Cyprus and the Rotten Union of Big Government & Big Finance

Everyone in the financial community and at the top levels of governments around the world has one eye trained on the Mediterranean island nation of Cyprus now.

Unless you’ve been isolated from the media, you’ve probably heard that over the weekend, the government of Cyprus announced a tax on bank deposits to rescue the banks from potential insolvency. The term “bail-in” has been coined to differentiate between a taxpayer bailout (i.e., rescue funds coming from outside the bank) since in this case, at least some of the cost of rescuing the bank is coming from money already within the bank.

For the moment, the Cyprus government has retreated and stated that they have decided not to impose the tax; nevertheless, serious damage has been done. Money and banking ultimately depend on people having confidence in their soundness and integrity. It’s hard to see why, going forward, anyone would risk depositing money into a Cypriot bank if the government seems inclined to raid those accounts without notice. (That having been said, we should note that the Argentine government has confiscated a portion of bank deposits in their country in the past, yet banks still function in Argentina.)

The banking crisis in Cyprus is similar to the one that occurred in Iceland about five years ago. In both cases, the banks in those small island nations had balance sheets that were far larger than the modest GDPs of their respective countries. Iceland’s government bit the bullet, let the banks go broke without a taxpayer bailout. The Icelanders went through tough times for a couple of years, suffering a sharp devaluation of their currency, but now they are on the mend and credit markets have been restored. Cyprus, however, uses the euro, and so does not have the option of a currency devaluation.

Indeed, the government in Cyprus lacks the independence that the government in Iceland had. The European Central Bank and the International Monetary Fund are exerting heavy pressure on Cyprus’s government to implement the tax on deposits. They seem to be making an offer that the Cypriots ultimately might not be able to refuse. This power play raises several profound and unsettling questions.

The famous gold analyst, Jim Sinclair, triggered a tsunami of lurid speculations stemming from the fact that powerful Russian interests—allegedly, an old KGB network that enriched itself by looting valuable assets from the corpse of the Soviet state and parked huge hordes of cash in Cypriot banks —were the primary target of the proposed confiscation (tax). Sinclair averred that those hardball-playing Russians were the last customers in the world that the IMF and ECB should want to antagonize. Would the Russians send a message by taking out someone who helped to hatch the “bail-in” scheme? Would they try to destabilize the euro using whatever ability they have to rock markets? Would the Federal Reserve and ECB pay off the Russians by giving equivalent financial assets to them to keep them from doing some dastardly deed? Who knows? Such possibilities are titillating, although purely conjectural and possibly completely fantastical.

What should concern us all is the state of banking in the world today.

The banking crisis in Cyprus is the latest evidence that Big Government and Big Finance are joined at the hip. Iceland appears to be an outlier. In most parts of the world, politicians act as though they cannot afford to let market discipline put an end to error-prone banks.

The bailout/bail-in paradigm makes a mockery of the rule of law. I’ve been saying for several years that the major central banks of the world are essentially lawless. I’m not a lawyer, so technically I may be incorrect, but it seems to me that the central banks do whatever they feel they have to do—break contracts, abrogate property rights, purchase assets, dole out new funds created out of thin air—to prop up decrepit, bankrupt financial institutions because the deeply indebted governments of the world cannot continue to operate without the ready availability of complicit, dependent big banks to maintain a functioning infrastructure to accommodate their trillions of dollars of low-value paper. The last thing that those holding high office in governments want is for the whole rotten, rickety financial, economic, political status quo to come crashing down, so they willingly turn a blind eye to central banks’ creative interpretations of law and give them carte blanche to do whatever they must to keep the game going.

The inexorable trend of this “rule of expediency” in place of the rule of law is increasing centralization of power and the progressive absorption and confiscation of wealth for the state’s purposes. Compounding the ugliness of this grim process is the fact that the key decisions and policies are made by unelected officials. Central bankers are accountable to the governments that appoint them in a technical de jure sense, but in a de facto sense, they have free rein. Even less accountable are those who run the IMF. This mid-‘40s monstrosity was one of the first multilateral agencies to be created. The American official who helped to set up this bureaucracy designed to redistribute wealth from American and European taxpayers to often corrupt and illiberal governments was Harry Dexter White, who turned out to be a secret member of the Communist Party. If he were here today, he would have the satisfaction of seeing his baby sitting astride the financial system of the globe, dispensing billions of dollars and dictating policies to once-sovereign governments.

In short, there is a lot more at stake in Cyprus’s banking crisis than the ultimate fate of a Russian cabal’s loot or even the fate of the euro currency itself. This is a significant step on the road away from liberty and sovereignty and toward rule by illiberal global bureaucracies.

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  • AdinaK

    Global governance, indeed. In fact, I have been commenting on related issues for some time. To be sure, the Radical-in-Chief's deconstruction of the economy is geared towards such an outcome, however, he has to disarm the public first. But this does not mean that he started this train wreck. Not at all. But he is the engineer chosen to implement its careening off the tracks. He is working towards this goal, piece by piece –

    As a matter of record, the following was penned, as just one warning (out of many)to Americans –

    Adina Kutnicki, Israel

    • AnOrdinaryMan

      Yes, Zero is engineering a global government, dominated he hopes, by Islamic Sharia law.

      • Loyal Achates

        They let you have internet in your padded cell?

  • Rostislav

    "What should concern us all is the state of banking in the world today" – yes, of course, but I think that the state of the world democracies ought to be of even greater concern today. The voters of Cyprus are not some beduin tribe in the absolute Arab monarchies: they live in a classic democracy, therefore they, they only, and nobody else but them are the masters of their country's destiny – not some IMF, Russian gangsters, Merkel or EU. The Cypriots had shown themselves to be very bad masters, be it their applauding to the unfunded social guarantees or their permissiveness for local banks' unholy activities. The economy of the island went to the final deepest hole after the population happily elected In 2008 Comrade Christofias of the pro-Communist party AKEL as their president. I do not want to say that the EU politicians or bankers are cute and fluffy, but nevertheless it seems to me that the main guilt for the Euro-utopia failure lies not with the Brussels' bureaucracy, but with their devoted voters, always so eager to run for any mirages of the bright parasitic future. Maybe Churchill was mighty wrong with his idea of democracy as the best system of them all? Or maybe the European nations have changed into a very bad "multicultural" kind of demos since Churchill's times? But the same multicultural transformation is happening also far away from Europe now – in Australia. And Obama's re-election speaks for itself most eloquently in the USA… Isn't it a much more alarming trend than all the world's banking extravagancies together? Rostislav, Saint-Petersburg, Russia.

    • Indioviejo

      You make sense. I also believe it is a sociological problem which we will be unable to solve. Eventually we will be in a Total war.

  • Loyal Achates

    That's capitalism, baby. if you don't like it move to North Korea.

  • John Stone

    The common currency Euro is a good idea but badly set up. It seems unlikely that it will last. Getting rid of it will be a trauma, but once it is gone that undemocratic bureaucrat led EU will be weakened. All to the good.

  • Rianna Richards

    Thanks for explaining the Cyprus financial crisis; now it really makes a whole lot of sense.

  • La resistance

    We, the citizens, refuse to allocate our own funds in any form to bailout the gambling debts incurred through the financial speculation of investment banks.

    Sign :