John’s already written about the Cypriot bank bailout / bank customer hostage crisis, but check this out, from an interview with a economist Chris Pissarides, a Nobel Prize winner born and raised in Cyprus (via Atrios):
Do you favor or oppose taxes on bank depositors?
I am totally against it. First, deposits under 100,000 are insured. What happened to that insurance? How could the euro group agree to taxing deposits as small as one euro? What is the meaning of deposit insurance in the euro zone? Second, deposits include the savings of honest people who have paid their taxes and saved for retirement, to buy a home, educate their children or whatever. Why pay a hefty additional tax? And how would these people feel when they woke up on Saturday morning to be told, “Sorry guys, we are not letting you withdraw your money anymore, until we sort out how to take a big chunk away from you.” And why? Because two banks out of the tens operating in Cyprus made bad investment decisions three years ago to help Greece out of its crisis, and got hit by the troika. What’s the incentive that banks now have in the European Union to treat risky investments with caution? If one of them takes bad risks the others will pay for it; if it works well for it, it will keep the profits. A classic scenario for market breakdown.
Setting aside the overall stupidity of this move, it’s delusional psychosis to propose that depositors should lose €6,750 of the first €100,000 on deposit (which is what the EU proposed and the Cypriots will hopefully reject). I can’t imagine a more destabilizing move than voiding deposit insurance the moment that a bank “needs” a bailout. Deposit insurance was designed for precisely this type of circumstance. If this happened here, there wouldn’t be enough paper currency to handle the run that would ensue as everyone chose to move their money into a fucking shoebox. Especially when interest rates for all deposits are in the 1-2% range, the reason people tolerate those rates on savings or CDs is because their principal is safe. How can anyone running a banking system be so goddam obtuse?
Update: The Cyprus parliament rejected this plan unanimously a few minutes ago, presumably because they didn’t want to be hacked to death in the streets. Thanks to Comrade Scott for pointing that out.