Cyprus: I did change my mind (to an extent)
Some time ago, I was (to a limited extent and considering the circumstances) positive about the Cyprus actions of Jeroen Dijsselbloem. Not everybody agreed about this and I did some research, especially into the nature of the present crisis in the Eurozone and the role of the ECB. Look here and here and here and here and here and especially here. And this one, about the difference between ‘gold standard’ policies and non-gold standard policies in the thirties.
Did this change my mind, about Cyprus, Dijsselbloem and the bail-in? To an extent: yes.
(A) I still believe that the first Cyprus agreement was absolutely amateurish while the second is (slightly) better. It’s however still crippled by the almost complete absence of future, oriented policies aimed at fostering real investments and lowering debt levels of households and non-financial companies, read the Cyprus Memorandum of Understanding.
(B) And I still believe that, if necessary, shareholders (duh…) as well as junior bond holders (duh…) as well as senior bond holders/Coco’s should be wiped out.
(C) But I’m now of the opinion that deposit money (all of it, even when owned by Corrupt Russian Crooks, CRC) should not be touched. I define ‘deposit money’ as all deposits covered by the ECB M-3 definition of money – but am increasingly inclined to also include ‘financial capital’, i.e. longer term deposits. This can be quite some money (see the graph (source @cigolo), CRC money must have been part of the yellow part of the Cyprus bar, see also this story about the ‘Olympic Sized’ corruption which plagues the Sochi winter games ).
(D) This has to be financed with the printing press (the net amount of money does not increase when you do this, as this financing prevents a decline of the amount of money). Households sell their M-3 claims on the bank after the crash to the National Central Bank for paper money which is almost instantaneously exchanged for deposit money. This is much more complicated than it seems, as it’s a good idea to use this money first to pay any bills due).
The reasons for this shift of mind are:
(I) The present Eurozone crisis is totally extreme. There are no post World War II examples of developed countries with unemployment which even comes close to present unemployment in Spain and Greece and even unemployment in the entire Eurozone (12,1% at the moment) is slowly heading towards such record levels. We have to get out of this and destroying assets of households while at the same time diminishing the amount of debts of the banking system is not the way ahead. Something is very wrong within the Eurosystem, conventional models, thinking and experience do not capture this experience.
(II) The ECB did a lousy job before 2008, as it really did not look at or care about national imbalances (40% money growth in Ireland, 15% of GDP current account deficit in Greece, double-digit increases of private mortgage related debt in many countries…). The present problems are to an extent the direct responsibility of the ECB. If possible, they have to correct the consequences of this grave mistake, to prevent central banking Moral Hazard.
(III) The ECB does a lousy job at the moment. Unlike the situation before 2008 it now does look at national differences and it does accept the inherent instability of our monetary system. This clearly are improvements. But it still does not accept its prosperity mandate which (just like it’s inflation mandate) is clearly spelled out in the EU treaties. There is not just, to quote Trichet, ‘one needle in the ECB compass’ – The ECB is simply not allowed to promote strategies which wreck the social fabric of entire countries – an it can easily enable such policies by changing it’s inflation goal from a goal which targets Eurozone inflation into a goal which also states that ‘deflation of the price level in individual countries has to be prevented’.
IV. Most important: it’s ludicrous to try to solve a debt crisis using policies which shrink economies with a total of 20% to 30%, or so. This of course leads to mass suffering, broken lives and scavenging of garbage bins (look here for Olga Onassis doing this)- but also to a decline of the income which is the basis for paying back debt as well as even the amount of money which is used to do this.
The whole idea is that money is (among other things) a store of wealth as well as a means of exchange. Destroying shareholder wealth does not diminish the amount of ‘means of exchange’. Destroying deposits does. And I share the Keynes/Friedman idea that the ‘flow of trade, money, income and work’ has to keep flowing and that it’s up to the government (including the central bank) to ensure this,when dysfunctionalities of our monetary system (sky-high debts?) threaten to disrupt this flow. Which means that government policies should prevent a decline of the stock of exchange money (i.e. M-3 deposits) like the recent ones in Italy, Greece and Ireland. Or even should increase these, for instance by borrowing directly from banks, which in the USA in the thirties of the twentieth century enabled an increase of the severely decreased amount of ‘exchange-money‘. See also the ideas of somebody like Richard Werner. From a micro economic perspective: the deposits of small and medium business and households should not be touched – as they use them, which keeps the economy (and households and companies) alive.