Monday, March 18, 2013

European Economic Managers – If They Can Do the Wrong Thing They Will Do the Wrong Thing

Making Depositors Bail Out the Cypriot Banks

Lost in all of the news about the stupidity of European policy makers who are destroying some European economies in order to save them is the announcement that the European Union will bail out the Cypriot Banking system.  Well that news would have been lost except for this.

Under an emergency deal reached early Saturday in Brussels, a one-time tax of 9.9 percent is to be levied on Cypriot bank deposits of more than 100,000 euros, or $130,000, effective Tuesday. That will hit wealthy depositors — mostly Russians who have put vast sums into Cyprus’s banks in recent years. But smaller deposits will also be taxed, at 6.75 percent, meaning that the banks will be confiscating money directly from retirees and ordinary workers to help pay the tab for the 10 billion euro bailout or $13 billion.

The sanctity of the banking system is, well, sacrosanct  Until now depositors have not suffered from the fact that those managing the banking system in European countries like Spain have really messed up the entire thing.  But if the European action holds, depositors will be paying for the mistakes of men and women the depositors had no control over, the bankers.

And all of this brings the world back to 1933, and the term ‘bank holiday’ rears its ugly head.

The government also extended a bank holiday that was put in place to try to stop a run on the banks. The holiday was supposed to end Monday night. Now, banks will not be opening their doors Tuesday, as planned. There was talk that they might not open Wednesday, either.

A bank holiday is really a holiday for your money, it doesn’t do any work, it just sits in the bank where nobody can touch it. 

And who in the U. S. endorses such a policy?  Why conservatives of course.

“This is the first time that senior creditors have taken a loss in a euro zone bank rescue,” said Adam Lerrick, a sovereign debt expert at the American Enterprise Institute who has long argued that debt-heavy countries in Europe must make private investors — including bank depositors, if need be — share the cost of bank bailouts. “It prevented the insolvency from being transferred from the banking system to the government.”

 Ah, yes, the American Enterprise Institute, is there any  policy position these people can’t get right?

The good news, everyone living today who hasn't lived through a run on a banking system is in for a front row seat to a phenomena everyone thought had been cured and done away with decades ago.  Thanks European policy makers, you are making history come alive.

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