If you ever doubted that we lived in an interdependent world, the traffic chaos in south Dublin last Friday will reinforce just how fragile the ecosystem we inhabit is. Running up one rat-run after another to avoid the escalating traffic, it struck me just how similar the flows in the economic and financial world are to the flows in traffic.
One small change in the real world of rain and traffic can cause enormous ramifications all around the city. Last Friday, the torrential rain – unusual but hardly unheard of in Ireland – caused flooding, closing the N11 and revealed to all just how dependent we are on each other.
People like me, who were only collecting children two miles away from their house, got caught up in a jam which had its origin about five miles away on a main road that had no obvious connection to the blocked-up, suburban road on which I sat, motionless. But once the traffic stopped outside Enniskerry, the resulting chaos spread, revealing how we are all dependent on a smooth flow of traffic, and how an event in one part of the system can have enormous ramifications in another part.
Consider the similarities between the movement of traffic on the roads, and the movement of cash and credit in an economy. When credit is flowing and people are spending, and basing that spending on the notion that there will be no credit jams, broken ATM machines or bank runs, the system works fairly well.
You pay me, or indicate that your account will be debited, and I trust you and the bank to deliver the cash into my account in a few days. Similarly, when you deposit money in a bank, you fully expect that money to be there when you want it. When you open a savings account, it never strikes you that you are lending the money to the bank.
Expressions like ‘safe-keeping’ and ‘nest-egg’ come to mind when you put money in a savings account. Who thinks that, when you set aside money (or when you sell an asset like a house and put the proceeds into the bank, rather than speculate on bank shares or blow the money on fancy stuff), you are being anything other than prudent?
This is why the eventual deal being forced on Cyprus is so dangerous, because going after savers to pay for the greed and stupidity of the bankers, regulators and, of course, the EU itself – which created and oversaw the monster that is the Cypriot banking system – breaks the essence of trust between saver and bank.
Over the last few days, I have heard all sorts of people – particularly academic economists (who tend not to be the most entrepreneurial people in the world) – suggest that savers ‘lend’ money to the banks. Yes, let’s repeat that: ‘lend’ money to the bank. Is that what you think you are doing when you open a savings account? I defy you to find the word ‘lend’ in any bank literature or advertising about opening a savings account. You won’t find it, because it doesn’t exist.
In the main, savers put money in the bank for safekeeping. This is why savers are different. They are not ‘legitimate targets’ to go after in a bankruptcy. They should be regarded as a special case – no matter how big the deposits. Imagine you just sold your house – which you regarded as your pension – in Cyprus, and put the cash in the bank, only to be told you are to be punished for prudence.
Depositors are a different type of bank creditor to any other sort. In an insolvency situation, they ought to be regarded as ‘trust creditors’ or ‘creditors in trust’. They deposit their money because they trust the system. They are not ‘investors’ in the traditional sense like shareholders or bondholders. They trust the system to look after their savings and, as such, they need to be protected. If you actively break that trust, as the EU wants to do, you do so at your peril.
Of course, the peril or risk here is that depositors in other countries with still-unresolved banking crises, such as Spain, will see the Cypriot deposits being looted, think “we’re next” and take their money out of the banks.
This deposit flight is the bank-run – which is the very outcome that the authorities are most keen to avoid.
Why is Cyprus a special case? After all, every eurozone crisis has been labelled a special case by the EU up to now, so why believe that this is the last one? And what if ‘next time’, in the next country, the €100,000 threshold is €60,000, and the levy is even higher?
The reason there is likely to be a ‘next time’ is because, now that deposits have been targeted, people all over Europe are realising that the banks actually don’t have all your savings in their vaults, safe and sound. They have lent your money out and, when you look for it, they need to find it elsewhere to plug the deficit.
When economists blithely say that depositors are creditors who need to pay in the same way as taxpayers are asked to plug a deficit, they forget the role of psychology in finance and economics.
As they say, there are two things certain in life: death and taxes; we mightn’t like taxes, but we are used to them. Therefore, the reaction to higher income taxes is not that dramatic because we know what tax rises look and feel like.
Taxing savings is different. It breaks the rules and it causes panic. This is why, no matter what happens tomorrow, there will probably be a run on the Cypriot banks when they open. If you were Cypriot, what would you do the minute the banks open? Would you take the word of people who said that your savings would be safe, only then to turn around and indicate your savings could be confiscated because you had saved in the first place?
Once people lose trust in banks, they hoard money. Once they hoard money, credit stops flowing and, once credit stops flowing, the system, like the traffic system, clogs up. People in one part of the economy who mightn’t have been directly affected by the deposit confiscation are affected because credit dries up and the system gets stuck.
Credit needs to flow again, but this demands that trust in the system is recovered. However, trust, once it is abused, takes a long time to come back, not just in Cyprus – but all over the eurozone.
Swiss banks with minus interest rate back in business
Its theft.
It was disturbing to hear muinteoir Noonan stating that the situation in Cyprus has nothing to do with Ireland.
Really, I would class Cyprus as a test market.
THE NEW WORD FOR “LEVY” IS THEFT.I WILL STEAL A BAR OF CHOCOLATE TODAY AND TELL THE SHOP IT IS A “LEVY”.THE BLAME GAME GOES ON.NOONAN BLAMES CYPRUS FOR WANTING TO BURN DEPOSITORS AND CYPRUS BLAME EUROGROUP.IT IS BLANTANTLY OBVIOUS DEMOCRACY IS DEAD AND GERMANY WILL SOON BECOME THE NEW MAIN COMPETITOR TO CHINA.SELF INTEREST AT THE HEART OF THIS PIGS ARE LEFT IN THE SLURRY PITT. IRELAND NEEDS TO EXIT EURO PRETEND GAME, STOP BUYING GERMAN AND MARKET OURSELVES WORLD WIDE.
Although it would not affect me, this would drive me out of my sitting room and on to the streets.
That’s something Noonan wouldn’t want.
Noonan was a big man when he threatened a dying woman who was poisoned by his own department. But this, well , come on Noonan do it, Angela would think you were a great boy altogether !!.
http://en.wikipedia.org/wiki/Michael_Noonan (search for Bridget McCole )
Notice that depositors ‘need’ to plug the deficit, taxpayers ‘need’ to plug the deficit, but banks need to be given money. Funny how that works. We’re living in strange, Alice in Wonderland times. Banks and large financial institutions roll the dice, large men in cheap suits turn up at our doors demanding reparation. Personal debt and arrears cannot be forgiven, as this would create ‘moral hazard’, yet the same metric doesn’t appear to apply to financial institutions. The only other comment I’d make is that this seems like a never-ending series of collapses and crises. This would suggest that an… Read more »
.
Unfortunately that is the system we have.
If you put money in a bank above the taxpayer insurance limit then you are investing in the bank.
They are senior bond holders.
Now if you are suggesting that depositors should be protected regardless of the sums in there, then you have to ask whether private lending banks can be permitted to continue in their current form.
You can’t have a system that privatises profits and socialises losses.
You think the Euro-Austerity mentality is going to stay in Europe? Here in New Zealand our Reserve Bank has decided it would like to have a look at the new Basel Accord ideas about using depositor funds to pay bank debts if the bank goes under. Our right wing Prime Minister who is unaccountably popular has assured reporters that our banks (mostly Australian owned) are perfectly safe, so it is highly unlikely that this eventuality will ever arise. Great. Just fantastic. We used to have a deposit guarantee, now we have a crap-fest. Will I have to split deposits between… Read more »
Bond holders and deposit holders are fair game in a Euro economy (Cyprus) in which Russian money is the largest portion, when German Pensioners money is at stake – it is impossible to burn the bond holders and large depositors, wake up and stop protecting rich German Pensioners at the expense of our own children’s futures !!!
It seems that the agreement being announced today contains all the elements of the approach promoted consistently on here by David over the past couple of years. i.e. A Bank Resolution Framework where the rules of capitalism apply. Failed banks are wound down with shareholders and bondholders being wiped out, depositors below the €100,000 guarantee threshold are saved and larger depositers suffer losses but have the (slim) chance of future upside in a debt-for-equity swap. And according to the report, the €10 billion bailout money will not be used to shore up the banks (which although not stated, seems to… Read more »
I’ve said this before and I’ll say it again, in fact I’ll keep on saying it until the ordinary people of this country eventually sit up and take notice!!! We’ve got clowns running this country and we’ve got even bigger clowns running Europe!!! Yet the people of this country keep on voting for those very same clowns over and over again. Why do they do they keep on doing this??? What’s sadly lacking in this country is COMMON SENSE!!! We’ve got a government and a civil service that’s full of yes men and women and when it comes down to… Read more »
What is the lesson in all of this ? The lesson is this. If you are an oligarch or a rich bank with more than 100K to spare, then don’t lodge money in a country, whose political system you cannot compromise. Actually that was already evident in the Greek and Irish bailouts. But now we are seeing the other side of it. A little bit of political corruption, is effective in producing a little bit more political corruption. The current deal is bad news for Spain, because of the behaviuour that it will induce. It is also bad news for… Read more »
David, while I do agree that the imposition of sudden deductions on deposits and transformation of other accounts into deposits is causing panic throughout the European banking system, I would point out the following: 1. Cypriot saves were receiving interest rates far above the notional interest rate – apparently 15% in 2 years? So a deduction of 9-10% still leave a net return of 6% in two years which is still far above the returns in other countries. 2. Going on the history of defaults in Argentina and other countries, generally deposits are among the first thing to be seized… Read more »
If the ECB interest rate is less than inflation, then it is not just greedy people that get involved in asset price speculation, but the entire society. And this is the nexus of EU policy post Maastricht, and ECB interest rate policy. The EU is overall uncompetitive, and is losing employment. And the ECB is lowering the interest rate to make up for the deficiencies. This will result in the bankruptcy of every Eurozone country, and possibly a few non-Eurozone countries as well, like Denmark, and Sweden. The EU’s monopolistic, all embracing, totality approach is not up for negotiation. It… Read more »
War is inevitable when the wealthy in one country start theiving from the wealthy in another country, and they both put the poor to fight for their position.
I think it’s quite misleading to call account holders depositors. Perhaps conforming with the buzzword is forgivable but to continue the story with cash analogies in today’s digital world is not. The story still seems to be that customers of the bank deposited money with the bank who later lent it out and can’t give it back. David says, ”They have lent your money out” implying that banks fund loans from other people’s deposits. That is wholly inaccurate because banks don’t process loans in cash form and nobody’s bank balance is decreased when a bank advances a loan. It defies… Read more »
War is the next stage Deco…History is always repeating itself and Humans are doomed to continue the same behavior time & time again expecting a different result. Ordinary people paying for extraordinary financial disasters & failures… Their is zero incentive to end this financial War as it is too profitable..for the few and reduces the rights & aspirations of the many..a further dumbing down of society. Levies are theft…levies on pensions, wages, Bank accounts is just theft,nothing more nothing less..call it as it is… Ultimate goal is control of a Countries Resources, natural or otherwise. The raging apathy of the… Read more »
Finally The EU Is Bringing Thrust Back In To The Banking System… It’s great to see the bond holder get burned rather that the postman or the bus driver etc, having to bail out the bond holder. This means earned money-money worked for is at work – real money – a real economy. Where to run with your money – Noonan could set up a tax haven on Ireland Eye or Dalkey Island maybe D4 but I fear there is already one there common Markel sort it out. I wonder did Quinn have money in a Cypriot bank maybe Fitz… Read more »
Not sure there will be banking runs because there is no where to run. There is no solid evidence that taxing savings or wealth really causes that much emmigration of wealth. Basically wealth goes to where it is safe and pleasant and hangs around. Europe has been good for Cyprus. No war. Compare that with 30 years ago. OK, so the banking tax haven has gone belly up because they over speculated in Greece. Boh Hoo…it still looks a damn sight more prosperous than it was decades ago. It will be again. Let’s understand why the EU is there. Eliminate… Read more »
http://www.cyprus-mail.com/opinions/our-view-we-ve-paid-ultimate-price-avoiding-responsibility/20130324
One thing that will be tested…can bureaucrats really get away will burning the wealth of zillionaires and get away with it. Remember these are people who are used to getting their own way and doing something about it otherwise.
Interesting test to see who is really running the place.
When the government tells you and me that they need to raise money next year.
The public have no more to give after been screwed on all the new taxes ,what do you think this government will do go after your savings in the bank.
Do you trust this government ? I don’t .
“So, you see, Germany has broken the thieves-in-law code by imposing two different deals which, in both cases, protected German interests.
Just common thieves so.”
http://namawinelake.wordpress.com/2013/03/25/even-thieves-in-law-have-honour-that-is-missing-in-eu-parliaments/
Now, they have done something incredibly stupid. The EU is a collection of amateurs in charge of everything, and they have a monopoly. http://www.telegraph.co.uk/finance/debt-crisis-live/9951727/Cyprus-bailout-live.html { Head of the Eurogroup of eurozone finance ministers Jeroen Dijsselbloem has spooked global markets by saying the Cyprus bank restructuring deal should be considered a template for the rest of the single currency bloc. } Of course, it will get tricky if his country (NL) encounters any more banking difficulties. And his country has just experienced a daft housing market, that is now in decline. And private sector debt in NL is very high. Is… Read more »
The great flaw in David’s thinking is his inability to differentiate between ordinary bank depositors and money launderers/tax avoiders. He is trying to do exactly what the Cypriot President tried to do in Brussels but failed. Cyprus tried to hide money launderers and tax evaders among ordinary depositors. The Eurozone managers are not buying it. David and the Cypriot President and all who think like them are on the wrong side of history. Money laundering and tax avoidance as a legitimate state business is over, at least in the Eurozone. The Euro is the first major currency to embark on… Read more »
Well said Pat Flannery.
Most people( who don’t live with their parents anymore) have long ago discovered some of the limitations to DMcW’s analyses. His love of the ‘big boys’ in business, rather than government, and his championing of Anglo-Saxon liberal capitalism, despite its incipient failure since 2007, being two cases in point.
Eliot Ness rides again… When the article above is compared to previous articles written by David there are major contradictions with previous and strongly emphasized positions taken by him. But I am sure the XFactor viewer will enjoy his take on Cyprus- playing to the gallery…or we love the hate the EU for the sake of it… but maybe he is worried about his own personal bank account. If every bank has the same rules applied to it there can be nowhere to run, nowhere to hide, (Eliot Merkle Ness) no tax haven. Why should the tax payer bail a… Read more »
Firstly, is not the case according to BASEL II lending restrictions a commercial bank lend NOT the deposits BUT fractionalize ON the deposit.
Secondly, ‘the essence of trust between saver and bank point’ : that the terms of contract guiding saver putting money in the bank that it transacts legal ownership of the funds, splits the interest. It is on this basis that the ECB can levy depositors savings.
I challenge anyone to disprove any of these points.
I reckon their is a war underway within the walls of global banking between the utility banking system and the shadow banking system and the ECB have check-mated the dirty money laundering shysters and can now jack hammer any financial banking center laundering dirty mine flows throughout Europe.
Luxembourg will be next.
Skilful and simple writing is the best, thanks DMcW. The Troika were ‘flying a kite’ to see the reaction. When it got shot down they turned to Plan B. If that blows up , they’ll cobble together Plan C and re-think future strategy for the next imploding peripheral economy. Of course, no one is discussing the historic negligence of the supposedly prudent and ‘germanic’ ECB in allowing Cyprus’s monstrous banking system to grow so gargantuan relative to GDP, and no systematic effort was made to pro-actively pre-empt and deal with this despite Iceland’s lesson and despite forcing Cyprus to suffer… Read more »
There is one thing that all fail to recognise, and that is who is running the whole show. It is not big business, or big banks, or governments or ECU or the ECB or anything else mentioned. All are puppets dancing to the strings or the money masters, those who originate the whole scenario. Who owns the system of state currencies. Who funds government. Who is syphoning off the real assets, who stands to gain. The money masters. How is a population controled and captured. Devide and conquor is the name of the game. Sow discention within and corrupt the… Read more »
Cyprus Crisis: Betrayal of trust in banks will cause a long economic jam
Nice headline and commentary on the evident. Some of us have been warning of such for years.
How about an alternate plan in which the people can have faith and confidence?
@ Eireannach. That’s one of the main reasons why Cork is known as the ‘Rebel County’. I’ve never voted FF in my life and never will either!!! I always voted for Labour and FG in the past, but not anymore!!! I gave my No. 1 to the Sinn Fein candidate in Cork SC last time out and I’ll most likely do the same the next time out and then after that I’ll more than likely give my other preferences to some of the Independent candidates on my paper.The trouble with the majority of Cork people is that they’ve always considered… Read more »
Will there be a bank run when the banks open in cyprus?
This agreed deal with the EU will push cyprus into a very big recession ,its to harsh into short a time frame.
http://www.goldmoney.com/gold-research/alasdair-macleod/money-supply-accelerating.html?gmrefcode=gata
Low interest rates will turn to 0 zero interestrates and then inflation of consumables kicks in. The inflation rate is understated and the real economies are in depression (unstated)
http://campaign.r20.constantcontact.com/render?llr=n7vdaxbab&v=001qwhULkbmHDuvRQP_bGq83Y2oIOHTxq0hNHTDcq1LjlrUG13VN3TH9Zd0VcbQMyDf1akh_kow5HEMvu9wasMtf0vf_yq9EEovi2rZfljiV5o1GnsOVZWzEyR4vulghgbw
Worth a review and pick out from what appeals to you
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2013/3/24_Dr._Paul_Craig_Roberts_files/Dr.%20Paul%20Craig%20Roberts%203%3A24%3A2013.mp3 DR Paul Craig Roberts Very sobering observations. Do not pss this by. He suggests the Cypriot suggested sizure od bank accounts is theft and a complete denial of democratic principles. He suggests the people should get out on the streets and use whatever amount of vilence and force it requires to get the government to reverse policy. He states that in the US all the preparations are in place for an authoritarian military state. Any person can be executed, detained, tortured, punish, etc by unaccountable order of the president. Not only foreign nationals deemed terrorists but resident nationals deemed… Read more »
http://www.reuters.com/article/2013/03/25/us-cyprus-parliament-idUSBRE92G03I20130325
Be good Cypriots and rebuild your economy says the broke Uncle Sam
Ok , so if I have this right . Depositors are now fair game in this shambles that is the Euro . What is it with the Cypriots ? Dirty Russian money ? The Greeks were not paying taxes . Did they come up with one for the Portuguese or did they not bother ? I have lost track . Are the Spanish in a bailout or some kind of a half a bailout ? Who else is in bailout . I have actually lost track . One of these days somebody is going to figure out that the Euro… Read more »
“Economics is a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man”. (Alfred Marshall Principle of Economics) looking at situation in Cyprus and other European Debt bound countries, one must ask the question, do politicians really understand Math? One can discuss the Political machinations of various bailouts,OMT’s LTRO’s etc, until blue in the face. So much commentary with so little regard for… Read more »
Ok, if I had any money at all, I’d take it out and put it somewhere else. Maybe in another bank, gold or silver or some other investment. So banks are not to be trusted and we shouldn’t come near them. So gold and silver, is the one option. Should I have pots and bags of gold in the house or should I have this gold converted into electronic currency, in other words – put again in a bank so the government can take it off me. Maybe other commodities like grain, oil, coffee, etc and keep an area of… Read more »
Quote: With the current policy, they (EU Governments) will need force to keep it going against the interests of the people. You do not need to be a eurosceptic to conclude that such a monetary union is also deeply immoral.
– Wolfgang Münchau today in the FT.
In this era of globalization, it may be we simply do not have a proper global narrative or have yet figured out the cognitive wherewithal to fix this mess. Wills and Andrew Mooney’s comments on contract law are pertinent. Here’s a recent article: New Scientist: http://www.newscientist.com/article/mg21729090.200-banks-gone-bad-our-evolved-morality-has-failed-us.html Here’s the bit to read for those who cannot access… ======= Modern democracies are quite similar to egalitarian hunting bands in that moralistic public opinion helps to protect populaces against social predation, and dictates much of social policy. In a sense, the Founding Fathers were brilliant in creating a larger-scale system, one that basically… Read more »
From Graham Summers– Phoenix Capital Research March 26, 2013 The ECB’s Balance Sheet Is Literally a Work of Fiction As noted in numerous articles, the entire European banking and corporate system is over-burdened with debt. Jagadeesh Gokhale of the Cato Institute puts the situation as the following, “The average EU country would need to have more than four times (434 percent) its current annual gross domestic product (GDP) in the bank today, earning interest at the government’s borrowing rate, in order to fund current policies indefinitely.” Put another way, for Europe’s Government to fund all the entitlements they have, they… Read more »
http://www.zerohedge.com/news/2013-03-25/have-russians-already-quietly-withdrawn-all-their-cash-cyprus
http://www.reuters.com/article/2013/03/25/eurozone-cyprus-muddle-idUSL5N0CG13920130325
Russian cash walked while Cypriots fiddled
Cyprus is a Rubicon event. We are entering the final stages of the collapse of the world order as we have known it. The confiscation of private monies and savings to pay unsecured senior bond holders is the final bell for the current financial system. According to Jeroen Dijsselbloem, the chairman of the eurozone, this will be the pattern applied to other European provinces – formerly known as nations – as the crisis continues. Mr Dijsselbloem says the market will like it; so it must be a good thing. I say that whatever remaining trust the general public has in… Read more »
Hi David, How about this for a different view on things from across the Atlantic. The Seeds of War Have Been Sown … by Larry Edelson Dear Subscriber, In a previous column, I showed you how the war cycles turn violently higher this year. I also addressed the issue of war, and its implications for the markets, at the Weiss Global Wealth Summit in January. It’s a topic that no one likes to talk about. Yet I’ve studied the history and Cycles of War in detail. And I do not like what I see happening now in the least bit.… Read more »
After Cyprus, Who’s Next? Luxembourg? Malta? Slovenia? March 26, 2013–The first use of capital controls by a euro-area member, in the case of Cyprus, may also pose a challenge to countries such as Malta, Luxembourg, and Estonia whose banks also boast large foreign deposits, wrote Jacques Cailloux and Dimitris Drakopoulos, economists at Nomura International Plc., in a report to clients. “Fearing a fate similar to those who held deposits in Cyprus, these depositors may well decide to reduce their exposure, putting other countries under stress,” they warned. Indeed, if, as it is said, Cyprus basically ran into trouble because its… Read more »
A UN report has found that (surprise, surprise) the neoliberal experiment of the last few decades has had the effect of concentrating an increasing amount of wealth in the hands of an increasingly small proportion of the population, thereby making the masses and states poorer and more indebted. The resulting fall in consumer demand has, and will continue to push up unemployment levels:
unctad.org/en/PublicationsLibrary/tdr2012_en.pdf