Back in Europe it is like a showdown in an old TV Western.
Greece on the one side… Germany on the other.
Each in the street, facing off, waiting for the other to blink an eye or draw his gun.
And waiting... And waiting...
One deadline passes. Another approaches.
If we had money in Greece, we’d definitely want to make sure our passport was up-to-date and our savings were outside of the country.
Apparently, there are a lot Greeks with the same idea. The Wall Street Journal reports that cash outflows from Greek banks doubled in the last four days. The smart money is voting – to leave.
Big banks are private businesses. But they are so closely connected to the government and so heavily regulated that they may as well be public utilities.
Banks are responsible for creating roughly 90% of the money supply. They do this by simply lending money into existence.
Banks are also tools for “public policy” implementation – that is, for clumsy and counterproductive central economic planning. They play an integral role in QE. And overnight lending rates between banks determine where short-term interest rates go.
The feds also bail the banks out when they get in trouble…
You may think you have “money in the bank.” You don’t. Your “deposits” are really loans to the bank.
You lend it your money. It agrees to pay you back – under certain conditions. And it can change those conditions when it has the backing of the feds.
Our Meeting with the President
As the crisis nears, first the feds will limit withdrawals to a certain amount per day. The amount will seem reasonable; most people will see the need and not be inconvenienced.
But a growing number will see the handwriting on the wall… and begin taking out as much cash as they can. Then the feds will reduce the maximum withdrawal limit. Then they’ll ban withdrawals altogether.
When your bank reopens, your deposits could be subject to a tax (a negative interest rate). Or they could be transformed into a different currency.
That’s what happened in Argentina at the start of the new millennium. And it’s what could happen in Greece too.
We were involved personally, in a minor way, in the Argentine crisis. It was the late 1990s. The government of Carlos Menem had pegged the peso to the dollar. But the Argentine version violated just about all the rules of how a currency peg should work. And the smart money was beginning to bet that he couldn’t hold the peg.
We visited President Menem in the Casa Rosada. (The U.S. has a White House. Argentina has a Pink House.)
“Are you going to keep the peg?” we asked.
“Of course, we’re going to keep it. There is no way we would ever abandon it. It is now the heart of our economy. It is why foreigners such as you are willing to invest in Argentina, because you know the currency is safe. It is the reason we have such a booming economy.”
A few months later, Argentina abandoned the peg. It closed the banks. People had tried to protect themselves from a devaluation of the peso by opening accounts in dollars. But when the banks reopened, they discovered that their dollars had been converted to pesos – with a 66% loss!
The important insight is that government and banks always work together to protect themselves – not you.
Is Your Money Safe?
We saw it happen in Cyprus, too. The government there (working with the big banks) changed the terms of the deal – suddenly and, for depositors, catastrophically.
It gave big depositors – with over $100,000 in the bank – a haircut and a shave equal to nearly half their money. Why?
The Cypriot banks had bought Greek government debt. The fall in value of those bonds (the Greeks couldn’t pay then, either) left the banks on the edge of bankruptcy.
The loss was very real. Who ended up paying for it?
The banks that made the bad investments? The government that regulated the banks and forced them to buy government bonds?
Nope. The depositors! Innocent, but perhaps naïve, the depositors got scalped.
And now, Greek depositors – the smart ones, at least – are taking precautions. They yanked out €3 billion ($3.4 billion) this week – or about one-quarter of all deposits for the year.
In the U.S., the FDIC guarantees individual deposits at member banks up to $250,000.
How good is that guarantee?
In a pinch, all sorts of things that you took for granted suddenly have question marks behind them.
What’s the bank’s collateral really worth? How much does the bank have in reserves? How much does the FDIC have? How long will I have to wait to get my money? What will it be worth then? What will I do in the meantime?
You may want to take precautions too.
Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.
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