, the Ottoman. And this one would last nearly five centuries. In the 16th and 17th centuries, the Ottoman Empire was perhaps the most powerful state on Earth. It was on one heck of a roll. After Constantinople, the Ottomans took Athens in 1458. Then it was on to Tabriz (1514), Damascus (1516), Cairo (1517), Belgrade (1521), Rhodes (1522), Baghdad (1534), Buda (1541), Tripoli (1551) and Cyprus (1571).

They almost took Vienna. The powers of Western Europe drew the line in the sand there. Interesting to think what would’ve happened if the Turks took Vienna. All of Western Europe would be at their feet. If they had succeeded, perhaps the majority of Europeans would be answering the call to prayer, echoing from the minarets of cathedrals-turned-mosques…

Yet the Ottoman Empire, too, would crumble. It was constantly at war. By one historian’s reckoning, the longest period of peace was just 24 years in nearly six centuries of reign.

In 1923, with the founding of the Republic of Turkey, Ankara became the seat of government. As historian John Freely notes: “For the first time in 16 centuries, the ancient city on the Golden Horn was no longer reigning over a world empire with only the presence of the monuments to remind one of its imperial past.”

It is not hard to think of the U.S. in the context of these great powers.

*** Enter Chodorov

One of the books I had tucked in my bag that I read while in Turkey was Frank Chodorov’sThe Rise & Fall of Society. This is a slender 168-page book by a great, if somewhat forgotten, essayist and editor. It gives a tightly reasoned answer to the question “Why do societies rise and fall?”

Chodorov’s thesis is that “every collapse of which we have sufficient evidence was preceded by the same course of events.”

The course of events goes like this: “The State, in its insatiable lust for power, increasingly intensified its encroachments on the economy of the nation…” and finally gets to the point where the economy can no longer support the state at the level it is accustomed to. Society can’t meet the strain, so “society collapsed and drew the State down with it.”

The pattern is always the same, regardless of size or ideology. The state can grow only by taking. “Since the State thrives on what it expropriates,” Chodorov writes, “the general decline in production which it induces by its avarice foretells its own doom.”

Chodorov bases much of his thesis on what he calls “the law of parsimony.” In essence, it is simply that people try to get the most satisfaction with the least amount of effort. It is a natural law of human behavior.

Anatomy of the Bank Run

Fractional reserve banks, being inherently insolvent, are uninsurable

[This article is featured in chapter 79 of Making Economic Sense by Murray Rothbard and originally appeared in the September, 1985 edition of The Free Market]

by Murray N. Rothbard
It was a scene familiar to any nostalgia buff: all-night lines waiting for the banks (first in Ohio, then in Maryland) to open; pompous but mendacious assurances by the bankers that all is well and that the people should go home; a stubborn insistence by depositors to get their money out; and the consequent closing of the banks by government, while at the same time the banks were permitted to stay in existence and collect the debts due them by their borrowers.

In other words, instead of government protecting private property and enforcing voluntary contracts, it deliberately violated the property of the depositors by barring them from retrieving their own money from the banks.

All this was, of course, a replay of the early 1930s: the last era of massive runs on banks. On the surface the weakness was the fact that the failed banks were insured by private or state deposit insurance agencies, whereas the banks that easily withstood the storm were insured by the federal government (FDIC for commercial banks; FSLIC for savings and loan banks).

But why? What is the magic elixir possessed by the federal government that neither private firms nor states can muster? The defenders of the private insurance agencies noted that they were technically in better financial shape than FSLIC or FDIC, since they had greater reserves per deposit dollar insured. How is it that private firms, so far superior to government in all other operations, should be so defective in this one area? Is there something unique about money that requires federal control?

Why Cyprus 2013 is worse than the KreditAnstalt (1931) and Argentina 2001 crises

The Cyprus 2013, like any other event, can be thought in political and economic terms

by Martin Sibileau 

Political analysis: Two dimensions

Politically, I can see two dimensions. The first dimension belongs to the geopolitical history of the region, with the addition of the recently discovered natural gas reserves. The historical relevance goes as far back as 1853, the year the Crimean War began. The Crimean War took place in the adjacent Black Sea, but the political interest was the same: To avoid the expansion of Russia into the Mediterranean. The relevance of this episode was the break-up of the balance of power established after the Napoleonic Wars, with the Congress of Vienna, in 1815. From then on, a whole new series of unexpected events would lead to a weaker France, a stronger Prussia, new alliances and a final resolution sixty years later: World War I.  It is within this same framework that I see Cyprus 2013 as a very relevant political event: Should Russia eventually obtain a bailout of Cyprus (as I write, this does not seem likely) against a pledge on the natural gas reserves or a naval base, a new balance of power will have been drafted in the region, with Israel as the biggest loser.

The second political dimension refers to a point I made exactly a year ago, precisely inspired in the KreditAnstalt event of 1931. In an article titled: “On gold, stocks, financial repression and the KreditAnstalt of 1931” I wrote:

“(The KreditAnstalt event) was triggered because France, a public sector creditor,introduced a political condition to Austria, in exchange for a bailout of the KreditAnstalt. Today, like in 1931, in the Euro zone, the public sector is increasingly the creditor of the public sector. In 1931, England and France were creditors of Austria and demanded conditions that no private investor would have demanded.

Private investors live and die by their profits and losses. Politicians live and die by the votes they get. Private investors worry about the sustainability and capital structure of the borrower, the collateralization and the funding profile of their credits. Politicians worry about the sustainability of their power. It’s a fact and we must learn to live with it.

In 2012, Greece and increasingly other peripheral EU countries owe to other governments, the IMF and the European Central Bank. Private investors have been wiped out and will not return any moment soon. We fear that just like in 1931, when the next bailout is due either for Greece again or Portugal or Spain, political conditions will be demanded that no private investor in his/her right mind would ever have demanded.

Think of it... What in the world had the customs union between Austria and Germany in 1931 had to do with the capitalization ratio of the KreditAnstalt??? Nothing! Yet, millions and millions of people worldwide were condemned to misery in only a matter of days as their savings evaporated! Ladies and gentlemen, welcome to the world of fiat currencies! You have been warned! If months from now you read in the papers that the EU Council irresponsibly demands strange things from a peripheral country in need of a bailout, remember the KreditAnstalt. Remember 1931.