Robert Tracinski writes a fine newsletter.
Sometimes he reprints his essays in other venues, particularly the “Real Clear” groups; in the case of this essay, Real Clear Markets.
With Mr. Tracinski’s permission I am posting this latest one, about the situation in Cyprus and its larger consequences.
The Baron and I have been discussing Cyprus since the news came out. We are both feeling the same alarm as everyone else who has been paying attention. Who’s next? Italy? The excitable Italians will not go gently at all.
Of course, for us, as for everyone, it always comes down to, “so when the tidal wave washes ashore here what will it mean for our bank account? That’s the normal human response to such overwhelming villainy. In our own case, frankly, our bank accounts are so small that we will no doubt be exempt from the confiscation. But we will not be untouched: Gates of Vienna depends on the generosity of our donors and it will be they who feel the weight of the boot of the increasingly mendacious political class in charge of creating and sustaining this fiasco. We will be in eternal deep doodoo as long as those in charge have the colossal hubris to think they know how to milk the system and not cause a world of ruin.
A word on Mr. Tracinski’s humorous title for his essay. Willie Sutton was a famous — and for quite a while a fairly successful — bank robber. When he was caught, they asked him why he chose to rob banks. His famous reply? “Because that’s where the money is”.
Willie Sutton’s European Vacation
Cyprus and the Death of Deposit Insurance*
by Robert Tracinski
From the beginning, the European crisis has been a story of small countries on the Eurozone’s “periphery” revealing fundamental problems at the heart of the system. Now a very small country on the outer edges of the periphery—the tiny Mediterranean island of Cyprus, with about a million inhabitants and 0.02% of Europe’s GDP—is triggering the latest wave of the crisis.
This is not really about Cyprus, of course, but about the precedent that is being set there. In exchange for an infusion of capital into the nation’s banks, Cyprus is being asked to impose a “special bank levy” that would take 6.75% out of all bank deposits up to 100,000 euros, and 9.9% above that.
This is described as a “wealth tax,” except that it’s not a tax. A tax is a regular rule that operates uniformly according to a pre-determined formula. A one-time, ad hoc seizure of money isn’t a tax. It is confiscation. Or we can use a plainer word for it: theft.
The big news isn’t this bank heist, but who is pulling it off. The plan was imposed, not by some wild-eyed revanchist Communists, but by the finance ministers of respectable European countries, who thought up the idea and imposed it on Cyprus. Like Willie Sutton, they know where the money is.
There are special circumstances that made them think they might get away with it. Cyprus is a small island with a large banking center that holds deposits many times larger than the local economy. A lot of this money comes from Russia, and Cyprus is reputedly a tax haven for Russian “oligarchs” (politically connected billionaires) and mobsters. In an American context, you might compare Cyprus to the Cayman Islands, which have been so vilified just having a bank account there is enough to end a politician’s career. Just ask Mitt Romney.
But in showing us what they’ll do to an unsympathetic target, Europe’s leaders are showing us what they would like to do everywhere: dig themselves and the crony banks out of a tight spot through the mass confiscation of wealth. It’s the ultimate bailout plan: they just take whatever they need.
And there is more to it than that. This is confiscation, but it a particular kind of confiscation with particular implications. It is the end of deposit insurance. Depositors, particularly small depositors, are supposed to have an ironclad guarantee that their money will always be there, no matter what—that they won’t wake up one Monday morning to find that 6.75% of it is gone.
That’s why the Cyprus heist is really important. It is a warning that the whole system of deposit insurance is coming unglued.
Deposit insurance is central to modern banking—or rather, it is central to the contemporary system of government-guaranteed, government-regulated, too-big-to-fail banking. Here is how the deal is supposed to work. The government guarantees ordinary bank deposits, but in exchange it imposes regulations meant to prevent banks from failing so that they will rarely have to call on the government guarantees. But then there’s a complication. While the government’s deposit insurance raises enough money to handle the failure of a limited number of smaller banks, there are some institutions that grow so big that the government doesn’t have enough money to cover their losses if things go wrong. That’s one of the reasons why these banks become “too big to fail,” which necessitates even more government support, in exchange for which they are supposed to be placed under an even heavier layer of regulation.
Cyprus is a signal that this whole system is failing. Government regulation doesn’t actually guarantee solvency; in fact, it is the insolvency of the governments themselves that triggered the Euro crisis. Moreover, when things really go wrong, the government can’t actually guarantee all of the deposits—and now we’re starting to wonder whether they’re still interested in trying.
When this system starts to come apart, its consequences are worse than an ordinary bank panic. In the bad old days, when individual banks and their depositors were on their own, if one bank failed—and if it was not bought out or rescued by another bank—its depositors might take a haircut, but only after shareholders and bondholders were wiped out. This gave all of the parties a strong incentive to make sure the bank was solvent and wasn’t taking too many risks. Under the current system, all of these parties are absolved from such a responsibility, but we pay a heavy price for it. When things go wrong, every depositor at every bank gets a haircut, while politics decides who gets hit worse. In the Cyprus deal, European bondholders will be protected, but Russian oligarchs will be looted, and small Cypriot depositors will get caught in the middle. Remember, also, that all of this is being done to avoid a run on the banks—but that is precisely what has been happening in Cyprus, with depositors emptying the nation’s cash machines in an attempt to withdraw their money before it could be seized.
Combine this news with Gretchen Morgenson’s summary of a Senate inquiry into huge trading losses at JPMorgan Chase, one of our too-big-to-fail megabanks. The bottom line is that big banks are still too big to fail and they are still taking undeclared risks backed by taxpayer money. Across the board, the general sense is that the system is failing and government leaders aren’t really trying to reform it. They’re just trying to restore the status quo ante, setting us up for a whole new round of financial crisis.
Can Cyprus happen here? Well, some on the left are already floating plans to rescind the tax exemptions on retirement accounts, making a grab for a big pile of your savings.
But will they do what Cyprus is doing with our bank deposits? Probably not. If history is any guide, our political czars wouldn’t attempt something so crude as to just grab money from our accounts. No, they’ll do what they have always done: siphon it gradually by printing lots of money and inflating away our savings.
I understand if you don’t find that very reassuring.
* * * * * * * * * * * * * * *
| * | In the United States we have something called the FDIC, an acronym for The Federal Deposit Insurance Corporation. This entity was created to keep our bank accounts secure. All deposits up to a hundred thousand dollars are purportedly “safe” from the predations of bankers. The FDIC is largely a myth, a big bureaucracy employing hundreds of foxes who pretend they are guarding the henhouse. — D |
Mr. Tracinski’s essay is recycled here without the links that you’ll find in the original work. I think you’ll find that version to have more depth as a result.
This is the place to thank him for his kind permission to share his views with our readers. And he’s right, unfortunately: I don’t find his analysis “very reassuring”at all. To the contrary, it is glum reading indeed.
Post-Marxist Russia’s dealings with the Marxist totalitarian EU are becoming more and more interesting. The Cypriots compare poor old Angela Merkel to Hitler but she is really just an old GDR commie with a utopian agenda pretending to be a Christian Democrat. Now Russia has said that the EU is behaving like the Soviet Union stealing people’s assets to prop itself up. Will Russia save Cypriots from the EU? Will Russia save us all from the EU as predicted. Russia Today said that if the euro went down it would cost Germany one trillion euros. No wonder Germans are planning an exit strategy. A commentator said that events in the eurozone are going to effect the economies of non-euro zone countries linked to it, like most of Scandinavia, Britain and Switzerland. I remember sensible Dutch people putting their savings into dollars when the euro was launched. Perhaps they would have done better with the yen and many Cypriots still hold their savings in sterling. Has banker-backed Marxism finally run its course? Could Europe now go back to being like Russia, free, independent, anti-islamic and non-multicultural please?
You ask interesting questions, and pose even more interesting theses. Russia-on-the-Rebound has become a fascinating player. Most of its criminal wealthy class have stored their ill-gotten gains in Cyprus. As Mr. Tracinski noted it is the equivalent of the Cayman Islands for the super-rich Americans like Romney*.
Russia will not take the EU’s interference with Cyprus lightly. Way too many VITAL concerns, including fossil energy, for it to sit idly by as events go down. If I’m not mistaken Momma Bear Russia has moved some big naval guns into the area…I would say it is worth watching, but I know my own ignorance to be such that I couldn’t observe any of what’s going on without a knowledgeable interpreter to tell me what to make of events.
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*Romney didn’t lose to BHO because he was/is super-rich. He lost because he didn’t pay attention to the concerns of average voters. Instead he stayed in the bubble created by those useless Republican National Committee advisers . IOW, he played his hand badly- we’re in such trouble that this was his election to lose and amazingly, he did just that, against big odds.
I knew the election was lost when the RNC cut the Tea Party off at the knees during the convention. It’s hard to imagine being that clueless, but it’s mostly a result of breathing the rarefied air inside the Beltway. Oxygen deprivation causes brain damage.
We actually got a fund-raising call from the Republican National Committee the other day. Like we have funds for such frippery anymore…But I regret being only half-awake when the call came. I missed my chance to get on my soapbox. All I said was, “I will NEVER contribute to anything Republican again. I am a conservative. The RNC is a shameful disgrace. Or should I say shameless?”
And then I *gently* disconnected. Shoot…won’t get another chance like that again.
Sure do wish I’d been more awake though.
Sorry, Dymphna, not many people, including me, realised that wealthy Russians had their money in Cypriot banks. Have I been too naive. Still there are plenty of Brits who do the same as wealthy Americans and whilst not calling them criminals I would say they were economical with the truth. A shame about Russian oligarchs. I wondered why the Russian fleet was all of a sudden on its way to the Mediterranean. Hopefully the Brits stationed there are not meant to defend the bankers against the Russian fleet? Could we have a comment from Bilderberger stooge Mr Cameron please?
Seldom mentioned is the identities of “bondholders” or “shareholders.” Images of Mom and Pop holding their $50 Savings Bond, or sitting with the stock listings, checking out their 21 shares of GE come with those nouns. Rather, Mom and Pop are balancing the checkbook and thinking about the $5 fee the bank charges for the .5% interest on the $143.67 in the savings. The same bondholders are the same thieves who sought to steal from Cypriots–and expatriates. They are the shareholders who run giant public and private pension funds (what few remain). They are the t0o-big-to-fail corporations; they are the t00-big-fail banks; they are the rules makers.
“This is an undisguised act of expropriation, in other words something from the arsenal of the Bolshevik class struggle, but not civilised economic policy” — The Russian paper Moskovskiy Komsomolets.
The EU economic policy has always seemed a faux-civilized construct where the gloves would come off and the knives would come out eventually.
It reminds me of someone ignorantly but with great insouciance driving around in a car whose tires are so worn that the steel belts are showing thru. They need to be replaced? Not my concern, says the driver. And, he continues, so what if the engine’s oil light keeps flickering on? Put a piece of opaque tape over it and chug on.
Cheating Russian oligarchs. Oh my. The Boyz n Brussels may be, to use an odious Obama term, “punching above their weight” when they mess with those guys.
Yikes.
The blood flowing won’t be Russian.
There is something supremely ironic about a paper that has “Komsomolets”(member of the communist youth in the old USSR) in it’s name criticizing the EU for Bolshevik style expropriation.
The general public still has no grasp of just how chasmic the financial bleeding is in the Cypriot situation.
1) Iceland’s woes revolve around a long con: IceSave. It was an Internet banking con. The actual control persons were Soviet Mafia/ Russian Mafia. The money went to Moscow. The Icelandic government went all the way to Moscow — to be given the brush off by Putin. The grifters had paid their cut to the Boss. Journalists that pursue this story face death. The word has been given.
2) Ireland’s woes revolve around a series of long cons: control fraud by the Russian Mafia, again. Arrest warrants have been issued. The key perp flew out of Luxemboug City right ahead of the cops. (Financial Times of London) Journalists that pursue this story face death. The word has been given.
3) Cypriot woes revolve around dodgy assets. It turns out that they lent vast, vast, sums to Russian Mafia figures — while holding tissue paper collateral. Yes, it’s control fraud again. During the last months the ECB, IMF, et. al. have been trying to bring the money back from Moscow. Putin has a condition: he wants Cyprus to give away the mineral development rights around the island (oil and gas) to Gazprom. Putin is the largest shareholder of Gazprom. Its old president was Medvedev. Putin moved him from Gazprom to the Russian presidency, as his place holder.
All these many months Berlin, et. al. have tried to work this out in secret. Nothing moved until the recent Cypriot election. Berlin figured that since the Russian Mafia/ Putin & Co took the money, it’d be a fair turnabout to clip the Russian depositors — especially the big boys.
It has blown up.
Because of financial propaganda, the retail public, worldwide, has been successfully sold on the false notion that there is a unified currency: the Euro.
It’s a flat out lie.
By the very treaties that they signed, the Europeans never provided the currency with unified backing. It’s a half-breed, a fake.
Instead, you have a 1:1 rigid exchange rate system built around a slew of fiat currencies. Each particular fiat has backing from ONLY its own issuing nation. That last point bears emphasis. Euros issued by Athens are not backed by any other nation. Period, stop.
It does not matter how many times you see/ read/ hear some babbling idiot proclaim the Euro as a unified currency — such has no legal basis. Indeed, that’s what the fuss is all about.
If it was a unified currency, then Athens — or Madrid — or Rome — could merely print off additional banknotes and hand them over to Berlin. Obviously, such is not the case. Berlin wants Athens to pay back in the currency that she borrowed: German Euros… the Euros that only Germany can print. They have serial numbers ending in X.
When anyone transfers funds from their Paris bank to their Berlin bank — they are making an international exchange of French Euros for German Euros — at a one to one exchange rate. They are still two different currencies. By holding rigid to the 1:1 exchange rate, the public is lulled/ lured into thinking that every Euro is the same.
But, they’re not. The European central banks for each nation are still in business, keeping track of who owes whom. Which gets us back to Cyprus. ECB audits reveal that the Russian Mafia has struck again. It has cleaned out Cyprus in the exact same manner as Iceland and Ireland. (BTW, the IceSave con fleeced the British and the Dutch — the islanders were not solicited. Most didn’t even know that IceSave even existed. It didn’t advertize to speak of in Iceland!)
In all three cons the Russian Mafia used above market rates to induce deposits, and then compelled the bankers to extend them ‘loans’ against tissue paper collateral. Just because their names don’t appear on the masthead, don’t ever assume that the Mob is not in full control.
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When the FBI first tumbled to the Mob ownership of Las Vegas casinos — it took a while. Their de facto ownership never showed up on ANY records at all! Everywhere you looked the registered owners were as clean as a whistle. Control was maintained by bullets. They took their profits as skim — cash right off the top — typically in the counting rooms. The money never hit the books.
That still wasn’t enough, they forced the casinos to buy dry cleaning services from their companies. Ditto for everything from booze to food. Their corporate income tax returns made these gushers look like they were just covering debt service!
Then Howard Hughes was brought in to buy the Desert Inn. Yeah, the original Mob casino. Then the FBI found out that it was an absolute gusher. In short order, Hughes bought up the rest of the town. The FBI made offers that the sellers couldn’t refuse. (They were all crooks facing decades in prison, of course.)
All of which is to explain what Control Fraud means. A business/ institution is being cleaned out by its own management — sometimes just to avoid ‘kinetic lead poisoning.’
For further illustration, review Goodfellas, the film, for what a control fraud Bust-Out is.
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All three island cons were Mega-Embezzlements. Putin has to be very upset that the game is terminated. The total amounts looted is way, way, way, way, beyond any Bond Villain. These monies provide the wherewithal for the mega-yachts that Russian mobsters keep buying — from Germany, no less.
(Que: irony)
From here on in Berlin is going to be performing all of the audits. In which case, the greatest cons of financial history are being shut down.
In all three islands, the monies involved are so staggeringly high compared to local economies that there is no way on Earth that they could cover the Russian theft.
And, yes, Berlin, London, Paris, et. al. feel like fools. Hence, the attempt at a backroom cure.
In other news, the Russians have signed a mega-deal with Israel inre developing her natural gas reserves. Now think how many, Jewish, hostages Moscow has to influence that deal. Yeah, it sealed it, for sure.
Seems I might have to abandon my hopes of Russia saving us from the EU. We in Europe are now stuck between the “banksters” behind the EU and the Russian mafia. They are all predatory financial criminals. It seems that the peoples of Europe will have to save themselves by bringing down the euro and the EU and ensuring that the Russian mafia keep their distance. Those mafia are, of course, laundering their money in the London property market as David Cameron’s friends delight in property prices going through the roof and ordinary Britons being unable to afford anything in the capital but being forced to move out and commute long distances – and that is the middle classes. The New Britons are mostly in social housing of course.
The FDIC now insures accounts up to $250,000, but it only holds funds sufficient to cover a tiny fraction of the deposits. The Russian involvement in Cyprus stems from a long tradition of being the protector of small Orthodox Christians since shortly after the fall of Constantinople. They have fought dozens of wars against muslim encroachment on her southern flank for this purpose.
Very enlightening, thanks!
Remember this? http://www.youtube.com/watch?v=ypErWjLlWIs
The one thing left out of the above article is that the Russians will not take kindly to some banker or pol taking their money, rest asured, the Russians don’t play and I would bet my life savings that words were exchanged with the Cypriot bankers and pols that went something like this, you take our money, we take what you hold dear. The country of Cyprus isn’t going to confiscate peoples money, because it would be too costly in lives for the pols and bankers. So it ain’t going to happen.