We Are All Cypriots
Back in the 60’s when Berlin was surrounded by 20 Soviet Army divisions in East Germany, President Kennedy, acting as the leader of the Free World (a quaint anachronism in itself) famously declared “Ich bin ein Berliner” – “I Am a Berliner”. For the moment, the front line for our Western system of individual rights rests in Cyprus. Ironically, the attack comes from the European governments and the strongest defenders are the Russians.
Quickly, how did we get here?
- This is Act XXV of the Eurozone drama. Since 2008 one country after another has needed bailouts for their financial institutions which are inextricably tied up with excessive government spending. To many this seems like an inevitable outcome of trying to combine a common currency with separate national budgetary authorities. That’s a subject for another day, better covered by more knowledgeable writers not named Krugman.
- Tiny (1,200,000 population; $18 billion GDP) Cyprus saw the opportunity to expand their financial industry by applying low taxes and loose oversight to become a conduit for businesses, government officials, and gangsters in Russia and the former Soviet republics to get their money into the Eurozone, with much being recycled back into Russia to buy companies and real estate there. (Russian deposits in Cypriot banks total about $30 billion; about $14 billion of annual direct investment in Russia comes from Cyprus.)
- Like Ireland, Spain, Portugal, Greece, and Italy, Cyprus spent beyond its means, benefiting from low borrowing rates of the German-backed Eurozone with loans from its own banks, banks throughout the zone, the European Central Bank, and the International Monetary Fund. Cyprus also borrowed $3 billion from Russia.
- The bill has come due. Cyprus needs a $13 billion bailout from the internatonal banking system who – in the form of the Europeran Central Bank, major country financial ministers, and the International Monetary Fund (e.g. the U.S.) – are demanding that Cyprus come up with $7.5 billion, which they can only do by confiscating a portion of the $90 billion in deposits in the banks. Traditional rules would have the bank owners wiped out first, bank bond holders second, and uninsured deposits third. To get to the $7.5 billion, the European Union czars jumped right to the depositors, insured or not, and totally ignored any consideration of the account holder’s total wealth or income.
- From there, the question was how new center-right government of Cyprus would allocate the confiscation between large depositors (like the Russians) and the small depositors (like the voters.) In any case it would be a confiscation, which Russian Prime Minister Dmitri Medvedev likens to the behavior of the Soviet era. The long battle for the security of the individual from arbitrary, after the fact assaults by the government has taken a significant step backward.
- At this point the resolution is unclear. The Cypriot parliament has rejected the plan, ostensibly foregoing any further European loans and resulting in a hard bankruptcy, but creative minds are looking at other options – closing one bank; selling rights to drill for natural gas off of the coast; a loan from Russia; anything.
And let’s provide a little American context:
- We have not fixed the fundamental flaws in our banking system that led to the crisis in 2008, and our government continues with fiscal policies driving Greek-style debt. We will not be as powerless as Cyprus, but the debtor does not get to set the rules.
- During the 2008 crisis there was attention to insurance for small bank deposits, and the arguments were about allocation of risk among the bank owners and bond holders, with the government throwing money at the industry, not confiscating deposits. Even the MF Global fiasco, which represented a politically-connected crook getting away with stealing customer deposits, did not involve government seizing deposits.
A year or two ago nobody would have thought it possible in the Western financial system – from Europe, to North America, to Japan – for the government to confiscate bank deposits. But most in America would not have thought that the federal government could force a citizen to purchase a service like health insurance that they didn’t want or that the federal government could force a church (or any person of conscience) to directly or indirectly pay for contraceptives and morning after pills. But they can, and they do.
Ich bin ein Cypriot.
This week’s video bonus, from a reader in Virginia, is a libertarian take on ordering a pizza in a data-intensive world.