The War on Savers Heats Up

The United States has so many “wars” on its hands that no one can keep them all straight. The War on Terror, the War on Drugs, the War in Afghanistan, the Drone War, the War on Women, the War in Iraq. To this must be added a quiet war, begun in 2008 as a response to the financial crisis, and so low key that it doesn’t deserve capital letters – the war on savers.

Ben Bernanke and the Federal Reserve are the principal protagonists in this war, through their Zero Interest Rate Policy that offers savers absolutely nothing on their investments, until at some point each saver is forced to start eating into their capital to survive. The interest savers would otherwise have earned in a normal economic environment is going to the banks, because while savers if they wished to borrow money can obtain rates anywhere from 4% to 30% depending on the term and the collateral used, banks and only banks can borrow at 0%, and invest in Treasuries to make an easy profit. The Fed’s policy has been providing a direct transfer of wealth to the banks from savers for five years now.

Now comes the next stage in the battle, occurring on the island of Cyprus, and so quiet a foray that only financial blogs at first were discussing the implications of what has happened. The Cyprus financial system is in a mess; its banks, like many of those in Greece, Spain, Italy and even France, are de facto insolvent, choking on bad debts and poor investments. The country has turned to the IMF, the European Union, and the European Central Bank for a loan. A €10 billion loan has been agreed to this weekend, but the terms are both extraordinary and horrific for savers. Those Cypriots who had deposits of €100,000 or less in local banks will be assessed a “tax” of 6.75% of their principal; those with more than €100,000 will be taxed at a rate of 9.90%.

Theft – confiscation of wealth – a bank “bail-in” as opposed to a bail out: call it what you will, no one is fooled by this “tax”. It is an attack on savings, a government action designed to force savers into recapitalizing their banks all at once. It protects the banks from bankruptcy and the consequences bankruptcy would have for shareholders and bank executives. It is what Ben Bernanke has been doing for five years, only on steroids and in highly concentrated form.

Press reports say that the Germans, who had to give their approval to the Cyprus loan, wanted a tax of 40% on all deposits. One European bureaucrat was quoted as saying that other countries besides Cyprus should not be surprised if a similar tax is imposed on their deposits. UK Chancellor of the Exchequer George Osborne said what is happening in Cyprus is yet more evidence that the UK needs to continue on its austerity path, lest the country face the same fate as Cyprus. Both Italy and Spain have filed requests with the IMF and the EU for financial assistance. What are people who have deposits in Italian and Spanish banks going to think?

It’s the principle of the thing, as they say. If there is such a thing as a financial Rubicon, beyond which the governments and bankers cannot turn back, this would be it. You cannot un-propose the confiscation of savers’ deposits, because it is the mere idea that something like this could be done that causes the damage. Even if the IMF, EU, and ECB withdraw this condition for a loan, who is going to have faith that something like this – something that would have been unthinkable to the typical depositor – won’t be enacted some time in the future?

The first thing anyone in Italy or Spain is going to think about when banks open on Monday is how to get their money out of the bank. Bank runs now become serious possibilities. You would think that European government officials and the IMF thought long and seriously about this possibility before crafting their proposal to Cyprus. Perhaps they have some measures they intend to take to stem any bank runs in these or other countries like France or the UK. It is hard to imagine what these actions might be or how they would be any help. Pouring a lot of liquidity into the banks won’t solve anything, because that’s been going on all along. Driving up to the banks with armored trucks filled with cash won’t help, because there aren’t enough trucks and there isn’t enough cash to satisfy any serious bank run. Besides, that just encourages people to stuff money under mattresses, which is the sort of thing that made the US Depression worse.

Announcing to the public that this is a one-off deal for Cyprus only, because so much of the money in Cyprus banks is dirty money or laundered money sent there by Russian criminals (and nobody would mind harming the Russian mafia) won’t do the trick either. It’s the principle of the thing, and the principle that your money in a bank is inviolate has now been irrevocably broken, because the Troika (as they are called) of the EU, the ECB, and the IMF are about as potent a group of financial masters as can be assembled. They are supposed to be the parties protecting you and your wealth, and not raping you.

Even the United States is going to have to think about the consequence of this development. The US has had deposit insurance for 80 years, and it has helped prevent bank runs whenever a bank needed to be shut down. Yes, it is true that the FDIC as the insurer does not have enough money to cover the closure of a Too Big to Fail bank, which is partly why the big banks are TBTF. That’s a risk that all depositors face, but that is very different from the newest risk that has been injected into the financial system: the risk that no one’s money is safe in a bank even if the bank is healthy. Deposit insurance becomes superfluous, or even useless, in circumstances where any government feels it necessary and appropriate to confiscate wealth from those who have done nothing wrong.

Financial officials of all sorts will be on the wires Monday morning assuring depositors “this can never happen here”. So what? Everyone thought that their brokerage account was perfectly safe at a registered exchange such as the Chicago Mercantile Exchange, but the MF Global collapse put the lie to that. Individual brokerage accounts were confiscated by the bankruptcy trustee, even though the rules of the exchange clearly mandated that this would never happen because the brokers themselves should have stepped up and made good on any losses by MF Global. The big banks such as JP Morgan which controlled the bankruptcy process didn’t want their broker-dealers ponying up for MF Global’s mistakes, and the CME, which had always touted that no individual had ever lost money on the exchange in over 100 years, cannot say that any more.

That is what this financial crisis is doing to savers. It is showing them that their money can be lost in the wink of an eye, due to a Flash Crash, or an arbitrary decision by a bankruptcy judge, or a decision by governments to confiscate deposits. And never, ever in this process is a bank put into receivership, or its shareholders asked to absorb losses, or its executives jailed for fraud. It is always the savers who are forced to recapitalize the system, while mistakes are never corrected. Supposedly the central bankers and finance ministers are petrified at the thought that any failure of a big bank will lead to a systemic failure of many other banks, resulting in a collapse of global finance, and terrible economic consequences such as high unemployment and loss of wealth.

The problem is that people are already being asked to suffer high unemployment, they have already had their wealth quietly shifted over to the banks by Ben Bernanke and other central bank governors, and now they are facing outright theft of their savings. At the very least, if this sort of pain is already being meted out to the individual savers, shouldn’t the bankers be forced to share in the pain?

If banks in Cyprus are insolvent, put them into receivership and use the bankruptcy law and the courts for the purposes they were intended. If bankers lose their jobs in the process, perhaps they will be more careful when and if they find work once again in the financial industry. If bank executives have broken the law, put them on trial and give them jail terms if they are convicted of fraud. If all of this causes Cyprus to leave the euro, then leave the euro and forego whatever perceived advantages there were to being a member.

At least all of this can be accomplished within the law. That is far better than traducing the law through confiscation of private wealth. Once governments go down that route, they not only risk losing the consent of the governed, they immediately undermine the bedrock upon which any government functions – the rule of law. If the people cannot have confidence that their laws will be faithfully honored, then there is no advantage to having a government, and if the social contract between the people and their government is fatally ruptured, the political order quickly collapses. The collapse need not be accompanied by riots in the street – not at first. The collapse occurs first in the mind, as citizens realize their country is only steps away from anarchy or dictatorship.

Why the finance ministers and economic experts cannot see this is mystifying, but that has been a feature of this financial crisis since its inception. The instinct of our financial masters has been to protect the banks at all costs. This instinct seems to be embedded in the DNA of men like Ben Bernanke and the wizards of finance who run the IMF, the EU, and the ECB. They know no other answer to the problem of insolvent banks, and the politicians who must endorse their actions live in fear of these financial masters, because the politicians are constantly threatened that “much worse” will happen if the banks are not mollified.

If the top 25 banks in the world, plus a few score other banks in small countries such as Cyprus, need to be put into receivership, it is time to get on with it and clean up the banks. The global economy will no doubt go into shock, and a deep depression will ensue, causing a wave of corporate and personal bankruptcies and much social pain. But at least this will pass, and society can rebuild its financial system on sounder grounds.

The path we are on now, where private wealth can be grabbed by government at any time without any notice and for any reason, more than likely guaranties the same sort of shock, economic depression, and severe social pain will ultimately ensue anyway. But when all of this passes, society will have nothing on which it can rebuild a sound financial system, because no law will be trusted, politicians will be laughed at if they profess to be working for the good of the people, and no government promises will ever be believed.

Now that three of the most powerful governing bodies in the world have shown their hand, it may be too late. They may already have pushed the developed world on to the path of anarchy or dictatorship, especially if politicians do not immediately, and for the first time, stand up to them and demand that the banks be dealt with according to existing laws. Someone in authority needs to assert that the rule of law will be honored, because otherwise all who are in authority will find they have no authority at all. The authority to act on behalf of the people will be squandered, and the door will be open to a tyrant strong enough to fill the void.

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Comments

ww2.2

This is a historical rerun. During the '30s, the Germans used various forms of financial blackmail to soften up the Balkans for easy conquest.

First the Germans gradually pulled the 'little countries' into total dependence on German trade. German businessmen and trade reps would buy up huge quantities of wheat and other raw materials at very high prices, then - often but not always - would fail to pay the debt. This made the 'little countries' reluctant to displease Germany, because their farmers and businesses stood to lose huge amounts of (potential) money if Germany pulled out entirely.

Next, the Germans used currency manipulation to buy up industries and properties with little real expenditure.

By the time the real war started, those Balkan countries had little choice. Most of them would have preferred the Russian side, but Germany already owned their resources.

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I agree, wipe the slate clean

It is 2013 and this started in 2008. If they had simply nationalized the banks per the Swedish solution or even Iceland, all of Europe would be humming economically by now. This makes no sense and perhaps you can explain why countries are even staying in the Eurozone. I thought the point was without the EU they would collapse, but in essence, haven't these economies already collapse?

Banks are just sucking the life out of nations and people with no end in sight in seems.

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The message is what it is...

The collapse occurs first in the mind, as citizens realize their country is only steps away from anarchy or dictatorship.

Surely you must understand that "the collapse in the mind" is the objective here. This is not a bug, it's a feature.

You realize the state is going to take your money and that there is no consequence to the theft for the banks and for the state.

And what is it precisely that "the people" are going to do about it?

If the money is confiscated - sorry, "taxed" - and there is no revolt, and any attempt to "run" is contained with capital controls, and life goes on, and hey, how 'bout that stawk market... then the "savers" will have been taught an object lesson. Namely, give up.

Besides, the times are changing.

The accumulation of financial assets? Bad. Making a portfolio of claims on future cash flows? Hoarding; a deeply anti-socal practice. The financial service industry does so miserably by "investors" that it's better to deprecate the whole "store of value" function of money. Best to condition "savers" to accept arbitrary "adjustments"; this will slowly begin to open them to alternative social arrangements.

"Savings" will join "guns" and "religion" as things that the left-behind, out of date people cling bitterly to.

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