Quotulatiousness

April 3, 2013

They “held the kind of attitudes that make the Daily Mail‘s headlines look positively Left‑wing”

Filed under: Britain, Economics, Government, Media — Tags: , , , — Nicholas @ 09:47

Brendan O’Neill on the vast gulf between the bien pensant supporters of Britain’s current welfare system and those who actually depend on that system:

Comfortably off liberal campaigners are always bemused to discover that the working classes and poor do not share their love of the welfare state. Where radical middle-class students bravely spend bitterly cold evenings on pro‑NHS demos, and Left-leaning newspaper columnists write heartfelt articles about the importance of maintaining welfare payments, the less well-off seem totally unmoved by cuts to welfare.

[. . .]

Agreement that “unemployment benefits are too high and discourage work” has risen steadily among the less well-off. Only 40 per cent of benefits recipients agreed with it in 2003, while in 2011 59 per cent did. Thirty-eight per cent of working-class respondents agreed in 2003 that welfarism discouraged work; 58 per cent agreed in 2011.

The lack of love for the welfare state among its supposed beneficiaries drives liberal campaigners nuts. Why, they wail, are those on the breadline so down about the glorious postwar system of welfarism, even though it has saved their ungrateful rumps from destitution?

In Monday’s Guardian, columnist John Harris, who regularly travels around Britain to find out what the little people think, bemoaned the fact that anti-welfare “noise” always gets louder “as you head into the most disadvantaged parts of society”. This echoes a recent Guardian editorial which complained that ordinary Brits have become “more Scrooge-like” towards welfare claimants.

Or behold the bamboozled Joseph Rowntree researcher Fern Brady, who was horrified to discover that the less well-off are not remotely “pro-welfare”. Earlier this year, Ms Brady interviewed 150 families who will be affected by benefits cuts and was alarmed to find that “the majority held the kind of attitudes that make the Daily Mail‘s headlines look positively Left‑wing” — that is, they were anti-welfarism, and stingingly critical of those who claim welfare, even though they themselves claim it.

April 2, 2013

Revisiting the revisionist view of the “Satanic mills” of the British industrial revolution

Filed under: Britain, Economics, History — Tags: , , , , — Nicholas @ 08:55

Rather in keeping with the sentiments expressed in today’s Quote of the Day post, Emma Griffin explains why the workers generally thought of the industrial revolution as a very good thing indeed:

Writers and academics often show an interesting ambivalence about industrialization. Today, they regard it as a blessing, the single-most-effective way to lift people out of poverty. But in thinking about Britain’s Industrial Revolution, they have tended to reach the opposite conclusion: The rise of the factory, they argue, caused the end of more “natural” working hours, introduced more exploitative employment patterns and dehumanized the experience of labor. It robbed workers of their autonomy and dignity.

Yet if we turn to the writing of laborers themselves, we find that they didn’t share the historians’ gloomy assessment. Starting in the early 19th century, working people in Britain began to write autobiographies and memoirs in ever greater numbers. Men (and occasionally women) who worked in factories and mines, as shoemakers and carpenters, and on the land, penned their stories, and inevitably touched on the large part of their life devoted to labor. In the process, they produced a remarkable account of the Industrial Revolution from the perspective of those who felt its effects firsthand — one that looks very different from the standard historical narrative.

[. . .]

Higher levels of employment also helped change the balance of power between master and laborer. So long as jobs remained scarce, workers, by necessity, obeyed their employers. The price of dissent or disobedience was unemployment. With more jobs, such subservience became less and less necessary. In the booming new industrial towns, workers could, and did, walk out on employers over relatively minor matters, confident that finding more work wouldn’t be difficult. One autobiographer left his position simply because he “grew sick” of the work; another because he didn’t want to “beg pardon” after a falling out with his master; another objected to wasting his precious Sunday mornings at his master’s religious services; and another quit when his master refused to let him take his tea breaks off the premises. All working relationships are defined by a disparity in power between master and servant. But that inequality is rendered more palatable if we’re well remunerated for our services and can leave at will.

The way in which working people described the upheavals of this period provides us with a powerful reminder of the transformative effect of industrialization and of its capacity to improve living standards, even for the poor. Generations of historians have dwelled on the loss of old working patterns and presumed that the introduction of more intensive ones was detrimental to workers’ welfare. But these developments weren’t viewed in such a sinister light at the time. Industrialization promised full employment, and for those used to scraping together a living from the land, this was very good news indeed.

April 1, 2013

Canadian government pre-approves Cyprus-style haircuts for bank depositors

Filed under: Cancon, Economics, Government — Tags: , , , — Nicholas @ 09:39

Not only can it happen here, but Stephen Harper’s Conservative government is making it explicit that it will happen here:

The politicians of the western world are coming after your bank accounts. In fact, Cyprus-style “bail-ins” are actually proposed in the new Canadian government budget. When I first heard about this I was quite skeptical, so I went and looked it up for myself. And guess what? It is right there in black and white on pages 144 and 145 of “Economic Action Plan 2013″ which the Harper government has already submitted to the House of Commons.

This new budget actually proposes “to implement a ‘bail-in’ regime for systemically important banks” in Canada. “Economic Action Plan 2013″ was submitted on March 21st, which means that this “bail-in regime” was likely being planned long before the crisis in Cyprus ever erupted. So exactly what in the world is going on here? In addition, as you will see below, it is being reported that the European Parliament will soon be voting on a law which would require that large banks be “bailed in” when they fail. In other words, that new law would make Cyprus-style bank account confiscation the law of the land for the entire EU.

I can’t even begin to describe how serious all of this is. From now on, when major banks fail they are going to bail them out by grabbing the money that is in your bank accounts. This is going to absolutely shatter faith in the banking system and it is actually going to make it far more likely that we will see major bank failures all over the western world.

What you are about to see absolutely amazed me when I first saw it. The Canadian government is actually proposing that what just happened in Cyprus should be used as a blueprint for future bank failures up in Canada.

March 31, 2013

The deep strangeness of the Cyprus bank haircuts

Filed under: Economics, Europe, Greece, Russia — Tags: , — Nicholas @ 11:36

At Forbes, Tim Worstall has some thoughts on the oddities now apparent in how the Cyprus banking crisis has played out so far:

Now that we’re seeing the real numbers coming out about who loses what in the Cyprus haircut/bank consolidations there’s something very strange about the numbers. Whiffy even, and that’s not with a good odour to it either. For, as far as I can tell at least, the haircuts are far larger than they need to be in order to make good the damage that we were told about. I’m therefore coming around to the idea that this wasn’t what we’ve been told it was, a story of Russian offshore deposits and tax avoidance. Rather, it’s two banks which invested regular domestic deposits into just terrible opportunities and then lost it all.

I don’t think I can make the case absolutely but I think it’s a case worth at least investigating.

[. . .]

But back to the point I’m trying to work through here. We’ve been told that the immediate cause was all about all that foreign money which flooded the country’s banking system. Yet when we look at the amount that is being raised by the haircuts it doesn’t look as if the two bankrupt banks had all that much of those foreign deposits. It looks very much like the banks which had the deposits didn’t invest badly and thus didn’t go bankrupt. So the problem isn’t therefore one of all that foreign money.

Rather, it’s a problem of where those two banks invested their deposits. And it looks as if this was largely in Greek Government and Cypriot Government bonds. Which is why they are bust.

March 30, 2013

All those manufacturing jobs are never coming back

Filed under: Britain, Business, China, Economics, USA — Tags: , — Nicholas @ 08:37

Tim Worstall explains why this is at the Adam Smith Institute blog:

I’m always rather puzzled by those who shout that we’ve got to bring manufacturing back to the UK. Apparently this will solve all our problems over what to do with dim Northern lads or something. Once they’re all hammering out whippet flanges then we just won’t have a problem with unemployment ever again. The problem with this idea is that modern manufacturing simply doesn’t provide many jobs. And if it were to provide mass employment it would be very badly paid employment too:

    Americans working to produce traded goods and services earn, roughly, according to their productivity. If low-skill workers in America aren’t much more productive in manufacture of traded goods and services than low-skill workers in China, then they can’t earn much more than workers in China while being employed in manufacture of traded goods and services. They can earn a rich-world wage in production of non-traded goods and services, like sandwiches and haircuts, so long as there is sufficient local demand. In other words, the only way to get less-skilled Americans a good wage in a manufacturing industry is to significantly raise their skill and productivity level. If that can’t be accomplished, they can only hope to find good wages in non-traded industries. At least, that is, until wages of less-skilled workers across the developing world come much closer to converging with those in America.

Of course, that’s all about America but the same logic pertains here as well. Chinese manufacturing wages are around $6,000 a year at present. Meaning that if we had mass employment in manufacturing, as they do, then wages would need to be around that level. Or, alternatively, UK based manufacturing would have to be much more productive to support higher wages. And “more productive” is the same as saying “uses less labour”. Thus you can have few well paid jobs (in the Rolls Royces etc of this world) or you can have many badly paid jobs (Shenzen). It isn’t actually possible to mix and match between the two.

Looking at crowdfunding as a replacement for venture capital

Filed under: Business, Economics, Technology — Tags: , , , — Nicholas @ 07:43

ESR looks at where crowdfunding fits in the traditional tech start-up food chain:

In How crowdfunding and the JOBS Act will shape open source companies, Fred Trotter proposes that crowdfunding a la Kickstarter and IndieGoGo is going to displace venture capitalists as the normal engine of funding for open-source tech startups, and that this development will be a tremendous enabler. Trotter paints a rosy picture of idealistic geeks enabled to do fully open-source projects because they’ll no longer feel as pressed to offer a lucrative early exit to VCs on the promise of rent capture from proprietary technology.

Some of the early evidence from crowdfunding successes does seem to point at this kind of outcome, especially near 3D printing and consumer electronics with a lot of geek buy-in. And I’d love to believe all of Trotter’s optimism. But there’s a nagging problem of scale here that makes me think the actual consequences will be more mixed and messy than he suggests.

In general, VCs don’t want to talk to you at all unless they can see a good case for ploughing in at least $2 million, and they don’t get really interested below a scale of about $15M. This is because the amount of time required for them to babysit an investment (sit on the company’s board, assist job searches, etc.) doesn’t scale down for smaller investments — small plays are just as much work for much less money. This is why there’s a second class of investors, often called “angels”, who trade early financing on the $100K order of magnitude for equity. The normal trajectory of a startup goes from friends & family money through angels up to VCs. Each successive stage in this pipeline is generally placing a larger bet and accordingly has less risk tolerance and a higher time discount than the previous; VCs, in particular, will be looking for a fast cash-out via initial public offering.

The problem is this: it’s quite rare for crowdfunding to raise money even equivalent to the low-end threshold of a VC, let alone the volume they lay down when they’re willing to bet heavily. Unless crowdfunding becomes an order of magnitude more effective than it is now (which seems to me possible but unlikely) the financing source it will displace isn’t VCs but angels.

March 29, 2013

Cyprus has become the EU’s “lab rat”

Filed under: Bureaucracy, Economics, Europe — Tags: , , , — Nicholas @ 09:59

In sp!ked, Bruno Waterfield talks about the EU’s most recent involuntary experimental subject, Cyprus:

Every negative European political trend has deepened in the latest round of the Eurozone crisis, as Cyprus has been treated by the EU with a disdain for self-determination worthy of the high age of imperialism. It is this which is really troubling, not the haircuts for depositors or the bank closures. In effect, an entire island nation has been made a laboratory rat for a new Eurozone experiment in rebalancing economies in the EU single currency — whether the Cypriots like it or not.

Cyprus is the perfect fall guy for the EU and IMF experts who, despite the mess in Greece and elsewhere in southern Europe, still believe they know best how to run a nation’s affairs. That’s because, as well as being too small to count, especially for the markets, Cyprus is easily painted as a bad guy, a swarthy, even Levantine crook which launders dirty Russian money (nearly a third of Cypriot bank deposits) for ‘dodgy’ oligarchs. This whiff of corruption (nothing new to Cyprus, or other European banks for that matter) provides the perfect pretext for treating Cyprus as a case apart. This is meant to soothe the fears of senior northern European debt holders — it is corrupt Cyprus, and not failed private risk in general, that has been targeted.

So, because it is small, and in the eyes of the Eurozone social engineers, easily contained, Cyprus has been selected to be an experiment, potentially a model for Portugal or Spain. And if it all goes horribly wrong… well, Cyprus is small and a dodgy special case, so who cares? The EU doesn’t.

March 28, 2013

Paul Wells: They didn’t call it a budget because it isn’t a budget

Filed under: Cancon, Economics, Government, Media — Tags: , , , , — Nicholas @ 13:48

For example, a budget would actually provide you with comprehensible statements of anticipated revenues and spending for all the big ticket items:

I work in Ottawa and I try to stay on top of things, but this was news to me. In fact, I didn’t even notice it until four days after Finance Minister Jim Flaherty released his — er — plan on March 21. Of course, there was much chortling in the press gallery at the government’s insistence on calling its annual account of revenues and expenses something besides a budget. But the significance of the thing took a while to sink in. Flaherty and his boss, Stephen Harper, do not call their big annual document a “budget” anymore because it is no longer a budget.

A budget, as anyone who has tried to run a household knows, is the moment when you stop telling yourself soothing tales and inject a note of reality into your life. On page 64 of the 1997 budget, for instance, the government of the day gave us an “outlook for program spending” with multi-year projections for spending levels in defence, Aboriginal programs, “business subsidies” and so on. It was that straightforward.

Harper’s Economic Action Plans, by contrast, are carnivals of fantasy. EAP13 — we will use the government-approved hashtag, which I assume is pronounced to sound like a shriek of terror — is 200 pages longer than Budget 1997 but finds no room for a one-page program-spending outlook, nor indeed for a program-spending outlook of any length. Like the best funhouses, this one depends on its volume for much of its amusement value. The decision to merge CIDA into the Foreign Affairs Department is announced on the 31st page of a chapter on “supporting families and communities,” and I can only assume it is there as a reward for perseverance. The morning after Flaherty’s speech, a diplomat asked me how it is possible for a G7 country to release a budget that does not at any point say how much the government will spend on defence next year. I gave the fellow a long answer. I should have said his premise was wrong, because — stop me if you’ve heard this — it’s not a budget.

March 25, 2013

Budget Day was also apparently opposite day

Filed under: Cancon, Economics, Politics — Tags: , , , — Nicholas @ 10:51

In Maclean’s, Stephen Gordon give props to the spinmeisters in the employ of the federal government:

Full credit to the government’s communications strategists: they managed to produce budget-day headlines that said the exact opposite of what was in the budget.

The first thing I read on the morning of budget day was the National Post story about cutting tariffs on hockey gear. There was also a matching A1 story in the Globe and Mail and I walked to the budget lockup in a cheerful mood. Even though the numbers involved were tiny, I couldn’t help but feel encouraged about how the measure was being marketed. Almost without exception, trade liberalisation is presented as a concession to the demands of foreign exporters, but the real gains from trade are those obtained from being able to purchase cheaper imports. These gains can be obtained by reducing tariffs unilaterally – the most famous example is the repeal of the the UK Corn Laws in 1849. There was no drawn-out process of negotiations with corn (wheat) exporters in other countries: the UK government simply eliminated tariffs so that the population could have cheaper food. The morning headlines led me to believe that our government was going to implement a unilateral tariff reduction for the simplest and best reason: because it increased consumers’ purchasing power.

I was wrong, of course. Yes, there were those 37 tariff reductions, but there was also the measure to ‘modernize’ Canada’s General Preferential Tariff (GPT) regime by ‘graduating’ 72 countries from the GPT; imports from these countries will now face higher tariffs. Mike Moffatt estimates that those 37 tariff reductions will be accompanied by 1290 tariff increases. [. . .]

So instead of a unilateral reduction in tariffs, the government is planning a unilateral increase. This is not how a pro-trade government behaves.

The Cyprus “deal” decoded

Filed under: Economics, Europe, Russia — Tags: , , , — Nicholas @ 09:04

With a blog post entitled “THE CYPRUS HEIST GOES THROUGH: And it’s an Orwellian masterpiece“, you could say that this is an unfair summary of the situation:

Somewhere, George Orwell is spinning in his grave — although he wouldn’t be even remotely surprised by the 1984-style nonsense being hailed as a compromise by the Troikanauts and Nicosia’s embarrassed leaders.

This is the deal: the levy is called something else scrapped, and none of the deposits below €100,000 will be stolen included.

The new lunacy idea sees Laiki Bank closed. The entirety of its €4.2bn in deposits over €100,000 will be placed in a “bad bank”: why you would put healthy deposits in a bad bank eludes me, but we’re really just moving the stash around here: the bad bank’s resources will be confiscated. We’re talk a 100% haircut for all these savers.

And don’t be fooled by the Berlin propaganda about Russian money-laundering. First up, being a rich Russian doesn’t automatically make you a crook; and secondly, nowhere near all — possibly under half — are Russian anyway: UBS, several Israeli banks, a number of French banks will have depositor’s money taken out of them to pay for the ambitions of Brussels-am-Berlin.

There’s more: all the bondholders in Laiki also take a 100% haircut.

[. . .]

Entirely appropriate however was the choice of Wolfgang Schäuble to face the cameras and ‘explain’ why none of this would need the approval of the Cypriot Parliament. Just “approved by the 17 eurozone finance ministers comparatively quickly, after about two hours of further deliberations”. As to why it needed FinMin approval (but not that of the citizens’ representatives) get a load of this for jargonised bollocks:

“This plan will not require the approval of the Cypriot parliament because the losses on large depositors will be achieved through a restructuring of the island’s two largest banks and not a tax.”

Update: I think Tyler Cowen gets it exactly correct here:

The capital controls will have to be strict. What will the price of a Cypriot euro be, relative to a German euro? 50%? I call this Cyprus leaving the euro but keeping the word “euro” to save face. And yet they fail to reap most of the advantages of leaving the euro, such as having an independent monetary policy.

March 24, 2013

Maclean’s agrees that Canada doesn’t need the UN’s flattery

Filed under: Cancon, Economics, Education — Tags: , , — Nicholas @ 10:44

Canada recently dropped out of the top ten in a UN beauty contest that we once “won” seven years in a row. At the time, Canadian politicians used that accolade as a regular talking point. Now, a bit to my surprise, the media hasn’t been using the “loss” as a stick to incessantly beat the government with. How unexpectedly mature of them:

Canadians with a penchant for lists will recall that in 1994 we began a record stint of seven straight years atop the United Nations Human Development Index. Meant to provide an international comparison of living standards, our dominance on this global leader board was seen as tangible proof Canada was the best country in the world. The annual report regularly garnered substantial media attention and sparked plenty of national braggadocio. Prime minister Jean Chrétien, in particular, made it a frequent talking point.

No longer. We haven’t topped the rankings since 2000. Current leader Norway now boasts more first-place finishes than we do. (Although our Nordic friends haven’t yet won seven in a row.) In fact this year marks the first time Canada has failed to place in the top 10. The most recent edition, released last week, has us at a humbling 11th — a whisker above South Korea. Ireland beat us.

[. . .]

In 1992 the Standard & Poor’s credit rating agency stripped Canada’s federal foreign debt of its coveted AAA rating, thanks to an endless stream of government deficits. In January 1995 the Wall Street Journal measured Canada for a barrel suit, declaring us to be “an honorary member of the Third World” in its now-legendary “Bankrupt Canada” editorial. Our debt-to-GDP ratio hit a peak of 68 per cent that year. The loonie was worth about US$0.72, and would bottom out at US$0.62 before it was done falling.

Since then, of course, Canada’s financial turnaround has become a totem for countries around the world struggling with the after-effects of the Great Recession. Government finances are in better shape than most and our dollar at par. Canada’s reliance on natural resources, once considered a retrograde habit, has played a large role in allowing our economy to weather the storm. Our banking system is an international paragon of virtue; we’re even exporting central bankers. Plus Canada has adopted a more self-confident stance on foreign policy, replacing our old reputation as a meek and mild peacekeeper with a more authoritative voice.

The domestic economy of Cyprus is slowing to a stop

Filed under: Economics, Europe — Tags: , , , , — Nicholas @ 10:09

In the Telegraph, Colin Freeman looks at how the banking crisis is impacting ordinary Cypriots and retired EU citizens in Cyprus:

Last weekend, the small Mediterranean island was plunged into the epicentre of the eurozone crisis when Brussels finance chiefs, led by Germany, demanded a levy of up to ten per cent of savers’ deposits in return for a 10bn euro bail-out of the country’s ailing banks. The move left many of Cyprus’s 60,000-strong British community facing heavy losses on retirement nest eggs — and as the week rolled on, that looked like being just the least of their worries.

On Thursday, unhappy at the Cypriot parliament’s rejection of the deal, Europe’s Central Bank then threatened to cut financial life support for the island altogether, a move that would have led to its banking sector collapsing, and savers losing not just a percentage of their money, but all of it. It was only thanks to a last-minute agreement hammered out on Friday night, which is expected to restructure the country’s banks and restrict the levy to deposits of more than 100,000 euros, that all-out chaos was averted. For now, anyway.

[. . .]

Since last weekend, when all of Cyprus’s banks were shut to stop a run on withdrawals, work has ground to a halt, as the repair man has been unable to buy in the materials he needs from suppliers, who are all now demanding cash. The job symbolises the malaise of the wider Cypriot economy, built on shaky foundations, and now in a state of paralysis, with thousands of shops, businesses and restaurants unable to operate properly because of the financial uncertainty.

“None of my food and drink suppliers are taking bank payments any more,” said Yiota Vrasida, 43, who owns a café in the winding streets of the capital, Nicosia. “We can keep going until this weekend, but that is about it.”

[. . .]

“Nobody will want to leave so much as 10 euros in any Cypriot bank any more,” said Dino Karambalis, 49, an IT worker, standing at the end of a 30-people-long queue at the Laiki Bank, where he had 90,000 euros in savings. “They say this levy is only for Cyprus, but why should anyone believe that? This is undermining confidence in the euro as a whole, and in the whole EU project itself. I was pro-European before, but not now.”

This weekend, the Cypriot parliament sought to reassure smaller savers, saying those with less than 100,000 euros would face at most a levy of less than one percent. State television also talked of a one-time charge of up to 25 percent on savings of over 100,000 euros held at the Bank of Cyprus. With that in mind, capital controls will be imposed to stop a run on the banks when they reopen next week.

But whatever new measures come in, some damage has already been done by declaring savers’ accounts to be fair game in the first place. Britain’s Business Secretary, Vince Cable, warned on Friday that it could lead Northern Rock-style runs on banks all over the eurozone in future.

March 23, 2013

Human Achievement Hour 2013

Filed under: Economics, Environment, Liberty, Politics — Tags: , , , , — Nicholas @ 00:01

Oh, right. It’s once again time for the Gaia-worshippers to do an hour’s penance for the crime of being alive in an industrialized society. The Competitive Enterprise Institute proposes a different way of using that hour:

On Saturday, March 23 at 8:30pm (local time), some people, businesses and governments around the world will choose to sit in the dark for one hour as a symbolic gesture to take action against climate change. The organizers of Earth Hour say that they [no] longer expect energy use to actually drop during the hour, but instead see it as a way for people to show their commitment to reducing energy use and taking action beyond the hour.

It’s absolutely every person’s right to decide if they want to conserve energy for whatever reason; they are free to sit in the dark as long as they want. However, it should not be their right to impose their beliefs or opinions on others. And that is what is at the heart of the environmentalist movement. While many participants in Earth Hour sincerely want a cleaner environment — a desire most of us share — the environmentalist movement whether implicitly or explicitly seeks to clamp down on human progress by reducing energy consumption whether through regulation and taxation. They want to make fossil fuels, which they see as dirty, more expensive to encourage the use of renewable “greener” energies.

Despite any good intentions, the ultimate result of environmentalist policies is not a healthier, cleaner environment. Instead we will see a population that is sicker and poorer. The only way we achieve technology that is “greener” is by building on older “dirtier” technology. As we make it harder and more expensive for those in the business of creating new technologies, all we do is slow progress and make it that much longer to reach more environmentally friendly solutions.

March 22, 2013

Cyprus: the state of play on Friday

Filed under: Economics, Europe — Tags: , , , — Nicholas @ 08:35

In the Telegraph, Thomas Pascoe summarizes the situation in Cyprus as of Friday morning:

As it stands this morning, there is a Plan B on the table after parliament voted down the proposal that every bank deposit in the country be subject to a deduction. The new plan only affects those with deposits over €100,000; however, it will require those depositors to take a loss of up to 40pc. As part of this package, the nation’s two large banks will be saved. However, the structure of the deal requires that one of the pair, Laiki, will be split into “good” and “bad” banks, with large depositors left to chance it in the bad bank.

A word on the thinking behind it. While you and I perceive deposits as secure money (and I have argued that to touch them is an abuse of power), technocrats in Brussels take a different view. They tend to view deposits in the technical sense of being loans to banks. You give the bank your money in exchange for interest, and can call the loan at any time (provided not everyone else is doing the same thing, which is the situation now). The bank loans most of your deposit on again. When countries struggle with too much debt, those who have loaned them money get “haircuts”, or less back than they gave. Following this thinking, the EU’s argument is that if we lend money to failing banks, we too must take a haircut to keep them solvent.

[. . .]

So the compromise deal is an ugly one, involving a precedent (confiscation of deposits) which will cast a pallor over the entire European banking system. But the problems are equally great with any other solution. If the banks are left to fail, depositors lose everything except the scraps recovered by administrators. To argue that they, and the country, must be funded directly by the EU, requires the continued willingness of Germany to act against its own economic interests and support an entire continent on its shoulders, impossible without fiscal and political consolidation which no electorate would assent to at present (not that they are asked, usually).

In my opinion, there is no faster way to destroy confidence in your retail banking sector than stealing the money from depositors with no recourse. I have no idea why the European Union is so hell-bent on crushing the banks, but perhaps they have some looney-tunes notion that they can supplant the existing bank system with something directly operated by the ECB or the EU itself.

March 21, 2013

The choices for Cyprus don’t seem to include saving the banks

Filed under: Economics, Europe — Tags: , , , , — Nicholas @ 11:04

In Forbes, Tim Worstall sums up the real problem facing Cypriots:

There’s a very large portion of the European political elite who believe, take on faith (for there’s certainly no convincing real world evidence about it) that the creation of the euro is part of the inevitable creation of the European State. And as such it is entirely irreversible. It’s not just that people once in the euro shouldn’t leave it: it’s that it is simply inconceivable that anyone ever would leave it. Either wish to leave it or be allowed to leave it.

Wherein lies the danger to said European dreams and it’s tiny Cyprus that poses said danger.

As both Krugman and Yglesias point out, the Cypriot banking system is bust, gone. Even if it needn’t have happened this way having the system closed for at least a week is going to lead to bank runs when they finally reopen. The economy is most certainly going to stutter if not be deeply depressed as a result of that banking system going. Given that a substantial part of the economy is about offshore finance, and that that’s not going to survive the banking system crash, there will also, whatever else happens, be substantial declines in GDP.

It’s most certainly true that leaving the euro will cause all of those things to happen. But if they’re going to happen anyway then why not leave the euro? Why not bring back the Cyprus Pound? That is, do an Iceland?

[. . .]

But here’s the thing: there’s still that religious insistence among the federasts that the euro is irreversible, a part of the future of the politics and economy of the continent. And if Cyprus does leave and does recover without too much paid then what reason for Greece, or Spain, Portugal, to stay in? If going bust and going back to one’s own currency is, as Iceland showed (although they kept, rather than went back to), less painful that the austerity required to stay in the euro then, well, why stay in the euro?

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