Will Determined GOP Nihilists In The House Overcome Anemic Democratic Defenses In The Senate And White House To Impose Their Failed Austerity Agenda On America? Is Cyprus Coming Here?
• Ann Kuster (NH)
• Sean Patrick Maloney (New Dem-NY)
• Mike McIntyre (Blue Dog/New Dem-NC)
• David Scott (Blue Dog/New Dem-GA)
• Juan Vargas (New Dem-CA)
“With that experience, I can tell you that this topic is not for the faint of heart,” said Neal. “Just explaining the different types of derivatives can fill volumes, plus the market is constantly evolving and growing. But this is a very important area of our tax law and one in need of reform. So I applaud Chairman Camp for taking up the challenge and releasing a discussion draft that has a lot of merit. Chairman Camp's legislation updates the antiquated tax treatment of financial derivatives and replaces it with a single set of rules.”
Another bill exempts public utilities, and those interacting with public utilities, from having to abide by the new derivative rules. Yet another removes much of Section 716, which requires federally supported banks to run their derivatives portfolios in separate corporations without guarantees, as many already do.
...[Y]ou might support the bills is if these were small, inconsequential parts of the financial industry. They’re not. As Marcus Stanley of Americans for Financial Reform told me: “The major Wall Street banks have literally thousands of subsidiaries in dozens of countries, so proper inter-affiliate regulation is crucial. If cross-border derivatives rules are weakened, you will have regulatory races to the bottom. If both these bills pass, it’s worse than the individual parts, as financial firms are expert at moving money and will use both to effectively evade regulations.”
...As Wallace Turbeville of Demos, who also testified on the bills, noted, “These bills undercut and second-guess careful work performed by regulators in making rules for the derivatives markets. Congress should not be advancing broad and sweeping statutory exemptions that overturn the judgment of expert regulators and effectively deregulate portions of the derivatives market only a few years after the decision to regulate them for the first time and before the carefully constructed regulatory regime can be evaluated.”
The fourth and final reason to support these bills is if it were clear that the financial sector had learned its lesson from derivatives in the crisis and was showing movement in the direction of being able to regulate itself. Sadly, the opposite is true. As the recent report by Sen. Carl Levin’s subcommittee on investigations found, JPMorgan’s “Whale Trade” derivative losses were not only huge but happened very quickly and were hidden from regulators for a significant amount of time.
Normally you shouldn’t care if a business loses money, which is just part of a market economy, but one of the core tactics for ending Too Big To Fail is using a new resolution authority to kill off large financial firms in danger of collapsing. Early detection of losses is essential for the process, which involves numerous techniques to ease a firm back to solvency or into failure. Firms that are able to hide that information from regulators by using complex derivatives are a big problem for ending Too Big To Fail.
A year ago, then-Treasury Secretary Tim Geithner put out a statement saying that a number of House bills amending derivatives reform while the rules were still being considered were “at best premature” and would likely ”undermine the integrity of the rulemaking process, further complicate the work of the regulators, and increase uncertainty for forms.” It is unclear whether his successor, Jacob Lew, will put energy into opposing these specific bills by name as they go forward with some Democratic support.
It is clear, however, that these rules are a bad idea, especially when financial reform is still being implemented. Lawmakers should realize that they would be dismantling important parts of the bill, rather than tinkering along the edges, if these proceed.
The problem in Cyprus is simple: the banks' assets included, in large part, government bonds from nearby Greece.
The Greek tragedy that befell Greece and its bonds has thus become a Cypriot bank tragedy. Having borrowed roughly eight times Cyprus' GDP from depositors and bondholders, much of them allegedly insalubrious Russian companies and nationals, the Cypriot banks are now bust, bankrupt, belly up, and in no position to make good on their pledge to their lenders-- especially the depositors, to whom they promised, as banks do, to pay the money on demand. Indeed, Cypriot bank demand deposits are frozen at least through next Tuesday as the Cypriot government decides what to do.
...Whatever happens, no one is going to trust or use Cypriot banks for quite some time. This will shut down the country's financial highway and flip Cyprus' economy to a truly awful equilibrium-- a replay of our own country's Great Depression, perhaps, which was fueled, if not kicked off, by the failure of one in three U.S. banks. That, of course, was also the fear worldwide in 2008.
Cyprus is a small country. Still, the failure of its banks could trigger massive bank runs in Greece. After all, if the European Central Bank is abandoning Cypriot depositors, might they not abandon Greek depositors next? A run on Greek banks could then spread to Portugal, Ireland, Spain, and Italy and from there to Belgium and France and, you get the picture, to other countries around the globe, including, drum roll, the U.S. 2008 all over again. Every bank in each of these countries has made promises they can't keep if all depositors demand their money back immediately.
...[T]he Federal Reserve, European Central Bank, Bank of England and other central banks can print so-called "hard" money and give it to the banks to pay off depositors. But the specter of such massive money creation would spark fears of massive inflation, since, in the U.S. case alone, providing enough to pay off all depositors would entail printing as much as $12 trillion overnight were bank runs to happen here. The fear of inflation or "hyperinflation" might, in turn, prompt everyone to get and spend their money as fast as possible before prices rise. This transformation of money into a hot potato would, by itself, produce the inflation that everyone would fear.
Given the above, the question we need to ask about Cyprus is not really about Cyprus. The question we need to ask is why we continue to tolerate a banking system that is built to collapse at the first sign of true alarm?
Perhaps we tolerate ongoing financial and economic fragility because we don't see a safer way to run our banking system. But there is, I believe, a much safer way. It's called "Limited Purpose Banking," which I proposed in my book Jimmy Stewart Is Dead. The plan, which I explained on this page in video a while ago is detailed here. Thoroughly non-partisan, it has since been endorsed by a Who's Who of leading economists and policymakers of all stripes, including six Nobel Laureate economists, former Treasury Secretary George Shultz, former U.S. Senator Bill Bradley, and former Labor Secretary Robert Reich.
Limited Purpose Banking (LPB) eliminates the two key factors that make traditional banking so fragile. The first is leverage (how much the banks borrow in order to lend). The second is opacity (the banks don't tell us what they are doing with our money).
LPB eliminates leverage by forcing all financial corporations to operate as mutual fund holding companies that do one thing only-- give depositors 100 percent mutual funds. Such mutual funds take in money, not by borrowing, but by selling shares. They then invest this money in the securities in which they specialize. These mutual funds are, thus, small banks with zero leverage (debt). A bank that has no debt can never fail.
To eliminate opacity and ensure that people know what they are buying when they buy the shares of any given mutual fund, a new federal agency-- the Federal Financial Authority (FFA)-- would verify and disclose all securities held by the mutual funds. The FFA would do for the financial services industry what the FDA does for the drug industry-- ensure its products aren't arsenic parading as a cure-all.
Mutual fund banking is not new. Most of us have our 401(k)s or IRAs invested in mutual funds. Indeed, there are more mutual funds in the U.S. than there are banks. The ones that were equity financed-- that is, they got all their money without borrowing any-- sailed unscathed through the great crash of 2008. The ones that were leveraged, like money market funds, did not. Yes, all mutual fund investors lost money if their shares went down in value. But the funds themselves-- their part of the financial highway system-- never failed.
Those who don't learn from history repeat its mistakes. The lesson from Cyprus is the same one we should draw from the long history of banking crises and the terrible economic fallout they engender. The lesson is simple. Traditional banking is unsafe at any speed. I've been saying it for years: It's time to switch to Limited Purpose Banking.
When talking about the rights and responsibilities of the Cypriots, it’s important to distinguish between the ordinary people, who are understandably bewildered by the fate that has befallen their country, and the government, which has been playing a double game. Ever since Cyprus joined the euro zone, in 2008, it has been free riding on the system, enjoying the stability afforded by a strong currency as well as the pecuniary benefits of acting as an offshore tax haven for rich foreigners who want to keep their money beyond the reach of their own governments. According to analysts at Barclays, accounts holding more than half a million euros represent nearly half of the entire deposit base of Cypriot banks.
And it’s not just a matter of wealthy Russians and other Eastern European oligarchs parking some of their wealth there. It’s more systematic than that. Many Russian companies routinely route some of their cash flows through Nicosia to shelter them from domestic taxes-- a practice, known as “round-tripping,” that garnered the Cypriot banks lucrative fees and enormous deposits. With hot money of many kinds flooding into the island, Cyprus’s banks got so big that, eventually, their assets were worth about three times its G.D.P.
The engorgement of the Cypriot banking system had several negative consequences. To begin with, it left the island’s banks with a lot of cash deposits that they had to lend out or otherwise employ. Unfortunately, they chose to invest quite a lot of this money in Greek government bonds. In 2011, when the E.U. bailed out Greece and restructured its debt, the value of these bonds plummeted, leaving the Cypriot banks in a mess. Ever since then, it’s been clear that Cyprus would eventually require a bailout; the only questions were how large it would be, and who would bear the cost. To be sure, the E.U. is big enough to have picked up the entire bill and moved on, but that wasn’t a realistic prospect. In addition to setting a bad precedent, it wouldn’t have received the approval of voters in places like Germany and Holland.
A one-time levy of 20 percent would be placed on uninsured deposits at one of the nation’s biggest banks, the Bank of Cyprus, to help raise 5.8 billion euros demanded by the lenders to secure a 10 billion euro, or $12.9 billion, lifeline. A separate tax of 4 percent would be assessed on uninsured deposits at all other banks, including the 26 foreign banks that operate in Cyprus.
|Here's how ruling elites panic "their people" into accepting Austerity agendas that serve no one but the very rich|
UPDATE: Cyprus And EU Work Something Out
No one seems to have all the details yet but what I'm piecing together is that right-wing President Nicos Anastasiades had a tantrum and threatened to resign on behalf of protecting Russian Mafia interests which just funded his successful election campaign. The agreement includes shutting down the Popular Bank of Cyprus (Laiki), the country's second-biggest bank (and that means thousands of job losses), and a "tax" on bank deposits over $130,000. Cyprus gets $13 billion is aid from the EU Central Bank and the IMF as long as they raise $7.5 billion locally. That will come from 20-40% taxes of accounts above $130,000, depending on what sources you want to believe. There is no chance Cyprus will avoid a full scale depression or that their hot banking sector-- all the money that could has already fled to Latvia-- will be viable again in the coming decade or so.
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