Cyprus and the Death of Deposit Insurance
While the New York Times tut-tuts Cyprus' woes and sniffs that it can't happen here, in Real Clear Politics, Robert Tracinski is a bit more circumspect take on what Cyprus could entail. He dubs it the potential "Death of Deposit Insurance:"
Cyprus is a signal that this whole system is failing. Government regulation doesn't actually guarantee solvency; in fact, it is the insolvency of the governments themselves that triggered the Euro crisis. Moreover, when things really go wrong, the government can't actually guarantee all of the deposits—and now we're starting to wonder whether they're still interested in trying.
When this system starts to come apart, its consequences are worse than an ordinary bank panic. In the bad old days, when individual banks and their depositors were on their own, if one bank failed—and if it was not bought out or rescued by another bank—its depositors might take a haircut, but only after shareholders and bondholders were wiped out. This gave all of the parties a strong incentive to make sure the bank was solvent and wasn't taking too many risks. Under the current system, all of these parties are absolved from such a responsibility, but we pay a heavy price for it. When things go wrong, every depositor at every bank gets a haircut, while politics decides who gets hit worse. In the Cyprus deal, European bondholders will be protected, but Russian oligarchs will be looted, and small Cypriot depositors will get caught in the middle. Remember, also, that all of this is being done to avoid a run on the banks—but that is precisely what has been happening in Cyprus, with depositors emptying the nation's cash machines in an attempt to withdraw their money before it could be seized.
Combine this news with Gretchen Morgenson's summary of a Senate inquiry into huge trading losses at JPMorgan Chase, one of our too-big-to-fail megabanks. The bottom line is that big banks are still too big to fail and they are still taking undeclared risks backed by taxpayer money. Across the board, the general sense is that the system is failing and government leaders aren't really trying to reform it. They're just trying to restore the status quo ante, setting us up for a whole new round of financial crisis.
Can Cyprus happen here? Well, some on the left are already floating plans to rescind the tax exemptions on retirement accounts, making a grab for a big pile of your savings.
As I mentioned in the previous post, lots of people in power on the left believe that the man has got to be hiding his stash somewhere -- and they want it badly to keep the 80 year old welfare state afloat another day.
Sooner or later, the man turns out to be you.
Update: In 2011, Thomas Friedman hilariously asked, "Can Greeks Become Germans?" Probably not, other than through the use of 1941-era techniques, the ultimate shotgun merger. But it's possible that "Kiwis could face Cyprus-style trim" -- and that's one haircut style that won't be very well received.
Related: "Um… OK, so China might be bubble about to pop, too," Steve Green writes. "I’m starting to wonder if anybody is going to make it out of 2013 alive."
I don't know -- let me check with the Times...
[jwplayer config="pjmedia_eddriscoll" mediaid="61329"]
...Whew, that's a relief.