What is Philip Inman talking about here?

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.

32 thoughts on “What is Philip Inman talking about here?”

  1. I think that taxing ongoing economic activity at a non-damaging level is a practical revenue raising technique. This is what the Cypriots should be doing.

    I think that taxing wealth via inflation in fiat-currency denominations is quite wicked enough, punishing those who have been responsible. (Bank savings rate = 0.5%, inflation = 4% => high nominal annual wealth reduction.)

    Simply taking physical Euros from savers is obviously wrong and additionally very dangerous. How can anyone in the Eurozone have any confidence in such a system?

    Say I had 105,000 Euros in the bank two weeks ago, legally. If I bought a house last week for 110, 000 Euros I have -5000 in the bank and pay nothing. If I didn’t, I wake up to find I’m X% poorer via direct confiscation. This X”%” is deceptive as it is many years worth of compound interest at today’s rates required to regain the original capital value.

    Message: don’t hold Euros. Buy land, “stuff”, CHF, AUD, metals, anything.

  2. and what if you were in the process of paying for that house, and now short for the payment and what other contracts would be effected.

  3. The tax on the insured portion is a bad idea because i now have two hazards to worry about when i keep money in europe. One was my bank becoming bankrupt, and that was what the deposit insurance allowed me to relax about. The new one is that the banking system in the country i bank in will become so badly off it has to be bailed out, and my deposit will be “taxed”. Now six percent is not so huge, but by just doing what they want, they have given no assurance it couldn’t be 50% next time. For my Belgian accounts, no big deal, probably, i think, for now (and if that’s not hedged enough, i will have to reassess from time to time). But if i had Spanish or Portuguese accounts, i’d now be considering moving the money. Which was what the insurance was supposed to avoid.

    By the way, is it the case that there was not one well run cypriot bank? The “tax” is on everyone, not just insolvent or undercapitalized banks, right?

  4. Is it really a tax or a reduction in bank liabilaties. It seems to be aimed at incorporating non Cypriot nationals deposit monies. It does seems to come under the Deposit Insurance. Does anyone no for sure what would happen if a depositor sued for there full contractual balance.

  5. Tim

    Do you think you have actually let Inman off the hook here a bit. He has gone far further than saying this is good because it’s necessary and a wealth tax is fair here. He is saying wealth tax, here in the form of a raid on insured and uninsured deposits, is a good thing in itself. So in Inman’s world raids on bank deposits are to be welcomed.

  6. Deposits are created by people spending loaned money so If deposits in a banking system are reduced does it not affect the abilaty for loans to be repaid and bank assets to be made good anyway.

  7. “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.”
    Is it?
    The original idea of money was as a promissory note. Save one having to directly barter a slice of cow for a bucket. It s just a token, eventually exchangeable somewhere along the line, for real goods & services. The further we’ve got from that, the further we’ve dug ourselves into the sh*t. Why I can never get enthusiastic about the gold thing. Gold s just another good with no intrinsic value other than what someones willing to trade another good of service for.

  8. My capitalist view, red in tooth and claw, is that risk should involve, well, risk. So yes, I’m actually quite delighted that private equity lost out big style in Northern Rock and that shareholders lost out with RBS and even that uninsured depositors lose their shirts in a bank’s collapse, that is how it should be. However, arbitrary expropriation of bank deposits, as Inman seems to be willing, is both wrong and guaranteed to destroy our financial system.

  9. I’ll just point out again that demanding State backing isn’t capitalism, red blooded pig dog or otherwise.

    By all accounts, the banks seem to have a very very great deal of money. Why can’t they run their own “insurance” scheme? Hmm?

  10. Deposit insurance isn’t the only response to troubled banks, they can also get temporary loans from the central bank or even other commercial banks.

  11. This attitude of the left (the majority of them, not all) where they consider money held in a bank account to be wealth shows how much the actually know about the world around them. Whenever they think of money they only think in terms of cash, not assets. It shows how blinkered their attitudes are.

  12. What the Left doesn’t take from you first time around they’ll steal later.

    Note his definition of wealth: even those with 5,000 euros in the bank put away for a rainy day. Or a couple of thousand patiently saved through sacrifices to pay for a wedding, or a car, or whatever. This is ‘wealth’ and there to be stolen, sorry, levied.

    I bet this cunt has enormously more wealth than 95% of Cypriots and at the first sniff of such a think in his country he’d whip his wealth out in an instant.

  13. @SBML
    Why I’m minded, the entire “capitalist” system the left bitches about is their own creation. Good capitalists know at heart you have to touch base with reality from time to time. Those notes become due. Left thinks the money itself has value.

  14. There s getting to be something really odd with this site. Unless I m mistaken, posting just crashed half a dozen instances of Firefox. Very strange.

  15. 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 those are our only two options? The “system” as it is, or bartering grain for cow skins? Can we think of nothing else?

    See, the problem I see here is that we have this situation where on the one hand “the banks” are seen as this institutional system, which thus requires State largesse. Okay, fair enough. We have lots of institutional systems and some of them might even be quite good things.

    But then on the other hand, they want to be seen as “capitalism” i.e. as free market enterprises, red in tooth and claw and all that. And it seems that when they want other peoples’ money (deposit insurance, bailouts, supertaxes to pay interest etc) it’s the first thing. And then when it comes to profits, and not paying taxes, and not being regulated and so on, it’s the second thing.

    And that is at the least inconsistent.

    There is no reason to think that banks could not operate as free market businesses, competing in the marketplace. If you got rid of the cartelisation; the central banks, the government borrowing, the fantasy that they are somehow managing the economy on behalf of us littluns.

    But the result of that would be a smaller banking industry; less aggregate lending leading to a lesser boom and bust cycle, and considerably smaller profits. Why don’t we try that?

    No doubt I will again be called some kind of crazy paranoid commie, but I fail to see why I, as a taxpayer, am required to actively support a system which funnels my money into a few well placed pockets, and throws the entire global economy into total chaos. Tim seems to think this is “modern”. I don’t. I think free markets are the most modern thing there is and guilds are rather old fashioned. How about we try that type of modernity?

  16. Ian B>

    You’re still (correctly) implictly accepting that deposit insurance is necessary for (fractional-reserve) banking system to work. Whether it’s provided/arranged by the government or some other group, the fundamental point here is that it’s necessary, and reneging on it is not a good idea.

  17. @Paddy
    Read what Inman said,not Tim’s summary of it.He said a tax on land would be a better tax of wealth but the Cypriot’s have n’t got the time to set it up.

  18. Dave-

    In the context of this thread, yes. In the general context, no, I don’t think “deposit insurance” is necessary, any more than gamblers need insurance against loss or venture capitalists do. All that is “necessary” is for people to understand that lending money is risky, and when they put money into an interest bearing account, they are lending it. And thus risking it.

    This leads to a more general problem identified by libertarians; because it has been for a long while now State policy to inflate the money suppply, all savings will lose their value unless hedged against that inflation by being earning interest. So, the cost of an inflation policy is that ordinary citizens are obligated to lend money (to get an interest return to offset inflation) thus risking it.

    So ultimately, one part of the solution to this is to stop inflating the damned money supply at 2% per year or whatever the target is. We don’t need inflation. It does much harm, and no good. The best thing an economy can have is sound money, which means a stable quantity of it. We can do that. Let’s do that then, and the other problems immediately become, not solved, but more tractable.

  19. “A wealth tax on bank deposits, where most wealth is held” – Philip Inman.

    Tar. Feathers.

    But only because drawing and quartering would not be as popular.

  20. I agree that the government should have coughed up on the deposit insurance – but because governments ought to be held to their promises. Overnight is not sufficient notice of a change of system.

    But is deposit insurance necessary? We’ve had fractional reserve banking without it. Yes, some banks went bust, but the system still operated.

    Deposit insurance has benefits (improving confidence, or did when the insurance worked) and disadvantages (moral hazard), so we can argue about whether one outweighs the other.

  21. pedantry perhaps, but, if its a wealth tax then why would the deposit insurance be relevant. The point of the “tax” is in conjunction with partners to bail out the banks so they don’t go bust – hence the insurance is not tripped. On the other hand, if they let the banks go bust the deposit insurance is relevant. The real point is its not a tax in the normal democratic meaning of tax, but rather a condition for the partners contributing to the bail out. Or in other words a political risk that most people with any knowledge of cyprus would have been aware of.

  22. Ian B>

    Still rather missing the point with deposit insurance. It;s precisely because lending money to banks is inherently risky that we require deposit insurance. Perfectly sound banks can, under our system, be taken down by a run because once people start withdrawing their money, there”s good reason for everyone to do so. Deposit insurance removes the incentive for most depositors to take their money out, in turn significantly reducing the chances of a run in the first place.

    Personally, I fundamentally disagree with you about low levels of inflation. Hoarding money rather than investing it is anti-social (because economically damaging) and should be penalised. Leaving aside the “should”, however, I’m not sure what you suggest is concomitant with the nature of money. From where would your money derive its apparently magical power to preserve value?

  23. Dave, a sound bank hit by an irrational run would be able to borrow temporary liquidity on the market. The reason banks fear runs is because of rational ones; the customers have figured out that the bank is bankrupt and pull their money if they can, which is entirely rational.

    I don’t understand your second paragraph’s question. Why does non-inflating money lose its value? Why does non-inflating money get “hoarded”? I really don’t know what you’re asking.

  24. I think I agree with Ian B. I’m not sure that 100% insurance on interest-paying accounts is a necessary part of a fractional reserve banking system. Suppose it was only 93%, as would (roughly) apply in this case. It would tend to steer people away from institutions that are run by cowboys (RBS), which is a very good thing.
    But the vital part is that everybody knows beforehand, and is allowed to do what they like with their own money BEFORE the rules change. That hasn’t happened in this case.

  25. But in this case if it applies across the board then there is no oportunity for customers to differentiate between individual Cypriot Banks anyway.

  26. Ian B>

    Who would lend to a bank, however sound, currently undergoing a run? If the retail investors won`t, why should the other banks be any more inclined to do so? The rates would be punitive, at the very least. Far cheaper to insure against a run that almost certainly won`t happen if you have insurance.

    “Why does non-inflating money lose its value?”

    Eh? I asked why you think it doesn’t. What’s so special about it that means it retains exactly the same value over time?

    “Why does non-inflating money get “hoarded”?”

    You were arguing that hoarding – that is, keeping money out of circulation (under the mattress, perhaps) – is currently discouraged by inflation, and that the increased incentive to hoard that would result from removing that disincentive would be a good thing.

  27. @ Dave Aren’t you putting the cart firmly in front of the horse, there.
    “Who would lend to a bank, however sound, currently undergoing a run?”
    Why would a sound bank experience a run? If there s a bank suffering a run, there must be a bloody good reason for it.
    This where I get to agree with Ian. Banks want to be protected from the consequences of their own actions. And they want us to pay for the protection. Fuck ’em. If they don’t want a run on their bank, they should keep their noses. clean. Or insure.
    If all the banks had to be responsible for their actions, it s level playing field. Depositors will be cautious. Which is what they should be. Lending money is a risk. That’s what the interest rates are for. To reward risk. Banks scared of their depositors is a feature, not a bug.

  28. Dave-

    Who would lend to a bank, however sound, currently undergoing a run? If the retail investors won`t, why should the other banks be any more inclined to do so?

    If the bank is sound, and running, something must have spooked the customers. But the bank can show another bank their books, and thus show that they are sound, and thus fit to borrow. Remember, a sound bank has lots of future income from its creditors. If the current mob of customers have foolishly withdrawn their money, a new mob can harvest that interest. So, you’ve got a short term liquidity crisis that another bank can fund them riding out.

    Of course the quetion is whether bank runs really affect sound banks at all. Or whether bank runs are usually, or always, rational after all.

    Eh? I asked why you think it doesn’t. What’s so special about it that means it retains exactly the same value over time?

    Er, the quantity of it combined with the general belief that it is money. Like what creates its value currently. Printing more of it reduces its value, as we know. It simply doesn’t make sense to think that a stable money supply has any less intrinsic value than an inflating one. Hence, I’m not sure where you’re getting this question from.

    You were arguing that hoarding – that is, keeping money out of circulation (under the mattress, perhaps) – is currently discouraged by inflation, and that the increased incentive to hoard that would result from removing that disincentive would be a good thing.

    Ah, got you. I was simply saying that nobody would be obligated to risk their money. Lots of people would still want to. Since we currently have a situation of too much lending anyway, that’s a feature, not a bug. It would help calm the booms, and thus the busts.

  29. @BIS
    Why would a sound bank experience a run? If there s a bank suffering a run, there must be a bloody good reason for it.
    I don’t think thats true. As Mervyn King just said somewhere, the person who starts a run is irrational. The ones that follow are rational. And even that first person may just be gun shy, like the driver who brakes too hard in heavy traffic.

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