Sunday, March 17, 2013

This is what a democracy deficit looks like

If you put money in a U.S based bank, the Federal government insures it up to $250,000 -- if the bank gambles your money on worthless paper, gives it to its CEO, or otherwise fails, you get paid back up to $250,000 by the FDIC. Nobody would trust banks without this guarantee. It would make more sense to hide your money under a mattress which would lead to a very different and impoverished world. (This is how banking worked before the Great Depression; 4000 U.S. banks failed leaving their depositors without recourse in 1933.)

The present government of Cyrus promised people who put money in its banks that their deposits were insured up to 100,000 Euros (about $130,000). The Cypriot banks gambled and lost, like so many under-regulated financial institutions all around us. If they are to stay in business, they need a bail out. And they are getting one -- one third of which will be financed by grabbing a percentage of individual deposits from the banks. Many of the big depositors are Russian oligarchs who were using Cypriot banks as a place to stash money in Euros. But Cypriot depositors, ordinary people with less than $130,000 mostly middle class families, are getting hit for 6.75 percent of what they thought was safe government-insured savings. It is not as if Cypriots are even getting anything tangible for this tax: this is cash the European Central Bank (ECB) demands to be used to pay off bank investors -- mostly richer European countries like Germany.

I don't usually write about this sort of thing, but the ill-omens are too strong to ignor. I'll pass it to someone who knows what he is talking about: Felix Salmon, Reuters' finance blogger.
What we’re seeing here is the Cypriot government being forced to break one of its most important promises — the promise that if you put your money in the bank, and your deposits total less than 100,000 Euro, then they will be safe. What’s more, there’s no good reason for insured deposits to be hit in this manner: the same amount of money could be raised just by taxing the uninsured deposits at a slightly higher rate. The insured depositors are being hit, it seems, just so that the uninsured depositors can be taxed at single-digit rather than at a double-digit rate.

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. … of course, there are all the hedge funds who have been betting that the Cypriot government won’t default: they’re all popping Champagne right now.

The big loser are working-class Cypriots, whose elected government has proved powerless in the face of decisions driven by Germany, and who are now edging towards fury. The Eurozone has always had a democratic deficit: monetary union was imposed by the elite on unthankful and unwilling citizens. … Across the continent, they’ve lost their democratic right to determine their own fate at the ballot box, and instead they’re being instructed what to do by Germans. Now, in Cyprus, they’re simply and directly losing their money.

Someone with 8,000 Euro of life savings in the bank can ill afford to lose an arbitrary 540 Euro, but that’s exactly what is going to happen. … This decision is important not only because of the precedent it sets with regard to bank depositors, but also because of the way in which it points up just how powerless all the Mediterranean countries (plus Ireland) have become. More than ever before, it’s Germany’s Europe. That’s bad for Cyprus — and it’s not even particularly good for Germany.
People have been known to go mad with rage when they experience broken promises on this scale. The promise that their vote and their well-being matter is being exposed as a fraud. If we don't want to find ourselves in this fix someday, we need to make sure our democracy has the capacity to impose limits on capitalist greed. The many have to rein in the few, ultimately in the interest of all of us, even the plutocrats.

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