Thursday, March 21, 2013

No Way to Run a Bank

The idea of taxing Cypress bank accounts seems reasonable if you look at it from the viewpoint of the Euro Zone administrators in Brussels. The banks attracted a lot of foreign business, mainly Russian. They lost a lot of money in bad investments including in Greece and the amount of money needed to bail them out will push the Cypress national debt into the danger zone. Investors in stocks and bonds have had to stomach a haircut (sharing the cost of the bailout) so why shouldn't these customers?

There is also an echo of the Occupy movement and progressivism in general. A lot of money from the bailout will go to rich Russians. The tax is an attempt at getting someone else to cover the costs.

None of these arguments are good enough because of the special nature of banks. When we invest our money we know that there is a chance that we will lose it instead. Banks are supposed to be the alternative - someplace where we can put out money to keep it safe. Banks work because people trust them. If you take away 10% of their money because it is in a bank then you destroy that trust. If I stuff my money into an old mattress it may not be making any interest but at least no one is confiscating part of it.

Cypress is a small country but the idea for this came from Brussels, the heart of the Euro Zone. The worry is that this will set an international precedent. This could cause an international run on banks and destroy the world's financial system. Against that, the arguments in favor of the tax are insignificant.

Fortunately, the tax was so unpopular that Cypress is having to resort to an unnamed Plan B. Even so, the banks are likely to stay closed for the rest of the week to prevent a run that would cripple them.

It would be a good idea for US leaders to promise to never consider taxing savings. It would strengthen the US banking system.

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