“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 Brazil writes,
“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.
