Did We Already Get Cyprused?

In covering the proposed Cyprus bank account seizure—which fortunately was voted down by the country's parliament—I came across an odd defense of the proposal from New York Times business writer Andrew Ross Sorkin.

The essence of Sorkin's defense was that it had been 72 hours since the proposal was announced—a whole 72 hours!—and disaster had not struck.

A lot of contemporary economic commentary can be understood by reference to two quotes from John Maynard Keynes: "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist," and "in the long run, we are all dead." Many economics columnists are under the influence of the defunct Keynes, and they slavishly follow his advice about ignoring the long term.

Yet as I noted elsewhere, Sorkin ends with an interesting calculation.

"Would you have been better off leaving your money in a bank in the United States or in Cyprus over the last five years?

"The answer: You would have been better off in Cyprus, even after the bailout, when your money was 'confiscated.' If you had 100,000 euros in a Cypriot bank account over the last five years, where the interest rate has averaged about 5 percent, you would have about 127,600 euros today. Even after the bailout, which would require you to give up 10 percent of your deposit—12,760 euros—you would be left with 114,840 euros. The American bank? The $100,000 you deposited at Bank of America five years ago is about $105,100, at the going rate of about 1 percent interest a year."

This calculation is not quite complete. If you take into account currency exchange rates—over the past five years the euro has fallen from about 1.55 to the dollar down to 1.30—a bank deposit in Cyprus is still worse off than one in the US. (A comparison to the gold price doesn't change the calculation much; both currencies have, alas, collapsed equally relative to gold.)

But Sorkin's point is still suggestive, because it reminds us of the affect of artificially low rates on American savers. It suggests that we have already been Cyprused, and we just haven't noticed.

The Federal Reserve has maintained artificially low interest rates, indefinitely, as a matter of national policy, and this has much the same practical effect as the proposed Cyprus account seizure. But it does so in a more subtle and insidious manner. The government doesn't come in and take away the return on your savings; it just never allows a return to accumulate in the first place.

So where does that return go to? The purpose of this policy is to prop up the giant, too-big-to-fail banks by letting them borrow money for free from the Fed, pay next to nothing to depositors, and funnel all of the gains from their investments into their own coffers. So while the details are different, this has the same effect as the Cyprus "bail-in": to divert assets from small individual savers in order to bail out the bank's shareholders and bondholders.

So it's like I've been saying. We won't do what the Eurocrats wanted Cyprus to do. Such a bold act of daylight robbery might frighten everyone and provoke resistance. Instead, we'll do it in a more genteel, subtle manner.

The only advantage we have in the US is that this policy was not sprung on us suddenly, over a bank holiday, so we've had some ability to avoid it by desperately seeking out assets that provide an actual yield. The disadvantage is that, unlike in Cyprus, we never had the option of voting down the Fed's plans for our savings.

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