“If these worries become really serious, . . .
[s]mall savers will take their money out of banks and resort to
household safes and a shotgun.”
-- Martin Hutchinson on the attempted EU raid on private deposits in Cyprus banks
The deposit confiscation scheme has long been in the making. US depositors could be next . . . .
On Tuesday, March 19, the national legislature of
Cyprus overwhelmingly rejected a proposed levy on bank deposits as a
condition for a European bailout. Reuters called it
“a stunning setback for the 17-nation currency bloc,” but it was a
stunning victory for democracy. As Reuters quoted one 65-year-old
pensioner, “The voice of the people was heard.”
The EU had warned that it would withhold €10
billion in bailout loans, and the European Central Bank (ECB) had
threatened to end emergency lending assistance for distressed Cypriot
banks, unless depositors – including small savers – shared the cost of
the rescue. In the deal rejected by the legislature, a one-time levy on depositors
would be required in return for a bailout of the banking system.
Deposits below €100,000 would be subject to a 6.75% levy or “haircut”,
while those over €100,000 would have been subject to a 9.99% “fine.”
The move was bold, but the battle isn’t over yet.
The EU has now given Cyprus until Monday to raise the billions of euros
it needs to clinch an international bailout or face the threatened
collapse of its financial system and likely exit from the euro currency
zone.
The Long-planned Confiscation Scheme
The deal pushed by the “troika” – the EU, ECB and
IMF – has been characterized as a one-off event devised as an emergency
measure in this one extreme case. But the confiscation plan has long
been in the making, and it isn’t limited to Cyprus.
In a September 2011 article in the Bulletin of the Reserve Bank of New Zealand titled “A Primer on Open Bank Resolution,”
Kevin Hoskin and Ian Woolford discussed a very similar haircut plan
that had been in the works, they said, since the 1997 Asian financial
crisis. The article referenced recommendations made in 2010 and 2011 by
the Basel Committee of the Bank for International Settlements, the
“central bankers’ central bank” in Switzerland.
The purpose of the plan, called the Open Bank Resolution
(OBR) , is to deal with bank failures when they have become so
expensive that governments are no longer willing to bail out the
lenders. The authors wrote that the primary objectives of OBR are to:
· ensure that, as far as possible, any losses are ultimately borne by the bank’s shareholders and creditors . . . .
The spectrum of “creditors” is defined to include depositors:
At one end of the spectrum, there are large
international financial institutions that invest in debt issued by the
bank (commonly referred to as wholesale funding). At the other end of
the spectrum, are customers with cheque and savings accounts and term
deposits.
Most people would be surprised to learn that they
are legally considered “creditors” of their banks rather than customers
who have trusted the bank with their money for safekeeping, but that
seems to be the case. According to Wikipedia:
In most legal systems, . . . the funds deposited
are no longer the property of the customer. The funds become the
property of the bank, and the customer in turn receives an asset called a
deposit account (a checking or savings account). That deposit account
is a liability of the bank on the bank's books and on its balance
sheet. Because the bank is authorized by law to make loans up to a
multiple of its reserves, the bank's reserves on hand to satisfy payment
of deposit liabilities amounts to only a fraction of the total which
the bank is obligated to pay in satisfaction of its demand deposits.
The bank gets the money. The depositor becomes
only a creditor with an IOU. The bank is not required to keep the
deposits available for withdrawal but can lend them out, keeping only a
“fraction” on reserve, following accepted fractional reserve banking
principles. When too many creditors come for their money at once, the
result can be a run on the banks and bank failure.
The New Zealand OBR said the creditors had all
enjoyed a return on their investments and had freely accepted the risk,
but most people would be surprised to learn that too. What return do you
get from a bank on a deposit account these days? And isn’t your deposit
protected against risk by FDIC deposit insurance?
Not anymore, apparently. As Martin Hutchinson observed in Money Morning, “if governments can just seize deposits by means of a ‘tax’ then deposit insurance is worth absolutely zippo.”
The Real Profiteers Get Off Scot-Free
Felix Salmon wrote in Reuters of the Cyprus confiscation:
Meanwhile, people who deserve to lose money
here, won’t. If you lent money to Cyprus’s banks by buying their debt
rather than by depositing money, you will suffer no losses at all. And
if you lent money to the insolvent Cypriot government, then you too will
be paid off at 100 cents on the euro. . . .
The big winner here is the ECB, which has
extended a lot of credit to dubiously-solvent Cypriot banks and which is
taking no losses at all.
It is the ECB that can most afford to take the
hit, because it has the power to print euros. It could simply create the
money to bail out the Cyprus banks and take no loss at all. But
imposing austerity on the people is apparently part of the plan. Salmon
writes:
From a drily technocratic perspective, this move
can be seen as simply being part of a standard Euro-austerity program:
the EU wants tax hikes and spending cuts, and this is a kind of tax . . .
.
The big losers are working-class Cypriots, whose
elected government has proved powerless . . . . The Eurozone has always
had a democratic deficit: monetary union was imposed by the elite on
unthankful and unwilling citizens. Now the citizens are revolting: just
look at Beppe Grillo.
But that was before the Cyprus government stood
up for the depositors and refused to go along with the plan, in what
will be a stunning victory for democracy if they can hold their ground.
It CAN Happen Here
Cyprus is a small island, of little apparent
significance. But one day, the bold move of its legislators may be
compared to the Battle of Marathon, the pivotal moment in European
history when their Greek forebears fended off the Persians, allowing
classical Greek civilization to flourish. The current battle on this
tiny island has taken on global significance. If the technocrat bankers
can push through their confiscation scheme there, precedent will be
established for doing it elsewhere when bank bailouts become prohibitive
for governments.
That situation could be looming even now in the United States. As Gretchen Morgenson warned
in a recent article on the 307-page Senate report detailing last year’s
$6.2 billion trading fiasco at JPMorganChase: “Be afraid.” The report
resoundingly disproves the premise that the Dodd-Frank legislation has
made our system safe from the reckless banking activities that brought
the economy to its knees in 2008. Writes Morgenson:
JPMorgan . . . Is the largest derivatives dealer
in the world. Trillions of dollars in such instruments sit on its and
other big banks’ balance sheets. The ease with which the bank hid losses
and fiddled with valuations should be a major concern to investors.
Pam Martens observed in a March 18th article that JPMorgan was gambling in the stock market with depositor funds. She writes, “trading stocks with customers’ savings deposits – that truly has the ring of the excesses of 1929 . . . .”
The large institutional banks not only could
fail; they are likely to fail. When the derivative scheme collapses and
the US government refuses a bailout, JPMorgan could be giving its
depositors’ accounts sizeable “haircuts” along guidelines established by
the BIS and Reserve Bank of New Zealand.
Time for Some Public Sector Banks?
The bold moves of the Cypriots and such firebrand
political activists as Italy’s Grillo are not the only bulwarks against
bankster confiscation. While the credit crisis is strangling the
Western banking system, the BRIC countries – Brazil, Russia, India and
China – have sailed through largely unscathed. According to a May 2010 article in The Economist, what has allowed them to escape are their strong and stable publicly-owned banks.
Professor Kurt von Mettenheim of the Sao Paulo Business School of B...,
“The credit policies of BRIC government banks help explain why these
countries experienced shorter and milder economic downturns during
2007-2008.” Government banks countered the effects of the financial
crisis by providing counter-cyclical credit and greater client
confidence.
Russia is an Eastern European country that weathered the credit crisis although being very close to the Eurozone. According to a March 2010 article in Forbes:
As in other countries, the [2008] crisis
prompted the state to take on a greater role in the banking system.
State-owned systemic banks . . . have been used to carry out anticrisis
measures, such as driving growth in lending (however limited) and
supporting private institutions.
In the 1998 Asian crisis, many Russians who had
put all their savings in private banks lost everything; and the credit
crisis of 2008 has reinforced their distrust of private banks. Russian
businesses as well as individuals have turned to their government-owned banks as the more trustworthy alternative. As a result, state-owned banks are expected to continue dominating the Russian banking industry for the foreseeable future.
The entire Eurozone conundrum is unnecessary. It
is the result of too little money in a system in which the money supply
is fixed, and the Eurozone governments and their central banks cannot
issue their own currencies. There are insufficient euros to pay
principal plus interest in a pyramid scheme in which only the principal
is injected by the banks that create money as “bank credit” on their
books. A central bank with the power to issue money could remedy that
systemic flaw, by injecting the liquidity needed to jumpstart the
economy and turn back the tide of austerity choking the people.
The push to confiscate the savings of
hard-working Cypriot citizens is a shot across the bow for every working
person in the world, a wake-up call to the perils of a system in which
tiny cadres of elites call the shots and the rest of us pay the price.
When we finally pull back the veils of power to expose the men pulling
the levers in an age-old game they devised, we will see that prosperity
is indeed possible for all.
For more on the public bank solution and for
details of the June 2013 Public Banking Institute conference in San
Rafael, California, see here.
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