Fundamentally, the state owes an
obligation to the first standard deviation of all depositors by size to
preserve their deposits and matching assets in full. This is done through prudent banking. Outside that magic pool that preserves every household, the banks can accept large deposits and take large risks and they can all go bust or make great profits.
That is called investment banking.
Deposit insurance was never meant
to backstop any form of speculation.
That the losers have worked assiduously to lay off their mistakes is
certainly no surprise and will not end until the government simply becomes
predatory. Rather simple to do. Yes I will give you a billion dollar line of
credit but extract a half billion reward in your shares. This naturally makes the government the
financier of true last resort.
In Canada’s case I would extract
industry level equity compensation in equity shares which I would then transfer
directly into the Canada Pension Plan.
This has the advantage of transferring management to professionals and
creates a true moral hazard for the gamers.
Done this way every transaction has a possible profit for the pension
fund and generates political cover and even reward.
Obviously the USA needs to do
something similar.
The Cyprus Bank Battle: The
Long-planned Deposit Confiscation Scheme
By Ellen Brown
Global Research, March 22,
2013
“If these worries become really serious, . . . [s]mall savers will take their money out of banks and resort to household safes and a shotgun.” — Martin Hutchinson on the attempted EU raid on private deposits in Cyprus banks
The deposit confiscation
scheme has long been in the making. US depositors could be next …
On Tuesday, March 19, the national legislature of Cyprus overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout. Reuters called it “a stunning setback for the 17-nation currency bloc,” but it was a stunning victory for democracy. As Reuters quoted one 65-year-old pensioner, “The voice of the people was heard.”
The EU had warned that it
would withhold €10 billion in bailout loans, and the European Central Bank
(ECB) had threatened to end emergency lending assistance for distressed Cypriot
banks, unless depositors – including small savers – shared the cost of the
rescue. In the deal rejected by the legislature, a one-time levy on
depositors would be required in return for a bailout of the banking
system. Deposits below €100,000 would be subject to a 6.75% levy or “haircut”,
while those over €100,000 would have been subject to a 9.99% “fine.”
The move was bold, but the
battle isn’t over yet. The EU has now given Cyprus until Monday to raise
the billions of euros it needs to clinch an international bailout or face the
threatened collapse of its financial system and likely exit from the euro
currency zone.
The Long-planned Confiscation
Scheme
The deal pushed by the
“troika” – the EU, ECB and IMF – has been characterized as a one-off event
devised as an emergency measure in this one extreme case. But the confiscation
plan has long been in the making, and it isn’t limited to Cyprus.
In a September 2011 article in
the Bulletin of the Reserve Bank of New Zealand titled “A Primer on Open Bank
Resolution,” Kevin Hoskin and Ian Woolford discussed a very similar haircut
plan that had been in the works, they said, since the 1997 Asian financial
crisis. The article referenced recommendations made in 2010 and 2011 by
the Basel Committee of the Bank for International Settlements, the “central
bankers’ central bank” in Switzerland.
The purpose of the plan,
called the Open Bank Resolution (OBR) , is to deal with bank failures when they
have become so expensive that governments are no longer willing to bail out the
lenders. The authors wrote that the primary objectives of OBR are to:
·ensure
that, as far as possible, any losses are ultimately borne by the bank’s
shareholders and creditors . . . .
The spectrum of “creditors” is
defined to include depositors:
At one end of the spectrum, there are large international financial institutions that invest in debt issued by the bank (commonly referred to as wholesale funding). At the other end of the spectrum, are customers with cheque and savings accounts and term deposits.
Most people would be surprised
to learn that they are legally considered “creditors” of their banks rather
than customers who have trusted the bank with their money for safekeeping, but
that seems to be the case. According to Wikipedia:
In most legal systems, . . .
the funds deposited are no longer the property of the customer. The funds become
the property of the bank, and the customer in turn receives an asset called a
deposit account (a checking or savings account). That deposit account is
a liability of the bank on the bank’s books and on its balance
sheet. Because the bank is authorized by law to make loans up to a
multiple of its reserves, the bank’s reserves on hand to satisfy payment of
deposit liabilities amounts to only a fraction of the total which the bank is
obligated to pay in satisfaction of its demand deposits.
The bank gets the money. The
depositor becomes only a creditor with an IOU. The bank is not required to keep
the deposits available for withdrawal but can lend them out, keeping only a
“fraction” on reserve, following accepted fractional reserve banking
principles. When too many creditors come for their money at once, the result
can be a run on the banks and bank failure.
The New Zealand OBR said the
creditors had all enjoyed a return on their investments and had freely accepted
the risk, but most people would be surprised to learn that too. What return do
you get from a bank on a deposit account these days? And isn’t your deposit
protected against risk by FDIC deposit insurance?
Not anymore, apparently. As Martin Hutchinson observed in Money Morning, “if governments can just seize deposits by means of a ‘tax’ then deposit insurance is worth absolutely zippo.”
The Real Profiteers Get Off
Scot-Free
Felix Salmon wrote in Reuters
of the Cyprus confiscation:
Meanwhile, people who deserve
to lose money here, won’t. If you lent money to Cyprus’s banks by buying their
debt rather than by depositing money, you will suffer no losses at all. And if
you lent money to the insolvent Cypriot government, then you too will be paid
off at 100 cents on the euro. . . .
The big winner here is the
ECB, which has extended a lot of credit to dubiously-solvent Cypriot banks and
which is taking no losses at all.
It is the ECB that can most
afford to take the hit, because it has the power to print euros. It could
simply create the money to bail out the Cyprus banks and take no loss at all.
But imposing austerity on the people is apparently part of the plan. Salmon
writes:
From a drily technocratic
perspective, this move can be seen as simply being part of a standard
Euro-austerity program: the EU wants tax hikes and spending cuts, and this is a
kind of tax . . . .
The big losers are
working-class Cypriots, whose elected government has proved powerless . . . .
The Eurozone has always had a democratic deficit: monetary union
was imposed by the elite on unthankful and unwilling citizens. Now the
citizens are revolting: just look at Beppe Grillo.
But that was before the Cyprus
government stood up for the depositors and refused to go along with the plan,
in what will be a stunning victory for democracy if they can hold their ground.
It CAN Happen Here
Cyprus is a small island, of
little apparent significance. But one day, the bold move of its legislators may
be compared to the Battle of Marathon, the pivotal moment in European history
when their Greek forebears fended off the Persians, allowing classical Greek
civilization to flourish. The current battle on this tiny island has
taken on global significance. If the technocrat bankers can push through
their confiscation scheme there, precedent will be established for doing it
elsewhere when bank bailouts become prohibitive for governments.
That situation could be
looming even now in the United States. As Gretchen Morgenson
warned in a recent article on the 307-page Senate report detailing last year’s
$6.2 billion trading fiasco at JPMorganChase: “Be afraid.” The report
resoundingly disproves the premise that the Dodd-Frank legislation has made our
system safe from the reckless banking activities that brought the economy to
its knees in 2008. Writes Morgenson:
JPMorgan . . . Is the largest
derivatives dealer in the world. Trillions of dollars in such instruments sit
on its and other big banks’ balance sheets. The ease with which the bank hid
losses and fiddled with valuations should be a major concern to investors.
Pam Martens observed in a
March 18th article that JPMorgan was gambling in the stock market with
depositor funds. She writes, “trading stocks with customers’ savings deposits –
that truly has the ring of the excesses of 1929 . . . .”
The large institutional banks
not only could fail; they are likely to fail. When the derivative scheme
collapses and the US government refuses a bailout, JPMorgan could be giving its
depositors’ accounts sizeable “haircuts” along guidelines established by the
BIS and Reserve Bank of New Zealand.
Time for Some Public Sector
Banks?
The bold moves of the Cypriots
and such firebrand political activists as Italy’s Grillo are not the only
bulwarks against bankster confiscation. While the credit crisis is strangling
the Western banking system, the BRIC countries – Brazil, Russia, India and
China – have sailed through largely unscathed. According to a May 2010
article in The Economist, what has allowed them to escape are their strong and
stable publicly-owned banks.
Professor Kurt von Mettenheim
of the Sao Paulo Business School of Brazil writes, “The credit policies of BRIC
government banks help explain why these countries experienced shorter and
milder economic downturns during 2007-2008.” Government banks countered the
effects of the financial crisis by providing counter-cyclical credit and
greater client confidence.
Russia is an Eastern European
country that weathered the credit crisis although being very close to the
Eurozone. According to a March 2010 article in Forbes:
As in other countries, the
[2008] crisis prompted the state to take on a greater role in the banking
system. State-owned systemic banks . . . have been used to carry out
anticrisis measures, such as driving growth in lending (however limited) and
supporting private institutions.
In the 1998 Asian crisis, many
Russians who had put all their savings in private banks lost everything; and
the credit crisis of 2008 has reinforced their distrust of private banks.
Russian businesses as well as individuals have turned to their
government-owned banks as the more trustworthy alternative. As a
result, state-owned banks are expected to continue dominating the
Russian banking industry for the foreseeable future.
The entire Eurozone conundrum
is unnecessary. It is the result of too little money in a system in which the
money supply is fixed, and the Eurozone governments and their central banks
cannot issue their own currencies. There are insufficient euros to pay
principal plus interest in a pyramid scheme in which only the principal is
injected by the banks that create money as “bank credit” on their books. A
central bank with the power to issue money could remedy that systemic flaw, by
injecting the liquidity needed to jumpstart the economy and turn back the tide
of austerity choking the people.
The push to confiscate the
savings of hard-working Cypriot citizens is a shot across the bow for every
working person in the world, a wake-up call to the perils of a system in which
tiny cadres of elites call the shots and the rest of us pay the price. When we
finally pull back the veils of power to expose the men pulling the levers in an
age-old game they devised, we will see that prosperity is indeed possible for
all.
For more on the public bank
solution and for details of the June 2013 Public Banking Institute conference
in San Rafael, California, see here.
Ellen Brown is an
attorney, chairman of the Public Banking Institute, and the author of eleven
books, including Web of Debt: The Shocking Truth About Our Money System
and How We Can Break Free. Her websites
are webofdebt.com and ellenbrown.com.
