Cyprus; a very good reminder of history and the moral hazard the Fed has set up since the 1930’s. In the Great Depression, and all downturns prior to that one, if your bank closed, you lost your money. I showed this in my book (Secret Life). So what is happening in Cyprus presently is a reminder of what it would have been like in all countries prior to 1933. This is one reason why property related downturns could really get nasty back then. The experience of the Great Depression led governments world-wide to institute ‘depositor guarantees’; your deposit, up to a certain level, was ‘guaranteed’ by the government in the event of a bank (your bank) collapsing. This has led, currently, to what is called ‘moral hazard’; depositors and bond holders of a bank not taking any interest in their bank’s behavior as the bank’s directors go on a lending spree (to maximize profit) because they know governments will bail them out.
What’s more, the moral hazard is fostering utterly rampant bank corruption; more than ever. The above link says, in part:
“In a separate development, Cyprus launched an investigation after Greek media published the names of politicians who allegedly had loans forgiven by three Cypriot banks at the height of the crisis. The Bank of Cyprus, Laiki and Hellenic Bank apparently wrote off loans of millions of euros to companies, local authorities, and politicians from some of the island’s biggest parties.”
I urge everyone to read, or re-read, Appendix 9 of Secret Life, and see what happened in the prior cycle, 1991. Secret Life has all the info you need about such topics. If the rent of land was collected by the people, for the people, bank behavior like this would be (almost) impossible and banks would become more like service institutions for depositors, (and the owners), who would have to be far more vigilant about where they put their money, since banks would become just like any other service in the economy, and if it made bad investment decisions would simply fail, like all businesses must be allowed to do if the risk taking is beyond prudent levels. What’s more, if the economic rent were collected efficiently, anyone would be permitted to set up a bank, just like any other business and offer credit at competitive rates – but remember, if the rent is collected, there could be no lending on land price – for there wouldn’t be any. Banks would be much safer institutions as a result. Nor could they be the size that they are today.
This subject is a paradigm shift in thinking for most people; I urge you to see it; it will allow you far better investment decisions in the present capitalist monopoly-enclosed system in which we are forced to operate today. I urge you to see also, that the problems like in Cyprus manifest only because we as a society fail to collect what is rightfully ours to be shared amongst ourselves in the first place; the economic rent.
For Cyprus itself, it seems to me a curious decision undertaken by those at the top in Europe, asking Cypriot banks depositors and bondholders to take some losses, after not asking the same in Greece and elsewhere; it’s almost as if they know much if it might be Russian and dubious as to how it originated. I’m not sure I’d be comfortable out alone at night as a top European banker right now. Some ‘ramifications’ down the road a bit would not surprise me in the slightest.
This will all happen again at the bottom of the next real-estate-led recession, (although we are still working our way out of the prior one presently still, of course, and which will continue for a year or two yet) and should history repeat, 18 or so years from the bottom of the prior one.