March 20, 2013

Tuesday, the citizens of Cyprus were spared having their bank deposits partially confiscated, but only barely. Yes, I did say, bank deposits - money! Here's what happened.

On Saturday, in exchange for an EU bailout of $12.96 billion for a nation on the verge of bankruptcy, it was proposed that individual bank account deposits would be subjected to outright confiscation being promoted as a "wealth tax." Deposits of $130,000 or more will be hit at a rate of 9.9 percent, while depositors who fall below that threshold with be taxed at a rate of 6.75 percent.

The idea was initially proposed by Cypriot President Nicos Anastasiades last Friday. "We're not aiming to gloss over the situation," he said after the EU-IMF meeting in Brussels agreed with that idea early Saturday. "The solution taken may be painful, but it was the only one" worth taking, he added. The move would reportedly raise as much as $7.76 billion of the nearly $13 billion needed to bail out Cypriot banks devastated by billions of dollars of losses in investments in Greek banks.

Yet this bailout, or more accurately described by CNN as a "bail in" of ordinary people -- to pay for the mistakes made by bankers -- is unprecedented. Yet the effects of this policy were eminently predictable: Cypriots spent the weekend withdrawing their funds from bank machines all over the nation.

The deal was put together over the weekend with the knowledge that yesterday was a bank holiday, and that the timing of the events would induce a measure of calm in the beleaguered nation. It was thought that Anastasiades would have time to get the measure passed in the 56-member Cypriot parliament where his conservative DISY party controls only 20 seats. But a revolt by the MPs precipitated the extraordinary measure of declaring two more bank "holidays" today and tomorrow, giving lawmakers more time to debate the issue. Anastasiades is urging lawmakers to pass the levy. But as of now, the measure does not appear to have enough votes to get passed.

The current bailout level was arrived at after a bigger bailout of $22 billion was rejected. Twenty two billion dollars would have spared individual bank depositors, but the IMF hinted they would reject that option because it would overburden the nation, increasing Cyprus's sovereign debt to 145 percent of economic output.

When the deal was reached at $12.96 billion, Cypriot finance minister Michalis Sarris announced that the Cypriot government had already moved to ensure deposit holders could not make large electronic withdrawals, while ECB executive board member Jörg Asmussen revealed that a portion of one's deposits equivalent to the new tax would be frozen immediately.

"I am not happy with this outcome in the sense that I wish I was not the minister that had to do this," Sarris insisted. "But I feel that the responsible course of action of a minister that takes an oath to protect the general welfare of the people and the stability of the system did not leave us with any options." Asmussen also justified the policy, claiming that it increased the number of people who will participate in saving the country. He added that going after large deposit holders, many of whom are foreigners, meant that outsiders would also participate in the rescue. Yet an unnamed EU official revealed the truth behind such posturing. "Without Jörg, we would have no deal," said the official. "He was excellent in and out of the meeting."

Excellence, as well as rationalization, is in the eye of the socialist beholder and his media apologists. The primary rationalization for the scheme is the one presented by Asmussen: "foreigners" will shoulder a substantial part of the burden. "There is no moral or economic reason to protect foreigners who have decided to park large sums in a Cypriot bank account for whatever reason," wrote FT's Wolfgang Münchau. The NY Times referred to many bigger depositors as "Russians who have put vast sums into Cyprus's banks in recent years." "To be sure, the presence of large Russian and offshore funds in Cypriot banks is cause for a different format than those used in other peripheral countries," wrote CNN's Richard Quest. "For example, you could not realistically have the money of German housewives bailing out Russian oligarchs."

German Finance Minister Wolfgang Schaeuble, whose nation played a key role in formulating the measure, used the word "fair" to describe the distribution of the bailout burden. "The Cypriot banking sector will be significantly reduced to a sustainable level and business model," he added. "It's a good step that certainly made our agreement to aid for Cyprus easier," echoed German Chancellor Angela Merkel.

Mark Grant, managing director of financial firm Southwest Securities Inc. cuts through the socialist claptrap. "The European Union and the European Central Bank and the IMF have just advocated the confiscation of private property for their own indulgence," he said. "Bank accounts are not bonds or stocks or some other form of investments. It is private property like your house or your car. Germany, France, et al, came in and said, 'We want it, and we are taking it, and it is necessary for our government.'" Russian Prime Minister Dmitry Medvedev put it even more succinctly. "It looks simply like the confiscation of other people's money," he said.

That's because it is. And despite assurances that this type of bailout was both unique and a one-time event, government confiscation by fiat is the lesson that will be learned, not just in Cyprus, but in other EU nations, such as Italy, Spain and Greece, whose banks are equally shaky. Yet when those nations were bailed out, bondholders took losses, not depositors. Depositors put their money in a bank to keep it safe. This deal completely undermines that long understood premise.

Thus, it was no surprise that international stock markets were down substantially  yesterday, with shares in financial entities leading the way. Such turmoil, and the implications for further market pullbacks and bank runs in other nations may have precipitated a change of heart yesterday afternoon: the ECB's Jörg Asmussen announced that Cyprus could "alter" the terms of the bailout. "It's the Cyprus government's adjustment program," he said. "If Cyprus' president wants to change something regarding the levy on bank deposits, that's in his hands. He must just make sure that the financing is intact. The important thing is that the financial contribution of $5.8 billion euros [$7.5 billion] remains."

Reuters is reporting that two new proposals are being considered. In one, the current rates of taxation, 6.75 percent for small investors and 9.9 percent for large investors, would be reconfigured to 3 and 12.5 percent respectively. In the other, an additional tax bracket would be created, grouped by accounts containing less than 100,000 euros, those with 100,000 to 500,000 euros, and those holding more than 500,000 euros.

None of it amounts to anything more than the proverbial rearranging of Titanic deck chairs. The creation of the European Union was a colossal mistake, based on the ludicrous premise that vastly different cultures and countries would somehow acquire the exact same financial sensibilities, and once such sensibilities took hold, the kind of warfare that destroyed the continent twice in the 20th century would be relegated to the ash heap of history. Yet the new era of "enlightened" cradle-to-grave socialism envisioned by European elitists gave way to unsustainable spending sprees, followed by massive economic crashes, increasing levels of domestic unrest and rioting, and jaw-dropping levels of unemployment.

Two primary factors hold this unsustainable arrangement together. One is abject fear on the part of working people, who have been convinced that the devil they know, even when it manifests itself as 26 percent unemployment in Spain and Greece, or endless "austerity" that amounts to raising taxes coupled with faux spending cuts, is better than the one they don't, which is national bankruptcy. The other factor is the sheer, unrelenting hubris of an elitist class determined to prove that continent-wide socialism can work, even if they have to drive Europe into the ground to prove it -- even as they make sure the same miserable policy of "too big to fail" protects the elitist status quo. "Politicians and senior bank bosses have covered each other's backs for years, now it's ordinary people who are paying the price and are being punished," said Christos Demetriades, 58, standing outside a closed co-operative bank branch in Nicosia.

Not quite. "Ordinary people" were more than happy to embrace socialism, even as the inevitable bills that piled up were ignored. That they consider paying the price for their indulgence to be "punishment" is one of the best indicators of the poisonous entitlement mindset that socialism inevitably breeds. That it was aided and abetted by elitists is inarguable, yet no one remains blameless. Thus, the fatal flaw of socialism is revealed: in the end, there are no heroes. There are only those looking to salvage their piece of a pie that grows no bigger, when entitlement and greed have supplanted industriousness and growth.

No doubt many Americans are wondering if the same thing could happen here. In 2010, when Democrats had complete control of Congress and the White House, discussions were held regarding the possibility of seizing private 401(k) retirement plans, and creating a "Guaranteed Retirement Account" aimed at distributing funds more "fairly" to all Americans. It hasn't gone anywhere -- yet.

The Obama administration is monitoring the Cyprus bailout, but White House Press Secretary Jay Carney declined to answer questions about the president's position on confiscating money from private savings accounts. "I can't. I think that it is the wise course to defer to the Treasury Department," Carney said. The Treasury Department was equally noncommittal. "It is important that Cyprus and its Euro area partners work to resolve the situation in a way that is responsible and fair and ensures financial stability," the department said in a statement.

In Europe, the demarcation between private and public property has been kicked to the curb. Cyprus is being told that confiscation of funds from private savings accounts, or national bankruptcy, are the only two choices the nation has. Those aren't choices. They are ultimatums. Europeans are about to learn there is a corollary to Margaret Thatcher's insightful statement: when you run out of other people's money to spend -- you have to find more people.

We believe that the Constitution of the United States speaks for itself. There is no need to rewrite, change or reinterpret it to suit the fancies of special interest groups or protected classes.