Monday, March 18, 2013

Even Paul Krugman Gets the Problems with the Cyprus Bank Tax

 He writes:
OK, I didn’t see that one coming. With all the problems in Greece, Italy, Spain, and Portugal I wasn’t watching Cyprus. But that’s where the big euro news is this weekend; in return for a bailout, Cyprus is supposed to impose a large haircut — that is, loss — on all depositors in its banks.[...] 
The big problem, however, is that it’s not just large foreign deposits that are taking a haircut; the haircut on small domestic deposits is a bit smaller, but still substantial. It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying “time to stage a run on your banks!” 
Tomorrow and the days immediately following should be very interesting.
I'm don't think there will necessarily be an immediate bank run beyond Cyprus (and possibly Greece) but I think two things will occur throughout the troubled eurozone area, including Spain and Italy .

First, you will see many in these countries being reluctant to add new money to their current deposits. The mattress, gold, silver and bitcoins will be the new places to store money.

Second, at the first hint of intensifying crisis in any eurozone country, a move to pull money out of banks will be very swift. Thus, even if there is no immediate run on banks that does not mean the banking system is safe from bank runs in the future. Regardless of what happens at this point in Cyprus, even if the tax is killed, the situation is pretty close to the way Krugman calls it, although to be more accurate the neon sign the IMF and other bankster tools are flashing says, "be prepared to stage a run on your banks at anytime!"


  1. Hahaha, that should be Paul Krugman's catch phrase: "OK, I didn't see that one coming."

  2. "The big problem, however, is that it’s not just large foreign deposits that are taking a haircut..."

    So that means aaaaa, let's see now, I want to be absolutely clear on this, it's OK to steal people's money from other countries, but not from your own country???

    Boy, a Nobel prize sure comes in handy when you're trying to sell a boat load of crap like that, otherwise people would just fall down laughing and pee themselves.

    Ha, ha ha, haaa haaa haaaaaaaaa haaa haaaa bwaaaaaahaaaaahaaaaa ouch, damit, oooops, excuse me gotta go - small problem - (gonna have to start wearing Depends when I read Krugman stuff)

  3. Perhaps I'm wrong, but my understanding is that the banks are broke, and the Cyprus equivalent of FDIC can't guarantee deposits, so the EU is stepping in, but only if depositors take a haircut.

    I'm sure there are details that I would find nefarious, but in general, I'm not surprised or outraged.

    If a bank goes broke, and government insurance can't support it, the only alternative to an orderly haircut is a disorderly bank run.

    Yes, the haircut will encourage people to run their bank at the first sight of trouble, but bank runs themselves are equally contagious, so I'm not sure of what the better solution is.

    Some government official in Cyprus mentioned transitioning deposits to "bank shares". That's what deposits really are, aren't they? The only difference is that, when a bank faces rough times, deposits don't lose value like shares do, they are bought back by the bank on a first come first serve basis until the money runs out, and the rest of the outstanding deposits are worthless.

    If we do see more of this, the best way to prevent runs, and restore an honest banking system, would be to transition all deposits to bank shares preemptively.

    1. umm general your missing the point. its not the Cypriot banks that are in the shit, its the government of Cyprus that is and the EU told them to get money to pay back its loans (otherwise it break its legs with a tire iron presumably) so the government seized 10% of the money in everybody accounts including some very well connected Russians. And that why Gazprom's offer is so interesting as it will put Cyprus in the Russian pocket, and cyprus is only a hundred or so kilometres from Syria.

    2. Isn't it both that are in the shit? That's my trouble with the media on this, there isn't clarity as to who is being bailed out and why. Near as I can tell, the banks are broke, and this is going to also bankrupt the Cypriot government as it will wipe out their deposit insurance funds and their pension fund, so they are giving depositors a haircut in order to secure an infusion from the EU so that the bank doesn't go bankrupt and the Cypriot government by extension.

      So, the nefarious part, as far as I can tell, is that the government/pensioner's interests are being put ahead of depositors.

      My point is that it's a bankruptcy, so the remaining assets have to be economized. I don't want the government deciding how these assets are economized, and I don't want them putting their interests first, but the process is still going to happen, whether we like it or not. If it weren't depositors rioting, it would be someone else.

      I think this needs to be made clear, that societies are being forced to chose who gets screwed, and this is the direct result of government largesse and state-sponsored central banking cartels.

      The first-come-first-serve system of economizing during a bank failure is stupid. Honestly, it would be in all our best interests if all depositors were pre-emptively converted to bank shares, in recognition for what they really are. I honestly hope that banks take a lesson here and do this pre-emptively to avoid the contagion that this crisis in Cyprus could cause.