Why That Cyprus Bank "Tax" Was Proposed in the First Place
The bank "tax" that was rejected last week by the Cyprus government was originally proposed by the IMF and pushed by the government of Cyprus - until they turned on a dime and decided to reject it. What was the point of the thing in the first place?
The banks in Cyprus - like so many other banks - needed to be bailed out. The powers-that-be feared that if one or more Cypriot banks failed, ti would set off a chain reaction across the Euro zone - the same reason they've bailed out other institutions. But this time, something new would be tried. Instead of pumping money into the banks, as has been done so many other times in Europe and in the U.S., the depositors would "chip in" to save the banks - without the depositors consent, of course.
On the face of it, doesn't this "new" approach strike you as evil? Who in their right mind would put up with this? Wouldn't you be up in arms if the government announced it was taking 10% of your bank account? Imagine if you had decided to sacrifice present consumption and save save your money, then, rather than invest the savings in speculative securities, you park it in the bank where - you were promised - your money was safe. Not only was it safe from loss of principal due to market gyrations, but your principal was insured by the government - in the case of countries in the Euro zone, up to 100,000 Euros. Suppose these savings were intended to buy a home, or pay for college or, indeed, this was all the money you had in the world.
All of a sudden, you're told your government is going to take some of your money - just like that, with no notice, and no way to get your money out of the account before they did it. That's exactly what occurred last week. After close of business on Friday the government of Cyprus announced they were taking anywhere from 6.75% to 10% of the money from every deposit account at every bank on the island of Cyprus. The banks were immediately closed for as long as the government needed to accomplish this plan. While ATMs were working at some banks, the percentage that the government was planning to take was already electronically frozen. The only thing people at the ATMs could do is get some of whatever was left over.
Authorities believed people would tolerate this outrageous action. Or at least they were prepared to go ahead in the face of any objections. While it's easy for us to look back now and wonder why the heck they would think that, just remember that when the first massive bailout was proposed in the U.S. Congress as a result of the crisis in late 2008, people resisted mightily at first. Then the U.S. government went to work and scared the daylights out of everyone until they stopped for a moment to think about the idea that the financial system would "collapse." Fear set in and the people stepped back, allowing the government to go ahead and pounce. The first TARP bailout was passed, to be followed by so much more.
That first bailout made the term "trillion" commonplace in economic and financial discussions. Before that, "trillions" was reserved for a few big items like the national debt and the U.S. government's contingent liabilities. After the bailout the federal government quickly switched its annual deficit from the hundreds of billions to over a trillion, and between the bailout and the deficit, we find ourselves talking trillions more and more these days.
Meanwhile, we hear that there's no "inflation." Make any sense to you? Perhaps Cyprus will focus people's attention on governments-gone-wild in their spending now that they've seen those governments attempt to deal with the problems caused by their depravity by openly stealing from individuals.
Then again, I wouldn't hold my breath. It hasn't happened yet.
The banks in Cyprus - like so many other banks - needed to be bailed out. The powers-that-be feared that if one or more Cypriot banks failed, ti would set off a chain reaction across the Euro zone - the same reason they've bailed out other institutions. But this time, something new would be tried. Instead of pumping money into the banks, as has been done so many other times in Europe and in the U.S., the depositors would "chip in" to save the banks - without the depositors consent, of course.
On the face of it, doesn't this "new" approach strike you as evil? Who in their right mind would put up with this? Wouldn't you be up in arms if the government announced it was taking 10% of your bank account? Imagine if you had decided to sacrifice present consumption and save save your money, then, rather than invest the savings in speculative securities, you park it in the bank where - you were promised - your money was safe. Not only was it safe from loss of principal due to market gyrations, but your principal was insured by the government - in the case of countries in the Euro zone, up to 100,000 Euros. Suppose these savings were intended to buy a home, or pay for college or, indeed, this was all the money you had in the world.
All of a sudden, you're told your government is going to take some of your money - just like that, with no notice, and no way to get your money out of the account before they did it. That's exactly what occurred last week. After close of business on Friday the government of Cyprus announced they were taking anywhere from 6.75% to 10% of the money from every deposit account at every bank on the island of Cyprus. The banks were immediately closed for as long as the government needed to accomplish this plan. While ATMs were working at some banks, the percentage that the government was planning to take was already electronically frozen. The only thing people at the ATMs could do is get some of whatever was left over.
Authorities believed people would tolerate this outrageous action. Or at least they were prepared to go ahead in the face of any objections. While it's easy for us to look back now and wonder why the heck they would think that, just remember that when the first massive bailout was proposed in the U.S. Congress as a result of the crisis in late 2008, people resisted mightily at first. Then the U.S. government went to work and scared the daylights out of everyone until they stopped for a moment to think about the idea that the financial system would "collapse." Fear set in and the people stepped back, allowing the government to go ahead and pounce. The first TARP bailout was passed, to be followed by so much more.
That first bailout made the term "trillion" commonplace in economic and financial discussions. Before that, "trillions" was reserved for a few big items like the national debt and the U.S. government's contingent liabilities. After the bailout the federal government quickly switched its annual deficit from the hundreds of billions to over a trillion, and between the bailout and the deficit, we find ourselves talking trillions more and more these days.
Meanwhile, we hear that there's no "inflation." Make any sense to you? Perhaps Cyprus will focus people's attention on governments-gone-wild in their spending now that they've seen those governments attempt to deal with the problems caused by their depravity by openly stealing from individuals.
Then again, I wouldn't hold my breath. It hasn't happened yet.
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