A Greek tragedy

“In money management what sells is illusion of certainty. The truth (i.e. we don’t know much) is a more difficult sale, but a better investment.”

– Tweet from Piet Viljoen of RE: CM asset managers.

“A woman was trying to read
If deposits were still guaranteed
If her bank would consign
To Frankfurt am Main
Or Cyprus would have to secede.”

– Tweet from Dr. Goose

“..a quite outstanding week’s work by the Troika [ECB, EC, IMF]. Take a moment to realise the scale of what’s been done here. No human agency has achieved so much economic destruction in such a short time without the use of weapons.”

– Pawel Morski, ‘Cyprus: the operation was a success. Shame the patient died’.

“Alright, people just need to chill. Cyprus is a tiny country. To put things in perspective, its GDP is roughly the size of.. Lehman.”

– Tweet from Jesse Livermore.

Like Lehman Brothers before it, Cyprus may well come to be seen not so much as the cause of further crisis but as yet another symptom of the ‘long emergency’ that continues to suffocate the western economies. We would describe this emergency as, fundamentally, an inevitable crisis triggered by an unsustainable explosion of credit. No progress or improvement has been or will be possible in the underlying condition because both the banking sector that collectively lost its mind and the governments that permitted it to are fatally dysfunctional and equally bankrupt, literally and morally. Western banks and western governments are now like Macbeth’s

..two spent swimmers, that do cling together And choke their art.

The prime minister of Luxembourg, Jean-Claude Juncker, has provided two clear insights into the world of deceit that the modern politician inhabits:

We all know what to do, we just don’t know how to get re-elected after we have done it.

And,

When it becomes serious, you have to lie.

This is what we now have by way of parliamentary democracy: a self-serving elite who cannot be trusted, operating to a timetable defined by, and limited to, the electoral cycle.

This democratic deficit is possibly more severely damaging than the supposedly intractable fiscal one that lies beneath it. One of the most outstanding discussions of these twin deficits was made by John Lanchester in May 2009. It’s a long piece but well worth the effort. Because it conveys the genesis and resultant scale of the banking horror story in terms that a layperson can understand, it may be one of the standout accounts of our ‘long emergency’. As Lanchester points out, western governments for five years now have been going to tremendous, Basil Fawltyish lengths to avoid taking insolvent banks into public ownership. Whatever emerges from the disaster that is now the Cypriot economy (with euro zone policy making nicely described by Dan Davies as “Laurel and Hardy carry a piano upstairs”), Cyprus has reminded us of a couple of awkward truths that most politicians and bankers would prefer to keep off balance sheet:

  1. A deposit in a bank is not a riskless form of saving. We may not see eye to eye with the FT’s Martin Wolf on many aspects of modern economics and central banking in particular, but he described banks well last week: “Banks are not vaults. They are thinly capitalised asset managers that make a promise – to return depositors’ money on demand and at par – that cannot always be kept without the assistance of a solvent state.”
  2. When states become insolvent, the piper must ultimately be paid. Fatally embarrassing insolvency is not a problem that can be perpetually or painlessly deferred.

Cyprus matters not because of the size of its economy or even because it is, for the time being at least, a member of the euro zone. It matters because the inept handling of its banking crisis last week threw one facet of modern banking into sharp relief: if a deposit guarantee scheme is seen to be fraudulent or sufficiently fragile to be easily smashed by politicians, then confidence in banks per se, and at a wider level confidence in unbacked paper currency itself, will be vulnerable to an unpredictable run. CLSA strategist and financial market historian Russell Napier writes as follows:

..the Euro is the progeny of political desire and is succoured by the political elite. If, however, the people of the system believe that the Euro’s sustenance necessitates the use of arbitrary power resulting in unequal treatment [i.e. the abandoning of bank deposit insurance for retail savers] then they will conclude that the Euro system is not worth having. The loss of democracy and the rule of law will outweigh whatever economic benefits Euro membership may bring. The citizens of the PIIGS [Portugal, Italy, Ireland, Greece and Spain] have shown incredible resilience to the economic sacrifices they have been asked to make, but will they be as resilient to the loss of democracy which the creation of the Euro necessitates and which the Cypriot bank levy clearly illustrates ? ..the bending of the rule of law to prevent its economic collapse brings arbitrary and unfair outcomes which peoples have always rebelled against. There will clearly be short term consequences from the sequestration in Cyprus but the key impact will be long term as the citizens of the Euro, like the citizens of the Soviet Union or the American colonies before them, eventually reject the sacrifice of political rights necessary to support the system. When the history books are written, the Brussels-imposed sequestration in Cyprus will be seen as the tipping point when the citizens of the Euro system realised that the socio-political sacrifice needed to sustain a single currency was just too great. [Emphasis ours.] 

This article was previously published at The price of everything.

5 Comments

  • According to Detlev Schlicter (qv his website), with whom I agree, the nature of the law concerning bank accounts and deposits in a fractional reserve bank (as they all are, around the world), is that of a loan to the bank. It is not your money, they take it, record it as an ASSET on their balance sheet, and issue a bank statement which is effectively an IOU.

    The IOU is a liability on their balance sheet, this is a double entry fact. Case law on this around the world has tested and confirmed that when a bank suffers a bank run or simple bankruptcy, be it Northern Rock in the UK, IceSave/Glitnir/Kaupthing/Landsbanki in Iceland, or Laiki Trapeza in Cyprus, then the IOU can legally be totally or partially lost, and the fact the government is pretending to be able to guarentee all deposits is an irrelevance – if the govt stands behind the banks – or calls the business loss ‘a levy/tax/sequestration/whatever weaselism you like…’. These terms are just red herrings, the business risk is the fundamental point.

    To say, as above, that this ‘Brussels-imposed sequestration in Cyprus’ is a pivotal moment which will go down in history is a different point the brute fact to with modern fractional reserve banking, that you will have great difficulty doing normal ‘due diligence’ on any bank, even S&P ratings are likely to be of no use, and that this opacity of the bankings system means that eurozone banks, UK banks, US banks, and Icelandic banks are no more than a bank-run away from losing you all your money, and that is a legal fait accompli. If you don’t believe Detlev or me, ask yourself this: if the Cyprus haircut/levy/tax is illegal, who is or could be prosecuted, and under what law? No idea? Well, start at the top and read my potted exposé again, it is your money.

    • Craig Howard says:

      These terms are just red herrings, the business risk is the fundamental point.

      I agree completely, but eliminating immediate risk to citizens is now a requirement of keeping one’s political sinecure. Eventual risk just isn’t spoken of in polite circles, of course.

  • John Phillips says:

    The posts on the Cobden Center website are insightful and provide useful, revealing economic analyses, but not this one. It putting out rubbish similar to the public media.

    The EU was never going to take any depositors money. They were always going to give them money. The Cyprus banks took the depositor’s money. Don’t misunderstand and think that I’m a cheerleader for the EU. I’m not. I’m just trying to counteract the gross media misinformation, including this disappointing post.

  • The Cyprus shambles, would never have occurred under full reserve banking.

    Under full reserve, depositors have to choose between 100% safety for their money, in which case the money is not loaned on or put at risk: it’s just lodged at the central bank. So that money cannot be lost.

    Second, depositors can choose to have their money loaned on, but if the loans go bad, its depositors who foot the bill.

    So under full reserve, all depositors would have got what they signed up for. Those wanting 100% safety wouldn’t have lost anything. As to those who agreed to have their money loaned on, they’d have taken a hair cut. But that’s no more than they originally agreed to. Problem solved.

  • Captain Skin says:

    Democracy: The God That Failed

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