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Cyprus and the Rotten Union of Big Government & Big Finance
Posted By Mark Hendrickson On March 21, 2013 @ 12:16 am In Daily Mailer,FrontPage | 9 Comments
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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