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Troika Technical Manual: How to wreck (another) country?

Cyprus is a small country of some 839 thousand people. It joined the Eurozone on January 1, 2008. That decision sealed its fate. Now the Troika are making it pay for that mistake, one that the Troika lured it into making. Such is the way of the Eurozone. The elites set the system up to suit their ideological preferences. Lure the local national elites who aspire to wine and dine in style in Brussels into becoming pro-Euro. Then attack the ordinary folks when the system collapses. But as we know, the Eurozone was a system designed to fail as soon as the first major negative aggregate demand shock hit. The shock hit in 2008. The system failed. Since then the elites have been divining ways to push the costs of those mistakes onto those who are least able to pay. How many Euro decision-makers are unemployed as a result of the crisis? How many Euro decision-makers who have since retired have lost any pension entitlements? But now the citizens of Cyprus are having their savings plundered by the Troika. The shamelessness seems to have no bounds. It is not even a strategy that will deliver the outcomes they have defined. The elites go from one blunder to the next and meanwhile all the key economic targets continue to deteriorate (like employment growth etc). And even the irrelevant targets that are the obsession of the elites also move in the opposite direction to that intended. If it wasn’t so tragic it would be the comedy of the century.

When the Republic of Cyprus entered the Eurozone, 39 per cent of its land mass and the people within that 39 per cent didn’t. This area belongs to – Northern Cyprus – which is officially the Turkish Republic of Northern Cyprus that is recognised only by Turkey. The rest of us consider it an occupied territory of the Republic of Cyprus.

Occupied or not, the Turkish Cypriots have been spared the problems that the rest of the Island is being forced to endure as a consequence of the entry into the Eurozone. The TRNC has its – own central bank – but uses the the New Turkish Lira. The fact that the “nation” enjoys fiscal transfers from the Turkish government effectively makes it a state of Turkey in monetary terms.

On the other side of the “border” which is not recognised by the “Cyprus Problem”, Cyprus uses the Euro and bows to the ECB. When it entered the Eurozone its unemployment rate was 3.7 per cent ((Source). Since then it has risen to around 12 per cent and the – Ministry of Finance – predicted it will reach 14.2 per cent by 2014, given the austerity that is now being imposed on it.

And given the scale of the economic collapse, which is now impacting on the viability of its banking system, the Government of Cyprus is in trouble. Why? Because it surrendered its currency sovereignty. That is the long and short of it. All the talk of imbalances, structural inefficiencies etc are sideshows and smokescreens to divert our attention from the fact that it was going along nicely until 2008.

After which its economic fortunes collapsed.

And how does the EC and its partners in crime (IMF etc) plan to deal with the collapse in fortunes. Answer: make them worse. Except in this case they have devised an even more crazy plan. Crazy in the sense that it punishes activity that is virtuous (private saving), will demonstrate to the rest of Europe that it is dangerous to save in Euro, and is deflationary in the extreme at a time when there is a premium on growth.

The news was bleak. The ABC reported in the article yesterday (March 17, 2013) – Cyprus’ savers bear brunt of eurozone bailout.

This morning (March 18, 2013), the predictable stories started to emerge. For example, the Melbourne Age article – ATMs drained as bailout tax triggers run on bank deposits – reported that:

n a move that could set off new fears of contagion across the eurozone, anxious depositors drained cash from ATMs in Cyprus on Saturday, hours after European officials in Brussels required that part of a new €10 billion ($12.6 billion) bailout must be paid for directly from the bank accounts of savers.

Despite withdrawal limits imposed by the banks, “most of them had run out of cash by early evening. People around the country reacted with disbelief and anger”.

This picture from the Melbourne Age article linked above will repeat itself across Europe if the Troika continue to steal peoples’s savings in this way to pay for their own incompetence.

While the Government attempted to claim that it was a “one-time tax of 9.9 per cent is to be levied on Cypriot bank deposits of more than €100,000” which would hit “wealthy depositors – mostly Russians who have put vast sums into Cyprus’s banks in recent years”, the reality is that there is also to be a 6.75 per cent tax on all other deposits:

… meaning that Cyprus’s creditors will be confiscating money directly from pensioners, workers and regular depositors to pay off the bailout tab.

This is the first time that the the Troika has attempted to “tax” the savings of ordinary people.

As a “tax” the move will be deflationary. It might be claimed that its impact on aggregate demand will be minimal because it is a tax on saving. But people use saving balances to risk manage and as the risks are rising in Cyprus it is clear that they will attempt to “pay” for this impost by consuming less and restoring, in part, the saving balances lost by the Troika theft.

Today, the Cypriot parliament will be voting on the bailout deal. It is ironically a bank holiday in Cyprus. The ruling party has only 28 of the 56 seats in the parliament. The President is already blustering about the need to support the Troika death sentence.

The Sydney Morning Herald article (March 18, 2013) – President tries to calm ‘betrayed’ Cypriots – reported that in a televised address to the people, the Cypriot President, Nicos Anastasiades claimed that the bailout was the “least painful” option.

He claimed that if they refused the deal then the nation would suffer:

… a complete collapse with a possible exit from the euro.

The best thing that Cyprus could do would be to refuse the coercion from the Troika and exit the Euro. Other nations might then see that the sky doesn’t fall in and that most of the conservative claims to the contrary are just bluff.

I will write more on a Cyprus exit in due course.

But consider this action in the context of a document that came out recently from the European Commission – ECFIN Economic Brief (Issue 20) March 2013 – which reads like one of those statements that the – Peoples Temple Agricultural Project – might have released.

This document is sort of the ECs equivalent of “Flavor Aid”.

The brief carries the title – The debate on fiscal policy in Europe: beyond the austerity myth – claims that “large adjustments are needed in most economies to restore sustainable fiscal positions, not because of the arbitrary will of the markets or of EU institutions”.

The EU fiscal recommendations are not an ideological call for austerity at all costs. In general, the flexibility embodied in the rules is being used within a “steady structural” strategy.

Given the lynchpin is the Stability and Growth Pact and later the Fiscal Compact (the “Six-Pack”), which we know imposed fiscal rules that were plucked out of thin air over a weekend by the French advisor to the Mitterand government at the time.

Remember the revelations in Le Parisien article (September 28, 2012) – L’incroyable histoire de la naissance des 3% de déficit (The incredible story of the birth of the 3% deficit)

An English language report – The secret of 3% finally revealed – says that a “former senior Budget Ministry official” in the Mitterrand government was asked to come up with the fiscal rules that would become the Stability and Growth Pact (SGP).

He was quoted as being the “the inventor of the concept, endlessly repeated by all governments whether of the right or the left, that the public deficit should not exceed 3% of the national wealth”.

Note that this reporting, itself, is misleading because as we learned in the quiz this week, wealth is a stock and GDP is a flow and the SGP budget deficit rule is specified in terms of 3 per cent of GDP (the size of the flow of national output and income in any given period).

Anyway, the French official had this to say when asked about the origins of the 3 per cent rule:

We came up with the 3% figure in less than an hour. It was a back of an envelope calculation, without any theoretical reflection. Mitterrand needed an easy rule that he could deploy in his discussions with ministers who kept coming into his office to demand money … We needed something simple. 3%? It was a good number that had stood the test of time, somewhat reminiscent of the Trinity.

Which is another example of the arbitrary rules and assessments – all part of an elaborate smokescreen or charade – to limit the capacity of government. There are countless highly paid officials in Brussels strutting around making all sorts of statements about the need for nations to cut welfare, wages, jobs and the like based on a rule that was just made up on the spot without any economic justification or authority.

The ECFIN document basically addresses a number of what it terms to be “myths” about the austerity.

The first myth:

There was irrational panic in the sovereign bond markets of vulnerable European countries, and this led to the imposition of unnecessary harsh consolidation.

The ECFIN authors claim that the panic was rational and use the Greek haircut to demonstrate why bond market fears were justified. I found that an extraordinary argument. The haircut was not a market event but a cynical strategy by the Troika to punish investors who had outlaid money in good faith.

The fact is that the bond markets were themselves deluded by the apparent chimera of low risk in public Eurozone debt. But that is beside the point. The reason Greek debt became problematic lies in the essence of the flawed design of the monetary system, a design created and engineered by the EU and its “international partners”.

The ECFIN authors then claim that the OMT (and SMP) conducted by the ECB has calmed the bond markets down. Of-course these interventions have calmed things down. They amount to fiscal actions of the currency issuer, which in a fiat-currency system would ensure that public debt issued is risk free.

The ECFIN authors, however, say that the fact ECB has stabilised the bond markets:

… cannot be read as evidence that significant fiscal adjustment was unwarranted.

Au contraire. Yes it does. It demonstrates that if the Eurozone had been designed to include a properly functioning federal fiscal capacity, which could provide fiscal transfers to the “state governments” in the system who were beset with negative asymmetric aggregate demand shocks, then there would be no sustained crisis at all in the Eurozone. Greece would been allowed to run larger deficits, than say other “member states” in recognition of the disproportionately larger hit to aggregate demand that it incurred in 2008 and 2009, and growth would have been immediately supported.

All the talk of trade imbalances among the “states” would have been irrelevant. Further, vast discrepancies between the states in terms of wages and welfare rights would not have been tolerated. So there would be no singling out of Greece, Spain or Portugal etc. The Federal authority would use its currency-issuing capacity to ensure that all states were able to meet the spending gap that they faced.

The ECB is sort of playing that role but in a totally perverse way. They are prepared to bail the banks out and hold bond yields down low but then insist of killing growth to ensure they have to keep bailing out banks and buying public debt. It is irrational in the extreme and the only explanation is one that is based on ideology. There is no economic credibility to their overall strategy.

The ECFIN paper recognises that there are “higher multipliers in an environment of weak activity, lack of room for a supportive monetary policy, and tight financing constraints for private agents” – which means that the there is, in their words – “non-linearity in the growth cost of fiscal adjustment” – which in English means – fiscal austerity is highly damaging to growth and employment and impacts almost immediately in a negative way on both.

They also hint that any policy strategy should allow for a “sequencing of public and private deleveraging for getting out of a balance-sheet recession” – which means in English – when the private sector has over-borrowed and is now intent on saving there is no scope for public sector austerity.

In fact, public deficits are required to support the private deleveraging process via aggregate demand support. For the private sector to increase its saving overall, there must be economic growth and that has to be supported with public deficits.

So two real world reasons why austerity is bad.

Not to be daunted, the ECFIN paper say we have be “treading a fine line however”. What line is that exactly?

Well if government don’t tear the heart out of their economies now they might trigger “market expectations of a sovereign default and a liquidity crisis”. Ho hum. Didn’t they previously recognise that the ECB was a bulwark against that possibility? Yes, they did.

So how can the market rule when any central bank is stronger and can set yields at whatever level they like and play the bond markets out of the game? Answer: the markets can never be more powerful than a central bank in this situation.

What else defines this “fine line”?

Apparently, “basic arithmetic”. That is something I can understand. So their argument goes like this. Huge adjustments are required in deficit positions in the “medium-term”. So:

… spreading out consolidation over several years in broadly equal instalments will translate in not-insignificant fiscal effort from the beginning.

Plain arithmetic – allocating a whole over some sub periods.

But the issue is the question of the need for consolidation in the first place. That is apparently a consensus. Who between? The EU, the IMF, the OECD and the ECB. And, presumably, all the lackey economists who get paid huge amounts of consulting income from Brussels to do their bidding.

The ECFIN paper claims that the EU has been mindful of these issues and that:

… fiscal policies under the E(M)U framework have struck a balance between these conflicting considerations.

How so? Well they used fiscal stimulus in 2009/10 and then:

… it was agreed that the initial fiscal relaxation should be followed by fiscal retrenchment to stabilise and reduce debts

And so the austerity began. But this mindless mechanical approach – we do zis today and zat tomorrow – is seemingly context free. Haven’t these Eurocrat sycophants looked at the data that this agreed policy has created?

Haven’t they seen that unemployment continues to rise across the zone and each month a new record high is reached? Haven’t they worked out what 60 per cent youth unemployment (which is being approached in some countries) means for the future? Haven’t they realised that they have created a DEPRESSION in southern Europe?

The third allegation they consider is that the “Commission follows an inflexible approach”. Apparently, the EC is eminently flexible. Not only has it forced nations to obey by its inflexible fiscal rules but:

… a key aspect of the flexible approach we have adopted has recently been to make more explicit the focus on structural targets, rather than just the overall deficit of a country.

That is, not to be content with creating a depression they are now being more explicit about which conditions of work, pensions, etc are to be cut. How flexible of them!

And under the SGP the EC will not immediately enact the moronic “excessive deficit” rules, which include fines and sanctions. But we are told that:

Missing the nominal targets does not expose the country concerned to an escalation of the excessive deficit procedure, including the possibility of financial sanctions, if the structural effort (specified in the recommendation in terms of changes in the cyclically-adjusted balance net of one-off and temporary measures) has been delivered. Rather in these cases the country would receive an extension of the deadline for correcting its excessive deficit. The absolutely key point here is that we have not, and will not, pursue dogmatic targets for the reduction of the headline fiscal deficit, irrespective of the circumstances a country finds itself in.

The absolutely key point is that the EC enforces these pro-cyclical strategies in the first place which force nations to miss these arbitrary targets. Damaging growth and then saying to a nation that you won’t be fined if you damage growth a bit more is highly flexible. Wouldn’t you say?

The fourth allegation they address is that “Fiscal consolidation is not politically or socially sustainable”. They recognise that there are severe strains on social cohesion in some nations as a result of the policy framework being pursued.

But they claim they have “spread the costs across the population” – which is a lie. They are, in fact, concentrating the costs on the unemployed, pensioners and public employees. Businesses then become collateral damage.

They claim that they are making cuts “without weighing on aggregate demand in the short-run” but complete that sentence with “although not all consolidation can go this route in practice”. Which is an extraordinary thing to say. The data shouts out that they are liars. There has been massage short-term damage to aggregate demand – which is why unemployment rises each month.

The audacity of the Troika is extraordinary. They know that their policies are causing massive real damage. But they still nuance and massage their message with these sorts of statements. The oft-used “growth friendly austerity” is another way they try to convince us that underneath all the carnage is a very friendly growth-orientated policy.

The reality is that fiscal austerity kills growth – almost outright.

The final allegation they address is that “The Commission’s approach is one-sided. It puts all the burden of adjustment on debtor countries”. They respond by saying that:

For vulnerable countries of the euro area that face a large external sustainability gap, external growth is the only sustainable way to grow out of their debts.

This is straight from the IMF. Export-led growth will win the day. But if all nations are engaging in fiscal austerity including many of the Zone’s trading partners, how will that strategy work?

Please read my blog – Fiscal austerity – the newest fallacy of composition – for more discussion on this point.

The ECFIN authors, after 6 pages of self-praise conclude that perhaps there is a case for “the potential attraction of a “fiscal capacity” at the central level, in the form of a stabilisation instrument”.

But, of-course, this would be used to maintain “a credible rule-based framework” (that is, deny the basic reason why a federal capacity is needed in a federated monetary system).

And, equally, of-course, “such a tool should only be considered in the longer term in the context of full fiscal and economic union”. So several years of conferences and meetings in Brussels – with plenty of well-catered for lunches and lots of European wines for the EC elites who pontificate on these matters while they hire their bureaucrat economists to write self-aggrandising rubbish like this paper.


Lots of distractions today.

Cyprus should vote to exit the Eurozone immediately and reject the oppressive hand of the Troika. Send E-mail to the Opposition party in Cyprus immediately urging them to resist the neo-liberal bluff and to take their nation back into the world of currency sovereignty where individual savings are respected and governments have the latitude to pursue public purpose and counter major aggregate demand shocks.

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.

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    This Post Has 42 Comments
    1. If this crazy deal somehow gets through the parliament, expect an uprising. Most households in Cyprus contain at least one gun (partly due to conscription and also due to their love of hunting EVERY Sunday). Not only could this be the end of the euro even earlier than I had anticipated (I expect Spanish and Italian depositors to head for the exits), but it could lead to another war. Cyprus has been raped exactly twice in the last forty years – this time it was its own doing.

    2. I’m not so sure. I reckon the EU is the biggest example of the Stockholm Syndrome on the planet.

      I suspect after a few hours of grumbling the vast majority of people will bend over and grease up like the good ‘ickle Europeans they are expected to be.

    3. I’m less than 100% sympathetic towards those depositors in Cyprus.

      What depositors in Cyprus and all round the World want is interest on their money. But that can only be obtained by lending their money on in ways that are not 100% safe. However when that risk doesn’t pay off, depositors expect taxpayers to rescue them. I.e. depositors (along with everyone else connected with banks – shareholders, etc ) have been ripping taxpayers off for years.

      Now the tables have been turned: taxpayers have been spared, and depositors are having to cough up. Boo hoo.

    4. Ralph,

      Your attitude to this makes me think that you’d be ideally suited to politics. You seem to think that its okay to behave this way. Your argument might hold some water if it applied to banks that were actually in trouble. There are two banks in Cyprus under water for bad lending practices re loans to Greek banks – not every bank. One might say, have a heart. In your case, start by having a brain. :(

    5. ” However when that risk doesn’t pay off, depositors expect taxpayers to rescue them. ”

      Here comes the propaganda…

      The depositors were promised taxpayer protection, which encouraged them to maintain they deposits in the first place. Remember we are talking about floats here that businesses use to pay their payroll and suppliers as well as current account floats and day to day savings. The sort of thing required for a payments system to flourish.

      The taxpayer guarantee is essentially a subsidy for borrowers, not depositors. The banks don’t care because they just make a turn on the top of the cost of funds. All banks care about is the demand for loans which they want to be as high as possible.

      If the guarantee turns out to be worthless then banks cost of funds goes up, which increase the cost of private borrowing – reducing the expansion and maintenance of the money supply (assuming here that the discount window remains at the same level of tightness).

      The state has decided to advance its guarantee of the supply of money via deposit guarantees – rather than an extra wide discount window or by massively expanding the government sector balance sheet so that money is ‘in specie’.

      All of those policies look to achieve the same aim – reducing the cost of private borrowing to fund productive investments so as to encourage economic expansion.

    6. Esp Ghia,

      You say, “Your argument might hold some water if it applied to banks that were actually in trouble.” Well it’s PRECISELY banks that are in trouble that go begging to taxpayers, isn’t it? So my argument DOES APPLY to banks that are in trouble!!!!

      Which one of us is lacking in “brain”?


      Re your first point, namely that it’s unfair to rob depositors who lodged their money in banks on the understanding that they wouldn’t have to accept haircuts, that’s fair enough. That was why I intimated above that I’ve got SOME SYMPATHY for Cypriot depositors, but I’m not 100% sympathetic.

      Re your point about payrolls, it’s unlikely the 5% tax (or whatever the figure is) will stop any employer being able to pay their staff. But if it some employees AREN’T paid, that’s an argument for full reserve banking.

      Under full reserve, depositors CHOOSE how much of their money should be 100% safe, and in contrast, how much they want to have put at risk by having it loaned on.

      Re your claim that “the taxpayer guarantee is essentially a subsidy for borrowers, not depositors”, I completely fail to see how you prove that. The economics text books go into some detail on what’s called the “incidence of taxation”: that’s the fact that if any one type of participant in a market is subsidised, the subsidy normally ends up benefiting EVERYONE in the market concerned. E.g. if apple growers are subsidised, it is easy to demonstrate that if market forces are working in any sort of a normal way, that will benefit apple buyers as well.

      So my assumption that the taxpayer guarantee for banks benefits EVERYONE connected with banks is fair enough, absent some good evidence to the contrary.

      Re your claim that removing bank guarantees/subsidies would reduce the money supply, no doubt it would. But that’s easily compensated for by a measure which is popular in MMT circles, namely having the government / central bank create new money and spend it into the economy.

      For every dollar of money issued by commercial banks, there is a dollar of debt . Cutting down on that debt based money and replacing it with some debt-free money, and hence reducing total debts won’t do any obvious harm, far as I can see.

      Lastly, you point out that if taxpayer funded bank subsidies are withdrawn, then the cost of loans will rise. Well yes: obviously they will. Likewise, withdraw the tax on whiskey and cost of whiskey would drop.

      But that of itself does not justify bank subsidies or the removal of whiskey taxes. To justify a subsidy it’s generally accepted in economics that one must prove market failure: i.e. that without the subsidy, a less than optimum amount of the commodity concerned is produced (in this case loans).

    7. Great article, Mr. Mitchell. I read it out loud as if to an audience. The Troika is not only moving us backwards in terms of economic and social development, but they’re bringing back the specters that haunted Europe before, and I don’t mean the specter of communism.

    8. Ralph, you seem to be saying that the choice is between getting bank depositors to pay or getting tax payers to pay. My thought is that the first people to pay ought to be bank share holders and then bank bond holders. In principle couldn’t bank corporate debt be subjected to a debt to equity conversion so that the current bank bond holders became the new bank shareholders and the bank was thus deleveraged and so solvent? I guess the reason why that is not on the cards is because the bank bondholders are other banks in other EU countries. The EU consists of countries locked together but only concerned with the immediate interests of their own people and extremely loath to help other countries. That is a poisonous mix.

    9. Mr. Musgrave states that “What depositors in Cyprus and all round the World want is interest on their money. But that can only be obtained by lending their money on in ways that are not 100% safe”.
      (In passing, I thought the banks don’t lend depositors’ money, but created it out of thin air when they gave out the loans….)

      There is a big difference between “not 100% safe” and the reckless lending and leveraged financial instruments that the banks gambled with.
      Nothing is 100% safe, but if the banks stuck to financing the productive economy (OK, It know it’s busted just now), taking the hit on the odd failed business, they could make quite a nice living as they used to do, but the greed of the 1% demands more…

    10. If nothing else, this demonstrates that money is a relationship. Store of value doesn’t mean much when the uber-government can appropriate an arbitrary percentage at will. Have to keep bond holders of fictional assets whole. Disgusting.

    11. “To justify a subsidy it’s generally accepted in economics that one must prove market failure: i.e. that without the subsidy, a less than optimum amount of the commodity concerned is produced (in this case loans).”

      You’ve already proved that by requiring that the government issue more ‘in specie’ funds than is currently in place at the moment. That is, functionally, the Treasury doing the borrowing from the central bank. So clearly there aren’t enough loans in place or you wouldn’t need to do that.

      So that is a subsidy as well – no doubt channelled via top end tax cuts to the well-heeled who are funding the propaganda campaign. That’s why they are paying for the lobbying. They want the state subsidy to go to them – the amount of which is decided by a few of their mates they manage to get appointed to the ‘independent’ placeman committee.

      Your arguments for 100% reserve fall into the usual holes I’m afraid. All you are doing is swapping one set of subsidies for another. They all achieve the same end. It’s the distribution that alters. As Randy is fond of saying, somebody has to do the lending.

      Eliminating the interest income of small savers, increasing their mortgage payments, plus ripping up the free transaction banking system is just wrong – and completely unnecessary.

      It is entirely possible to design a narrowing of banking that keeps all that is good about out current way of doing things without causing problems. No need to throw the baby out with the bathwater. No need to subsidise the Rich and their trickle-down nonsense.

      But to do that you’ve got to get past the One True Money belief – and the subtle manipulation of the funders of that belief.

      ” completely fail to see how you prove that. ”

      Yes you will do. Because you believe something else.

      But however you slice it depositor protection is the same as a wide discount window at the central bank. Which you can easily show by moving all the insured deposits in all the banks to National Savings at the same interest rate. The resulting central bank overdrafts show you what a wide discount window looks like.

      That central bank funding stream is then marked up by the private banks for distribution to willing borrowers.

      MMT proposals change that by diverting some of that central bank funding stream into government provisioning (paying for the Job Guarantee nominal anchor amongst other things) and leaving some to go via heavily restricted private banks – limited to running a transaction system and loans to credit-worthy customers.

      100%ers want that central bank stream to go entirely via government provisoning (by which they mean extensive tax cuts for the ‘job creators’), while burdening the poor with an expensive bank transaction system and no ability to safely maintain the spending value of a small nest egg.

      As Bill points out in his blog: “I do not support a 100-percent reserve banking system. It is the work of a lobby that hates and distrusts government.”

      I have to say I agree with that based on the proposals put forward at the moment. They are democratically deficient and unnecessarily complex systemically.

      MMT bank narrowing proposals are the simplest thing that will work.

    12. @Ralph Musgrave
      Agreeing virtually completely with Neil, I should like to point out an empirical lacuna in your discussion. One reason that depositors should be protected is that not all depositors get interest on their deposits. There are many reasons why someone might choose to do this. Separating out the interest-bearing from the non-interest-bearing accounts would become extremely complicated. And would it be worth it? I doubt it.

    13. Stone,

      You are quite right: obviously bank shareholders and bond holders should be wiped out before depositors. But then senior politicians and bank shareholders and bondholders attend the same cocktail parties, and one doesn’t want to upset those one meets a cocktail parties, does one?


      Yes, it’s the irresponsible lending that causes the problems, but depositors want to be protected (thanks to taxpayers) from the downside, while benefiting when the risks pay off, i.e. from the upside.


      Re your first two paras, the fact that I advocate government / central bank organised stimulus (or that such stimulus is needed) does not prove the private sector is not lending enough. It proves the economy needs stimulus. Or put another way, it proves a market economy can get stuck, as Keynes rightly pointed out, in a situation that involves excess unemployment.

      Put another way, the extra money that government / central bank would spend into the economy would most definitely not all be allocated to lending and borrowing: a proportion would simply go on current consumption.

      You say, “All you are doing is swapping one set of subsidies for another.” In a sense that is true: if you want to call government / central bank implemented stimulus a “subsidy”. But there is nevertheless a difference between effecting stimulus via one specific industry, banking, and effecting general or non-directional stimulus.

      If an economy is working at less than capacity, it needs general or non-directional stimulus. There is no sense in channelling all the stimulus or an inordinate amount of it via one particular industry – banking or any other.

      Next, you say “No need to subsidise the Rich and their trickle-down nonsense.” Couldn’t agree more! But it’s you that advocate subsidising banksters via the TBTF subsidy and other bank subsidies like deposit insurance, while I advocate channelling stimulus money to the economy in general, while bankers are left to bid for deposits and compete for the attention of those wanting mortgages and in a manner that is as free market as possible and as subsidy free as possible.

      Next, you claim that deposit protection is the same as a system under which all deposits are shifted to the central bank, with risks being taken only by commercial bank shareholders presumably. There is actually a big difference: under deposit insurance, a depositor can go for a relatively large risk (Icelandic bank or whatever) and be insured for free by taxpayers. In contrast, if all depositors money is lodged at the central bank, depositors take no risks. And I’m not in favour of taxpayers bearing someone else’s risks.

      From then on you go downhill at a very fast pace.

      You claim that “MMT proposals change that..” – i.e. that MMT changes your hypothetical system where all depositors money is lodged at the central bank. I’m baffled as to how one changes a system that doesn’t actually exist.

      Re your claim that 100%ers want newly created central bank money to go to “tax cuts for job creators” that is total and complete nonsense. If you look at Positive Money’s literature (or at the literature of other 100%ers like the New Economics Foundation or Richard Werner or Milton Friedman, etc etc etc) you’ll find they advocate new money is simply spent into the economy on the normal public expenditure items (health, education) or fed into the economy by general tax cuts (not concentrated specifically on the rich or on “job creators”.)

      As to the claim you attribute to Bill Mitchell, namely that 100% reserve banking “is the work of a lobby that hates and distrusts government.”, I’d be absolutely FASCINATED to know how you or he reconcile that with the fact that 100% reserve LIMITS money creation to the government / central bank machine. I.e. 100% reserve takes powers AWAY FROM commercial banks (specifically the power to create money) and hands that power exclusively to government!!!!

    14. the funny thing is that, if Cyprus would regain monetary sovereignty, and re-denominate all the deposits in their new currency, they will all be taxed by more than 10% due to the currency depreciation.

    15. Cyprus brings into focus contrasting and conflicting realities:

      1. Apparently more than 30% of Cyprus deposits are not of Euro origin, but are converted from another currency. It appears that stimulus from one currency has flowed to another currency, causing problems in the banks of the second currency. Which currency is being proposed to be protected here? The small Cyprus depositors certainly seem to be unwitting victims of a much larger dynamic.

      2. Apparently the Cyprus banks were destabilized when the Greek banks were recapitalized at considerable cost to bondholders , some of which were Cyprus banks. Hmmm, this suggests a chain of Russian stimulus going to Cyprus banks going to Greece banks who bought Greek government bonds which paid Greek workers who bought German cars which—–ect. Quite a few hands in this chain which provided employment for a while.

      3. Nothing in the Cyprus story seems to support the theory that bank loans generate their own money without cost or need for precursory money creation by government. Instead, the events support the theory that banks merely resume the money flow that savers have delayed, exposing the saved portion of the money supply to taxation and lost of principle while also exposing the bank to the perils of capital loss. Such lending certainly increases near term employment and tax collection, but adds longer term difficult-to-predict consequences.

      4. The inability of Cyprus to print money certainly plays a part in the situation. It is doubtful that foreign currency would be a large part of deposits if the Euro link was not present. Of course, the ECB would also not be present to play a repairing role, just the IMF. For sure, the economy of Cyprus for the last 5 years would have been much different if Cyprus had not adopted the Euro. Now Cyprus must decide for the future.

    16. Ralph,

      “But it’s you that advocate subsidising banksters via the TBTF subsidy”

      And you advocate increasing the cost of mortgages, eliminating free banking, rotting away pensioner’s nest eggs and increasing the cost of working capital loans to businesses while championing a system that will deliver more tax cuts to rich people funding the lobbying process.

      So we disagree about the impact. No big deal.

      “There is actually a big difference: under deposit insurance, a depositor can go for a relatively large risk (Icelandic bank or whatever) and be insured for free by taxpayers. ”

      There isn’t any difference Ralph. I just gave you the accounting transaction that transforms one into the other. These are regulated banks permitted to make certain types of loans. The cost of funding follows from the level of regulated behaviour permitted.

      If a regulated bank exists and is permitted to undertake the transaction, the appropriate funding solution is for the central bank to advance the overdraft. The deposit created can then wander off into the transaction system. That maximises the maturity transformation effect via an entity that can stand the impact. The skill we are buying from private banks is the appropriate underwriting of the capitalisation of income streams.

      Nest eggs could then stay nice and warm at National Savings if that is deemed the best approach.

      “and hands that power exclusively to government!!!!”

      No it doesn’t. The proposals put forward have a cabal of the elite who decide how much money government gets to spend. They are not elected. They are appointed. Just like the current members of the monetary policy committee. That is undemocratic and unacceptable for such a vital function.

      It’s the myth of independence again. The money system must be under the direct control of parliament. No outsiders in charge, no agencies. Direct control. The government of the day must get its Finance Bill, including whatever overdraft it desires from the central bank. If parliament approves the spend, then it must happen – because the government is the elected representative of the people.

      And that includes the authority to completely stuff things up if that is what they decide to do.

      If the capitalist structure proposed cannot handle that, then that capitalist structure is incompatible with representative democracy.

      “you’ll find they advocate new money is simply spent into the economy on the normal public expenditure items (health, education) or fed into the economy by general tax cuts (not concentrated specifically on the rich or on “job creators”.)”

      Yes they would say that wouldn’t they. Much like they tried to suggest that ‘savings’ accounts wouldn’t change much – in language that is very likely to be in contravention of the Financial Service Acts, which outlaws describing investments as savings.

      In reality the supporters and funders of the proposals will get the money in their pockets via large tax cuts. There’s no attempt to put in place a nominal anchor or shift the economy to production based on servicing the needs of the many first.

      You don’t get Douglas Carswell supporting your proposals by accident.

      You don’t get an attempt to remove free banking transactions and putting risk onto Widows and orphans (either take risk or watch your nest egg rot away with inflation) without a particular ideology backing your proposals.

      It’s pretty clear what the slant is here, and it is exactly as Bill suggested: this is a lobby that distrusts government action. Really they just want the cash and have to drive it via the government account to give it the faint air of legitimacy.

      It’s a pity really because there are some elements of the Positive Money proposals that are useful. Unfortunately the rabid air of belief means they can’t analyse the system effects properly and regularly drift off into propaganda.

      Transactions could do with separating, not because only a liability with the central bank is True Money, but because separated transactions allow customers to operate their account via whichever private bank ‘front end’ they fancy (or the default state one). Removing the need to ‘move accounts’ would be a big step forward. And it is something we can easily do in the UK because we have a concentrated system and most of the tech is already in APACS and LINK anyway.

      There are elements there that are useful, but to my mind the superior control of the private bank system is provided by the central bank disintermediating the entire process. A nice wide discount window as the large carrot and tight regulation on a highly limited range of activities as the big stick from an active central bank regulation system. The regulated banks are agencies of the central bank and should behave as such – forced to wear bowler hats if necessary. That beats the pants off ‘investor oversight’ in an area where imperfect information is rampant.

      Such a design allows you to keep the transaction system as a public good and would actually make it less costly to run. So transactions can remain free at the point of use. It’s in keeping with our mutual heritage and the success of the LINK model.

    17. Ralph, you are indeed cognitively challenged if you can’t compute that 2 banks + 0 = 2 banks, not the entire banking system as you seem to believe.

    18. 1. Why is a Western capitalist called a “businessman” or “entrepreneur” but a Russian one a “mafia oligarch”? Why do the Prussians have more rights to Cypriot gas than the Russians? Isn’t Cyprus too geographically close to Syria and feeling too much heat?

      2. The so-called “workers” or unemployed have never successfully organised a revolution in Europe. Going after them was a relatively low-risk business. All the revolutions were organised by middle class. The middle class is being severely hurt now. The fuse may not go off this time because the safety margin is much wider (nobody is starving yet). Thanks to the presence of the Internet which acts as a distraction (and allows for smooth invigilation of the masses by the security apparatus) people of Europe are unable to organise themselves in the old fashioned way and change the ruling elites but who knows what will happen in the future.

      3. By violating the axiom of absolute property rights the Prussians have demonstrated yet again that their vission of Unified Europe is based on recycled medieval feudalism. It is not the Anglo-Saxon liberalism where the invisible hand rules everyone, it is the Continental statism in the most obnoxious form where peasants and town dwellers are ruled with an iron fist by the aristocrats and the clergy.

      4. The last time something similar occurred in Central Europe was the monetary reform of 1950 in Soviet-occupied Poland. Savings in banks were exchanhed at 100:3 ratio but cash was exchanged at 100:1 to punish “kulaks” and “speculators”. The history has run the full circle and Hilary Minc rules again, this time from Brussels.

      5. Rationally speaking all the resistance is futile. Just like in 1938 – it was “irrational” to oppose the Anschluss of Austria and the partition of Czechoslovakia. If the Cypriots do not agree to the confiscation of savings they will go bankrupt and lose much more than 10%. But people may not always be rational.

      6. Taking some statements at face(book) value – what will Mafia do to a politician if she takes 10% of its money away?

    19. Neil Wilson, to my mind our current system of state backed endogenous money bank deposits is a calamity. I’d prefer a simple system of transaction accounts (such as paypal) that couldn’t make loans and charged a small admin fee. Lending could be by very strictly restrained shadow banks that could not hold deposits and that could only fund lending by selling debt securities that had the same maturity profile as the loans made. The loans would also have to be held on the books of the lender until they matured. Without maturity transformation, such debt securities would only have credit risk and no liquidity risk. As such a fund consisting of many such debt securities would be a very suitable saving vehicle for “widows and orphans”. Interest rates could then be whatever saving behavior set them as being. We would no longer have the systematic, distorting, effect of debt financing being subsidized in comparison to equity financing. IMO it would give a much more stable, less leveraged, financial system.

    20. “But now the citizens of Cyprus are having their savings plundered by the Troika …”

      Err, not so much. Cyprus’ “savings” consist almost entirely of money being laundered by Eastern European biznizmen – it was notorious as a way to move ill gotten Roubles into Euros. If Cyprus’ banks disappear with those funds I won’t shed a tear; whatever the sins of the German bankers driving EU policy they aren’t a patch on many of the local bankers.

      I agree that the Euro was doomed from the start to fail in a very nasty way. But a divided Cyprus in particular should never have been admitted to the EU, let alone the Euro. The reason it was is because of Greece’s insistence – as a means of keeping Turkey out.

    21. derrida, agree with your last point re Turkey and Greece. Cyprus ought never had been admitted – indeed there was plenty of internal resistance to it, especially adopting the new currency. As for your first point, 70% of deposits is Cypriots of all ages. If the target really is Russian accounts, they could in fact do this, but it would still be nasty. Who in their right mind would invest in Cyprus now?

    22. ” I’d prefer a simple system of transaction accounts (such as paypal) that couldn’t make loans and charged a small admin fee.”

      Small admin fees are regressive and restrict transactions, reducing velocity. A very bad idea. We need the transactions to be free flowing, restricted where necessary by progressive taxation. The transaction system is a public good and should be provided as such – even if it is implemented in a distributed fashion.

      ” Lending could be by very strictly restrained shadow banks that could not hold deposits and that could only fund lending by selling debt securities that had the same maturity profile as the loans made. ”

      There is one that works quite well already. It’s called Zopa. Google it.

      Then google for reports of people using it. They don’t like taking the capital losses. It’s quite clear that many people just can’t handle the thought of making any sort of a loss.

      There is a debate to be had about the advantages and disadvantages of maturity transformation. It’s a bit like nuclear power. I believe it is better to understand it and use it in a controlled fashion rather than abandon the idea completely because you’re frightened of it.

    23. Neil Wilson, Zopa is quite different from what I was proposing because Zopa is one to one lending. What I was proposing was a collective lending. In Zopa if one borrower defaults, then one lender takes the loss. In what I was suggesting there would be a capital buffer in the form of the shareholders of the shadow bank. That shadow bank equity capital would be leveraged by selling debt securities. Holders of the debt securities would only suffer a loss if defaults were so bad that they wiped out all of the shareholders and even then losses would be shared across all of the debt security holders.
      I disagree about maturity transformation being of benefit “like nuclear power”. To me maturity transformation is lying- end of :) . The debt should be correctly priced on the basis of the time to maturity it actually has. Anything else amounts to a market distortion.

    24. Neil Wilson, sorry I just saw that risk is somewhat spread between lenders under the Zopa system as each loan gets diced up across several lenders. Nevertheless it is quite different from what I was proposing. Under my proposal the loan company would stand first in line to take all of the credit risk. I think that makes more sense because the professional lender’s job should be to assess credit risk.

    25. Neil Wilson, “Small admin fees are regressive and restrict transactions, reducing velocity. A very bad idea. We need the transactions to be free flowing, restricted where necessary by progressive taxation. The transaction system is a public good and should be provided as such – even if it is implemented in a distributed fashion.”

      I don’t see why transaction accounts could not be administered much as water utilities of mobile phone contracts are. We typically just pay a monthly fee for those; why not have the same system for a transaction account? Currently transaction accounts are roped into a system that includes all kinds of extraneous risks such that the transaction system is held hostage with threats to shut it down if the banks are not bailed out of the consequences of their reckless speculation. IMO there is no reason or justification for that.

    26. I agree that the austerity is misplaced. Current unemployment rates are criminal. The bottom line to me is indeed that no currency is worth 25% unemployment and Cyprus and other Club-Med states should just exit the euro. But there is no political will to dissolve the euro, either in the North or in the South (yet?), despite the fact that there is no solidarity among the Zone states and there is no will to pay for others. Economically stupid papers squaring the circle simply follows.

    27. “We typically just pay a monthly fee for those;”

      Which is therefore a hypothecated tax. If everybody needs the system and there is no differentiation then it is silly charging a flat rate fee to pay for it – which makes it relatively more expensive to access for poor people. That’s why the TV licence fee is a stupid regressive tax and should be scrapped.

      As MMT shows, taxes don’t fund anything. They are there to stop people buying stuff that the government wants to use.

      The transaction system is an absolute classic public good. Everybody needs access to it. Everybody needs to use it.

    28. Cyprus was a tax haven. Did anyone mention that? Tax havens are a menace to proper governance globally and they attract criminal money. I have sympathy for honest local people who will lose money. I have no sympathy for international tax avoiders and criminals (same thing really) who will lose money.

      Having said that, it IS a bad policy and will have the reverse effect the govt are seeking. Bank runs and the collapse of national finances will follow.

      Ceding currency sovereignty IS a big mistake for any country. However, few mini-nations (island states, city states) are really economically viable anyway. Cyprus will have troubles no matter what it does. It is not viable as a modern nation state.

    29. “Nevertheless it is quite different from what I was proposing. Under my proposal the loan company would stand first in line to take all of the credit risk”

      And when the buffer runs out, then what?

      If the depositors take no hit, then that is exactly the same as leaving those depositors in National Savings and back funding via the central bank. You can do the accounting transformation that changes one into the other with a couple of journal entries.

      The advantage of back funding with the central bank all the time is that the private banks have a very big investor watching over them with a very large stick. Investor oversight is then a very simple matter.

      I have no religious beliefs about Maturity Transformation. It is a financial tool. The history of the mutuals shows that it largely works if handled correctly and can be hugely beneficial.

    30. Bill,
      The Troika claims Cypriot banks are a special case in having few bondholders to take all the pain – is the ECB the main holder of these bonds via Greece bailout and therefore unwilling to acknowledge any losses?

    31. “Then just as with any other corporate bond, the debt securities do take a hit.”

      That’s longer term money with loss then. At least the maturities match, but I just don’t think it needs to be restricted that far.

    32. Might perhaps be worth pointing out that none of the officials that work for any of the Troika actually pay any income tax……they are very important after all.

    33. Neil Wilson, to my mind it is all about ensuring that debt financing only gets used as and when it gives some actual advantage over equity financing rather than debt getting a distorting state subsidy. Basically it is about grounding things in reality.

    34. This is predominantely a political crisis, manufactured by the EU leaders especially Mrs Merkel. I am a bit surprised that even those commentators who are sympathetic to MMT blindly parrot the anti-Russian propaganda.

      Wake up boys, it is not year 1981 It is not the Soviet army but someone else who is occupying Afghanistan this time.

      What if the significant amount of deposits belonging to Russians is in the banking system of Cyprus because of legitimate business conducted by Russian firms, private and state owned? So there is one free market capitalism for the Germans based on sacrosaint property rights and there is another free market capitalism for the Russians (and for the Chinese). If you are rich you must be a thief. Well this is what one Karl Marx said quite a long time ago.

      I am not a blind follower of Mr Putin but loking at how much one has screwed up I think that he is much more benign than the global peddlers of austerity or drone operators who gave themselves the right to kill anyone, anywhere, any time.

      “The Telegraph”:
      ” 2, The Cypriot finance minister has travelled to Russia (amid rumours of his resignation, since denied) accompanied by the country’s energy minister. This could be to strike a deal with Moscow to receive cash in return for Russian access to Cypriot gas reserves. Apparently, Russian gas giant Rosneft has even declared its interest in funding Cyprus in return for licences to its gas fields.

      While Russian money could help Cyprus to avoid bankruptcy, it could be the nail in the coffin for Nicosia’s relationship with the rest of the EU. The next few days are unchartered territory for the currency bloc – a potential bailout funded by a foreign country, especially Russia, throws the whole currency bloc into jeopardy. What next – Brazil bails out Spain, New York chips in to save Italy? ”

      Ранее Кипр в обмен на финансовую помощь от Еврогруппы попытался установить налог на депозиты. Парламент страны отклонил законопроект о принудительном списании части банковских счетов.

      Действия властей Кипра раскритиковал президент РФ Владимир Путин и премьер-министр Дмитрий Медведев.

      Вместе с тем канцлер ФРГ Ангела Меркель в телефонном разговоре с президентом Кипра призвала его вести переговоры о предоставлении финансовой помощи только с международными кредиторами, без привлечения третьих сторон.”
      (my translation)
      “At the same time the Chancelor of Germany Angela Merkel, in a phone call to President of Cyprus, urged him to negotiate financial aid only with the international creditors, without dragging in third parties.”

      Is Cyprus a German province, that Mrs Merkel can tell them whom they are allowed to talk? If this is the case just bail it out. Otherwise if you don’t want to “spend your taxpayers money”, hands off, Mrs Merkel and Mr Schaeuble. You have screwed up enough in Europe.

      Personally I think that a rotten compromise will emerge – the EU will blink but they will do whatever they need to save their face. They are not that stupid.

    35. Also – there is a very interested question asked on The Guardian by one commentator going with the moniker “worried”…
      Why exactly are Cypriot banks broke? Because the Russians deposited too much tainted money? Or because the banks lent out too much money to someone who cannot repay the debt now? And why cannot it repay in the first place?

      “Again let’s look at the limited information available …and not on CIF apparenetly.
      Cyprus siad it had difficulties coming up because the haircut via greek bonds was going to cost it ….5Bill. ( go that 5…)
      Suggestions of mafia style money laundering were thrown out out of hand by the IMF, and others . (!!!) Although an independednt enquiry is in the air …”

    36. Folks:
      If I had never been to a country or taken the time to find out the facts about how it is run, I would probably be as misinformed as some of you appear to be. Contrary to popular belief, Cyprus is not a tax haven – it did until now have a low rate of corporation tax, but has an established and robust taxation system that is otherwise as expensive as many other places. Thus far, its top rate of personal tax is 35% – that will go up.

      As regards the Cyprus banks in question, there is a list of banks elsewhere (few countries are an exception) that have got themselves into similarly dire straits. Trying to emulate the modern, investment banking model has proven disastrous for RBS, Merrill Lynch, JP Chase et al. The Lehman Lesson has not been learned at all. The problem is, Governments across the globe have failed to regulate banks – they have taken a swipe at Hedge and Alternatives Funds and allowed banks to carry on, supposedly creating value, profits and jobs but in fact, have been creating trouble for us all. Finally, by the way, Cyprus depositors are tax payers too, and they deserve the same protection when they SAVE as everybody else.

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