There are several principles at stake in the row over Cyprus and its bailout. But one we should ignore is the hysterical reaction to a tax on bank deposits. It is a wealth tax – and about time too.
The objection to this particular wealth tax is not that it is a wealth tax. It\’s that it is an entirely counter-productive wealth tax.
The aim here is to stop the financial system falling over. We\’re just fine with the shareholders losing everything, the bond holders losing a lot, even with depositors losing if that\’s what it takes. But do recall: the aim is to end up with a still functioning financial and banking system.
The reason is that a functioning financial system is the sine qua non of having a modern economy. Without it we\’re back to barter, a very inefficient method of doing anything.
So that\’s the goal: we can expropriate anyone we like but that goal is the important one.
Given that, why is this such a howlingly stupid wealth tax? Because deposit insurance is the thing that keeps a fractional reserve banking system going. It\’s just part and parcel of frb that the system is subject to the possibility of bank runs. Maybe we shouldn\’t have frb although I would argue that we most certainly should, despite deposit insurance and the associated moral hazard.
And this particular wealth tax breaches that deposit insurance. On Friday at 7 pm the Cypriot Government had a solemn promise to cough up up to €100,000 if the banks fell over. By 7 am Saturday they\’d reneged. That makes all deposit insurance schemes across the EU weaker than they were. Thus we increase the possibility of bank runs and thus increase the possibility that we end up without a functioning banking and financial system at the end.
Do understand, again, that us red blooded capitalist pig dogs are just fine with the idea of investors, bond holders, even depositors, losing their money. But is has to be done in a manner that leaves us still with a financial system. Because, for all that people rail at the banks, you really wouldn\’t like a world or economy where they didn\’t exist.
Which leads to the solution I\’ve outlined elsewhere:
There’s €35 billion in uninsured deposits. No one at all has any right, whether in law or morality, to get back their uninsured deposits if as and when a bank goes bust. But if anyone’s ever going to trust a government promise ever again then insured depositors should indeed get their insurance.
At which point the potential answer becomes obvious. Yes, of course all current bank shareholders should be wiped out. All bank bondholders (not that there are many senior ones anyway) and all over €100,000 deposits take a 50% haircut. All insured depositors can then be paid in full as the banks are solvent again. For the required €17 billion has been found in those larger deposits.
Forget entirely the €10 billion coming from the ECB, EU and IMF. Let\’s actually get capitalist about this, red in tooth and claw. The government promised you insurance? You\’ll get it because that\’s the only way to still have a financial system. The rest of you, the uninsured? You\’re fucked matey and that really is the capitalist way.
Not that anyone at all is going to take my advice on this. But they could adopt a slightly watered down version: take the €10 billion from the EUfuckers and then get the other €7 billion from those large depositors. It would require a 15%/16% haircut on them instead of the 9.9% currently demanded.
And that is a politically possible solution whereas my preferred one is not.
Back to Mr. Inman:
A wealth tax on bank deposits, where most wealth is held,
WTF is he on about? Wealth is held in assets rather than bank accounts. Shares, property, bonds, gold, jewelry, pension funds and so on. The cash lying around in bank accounts is a small fraction of the wealth of anywhere at all.