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Lenders Beware!

And that includes anyone with money in the bank...

CYPRUS may or may not prove to be a 'watershed' for the European crisis, writes Sean Corrigan for the Cobden Centre, but what we can say for now (tempting fate outrageously as we do) is that, for all the dire warnings that this 'confiscation' will provoke a Continent-wide bank run, the initial reaction of the wider populace has been to treat the matter as something of 'a quarrel in a faraway country between people of whom we know nothing'.

That said, there is a wider issue at stake, beyond the inequity or otherwise of penalising small depositors, or the opportunism of imposing a haircut on those stock music hall villains, the Russian oligarchs, whose holding companies populate the corporate register of this otherwise economically insignificant little island.

This is, namely, that however much we might express our contempt for a European elite which has so far exhibited a mix of pusillanimity and shameless political calculation in trying to avoid having their constituents face up to the cost of either their caprice or credulousness during the boom, the Cypriot 'tax'—in reality a haircut—must serve as a necessary, if horribly belated, reminder to all of what it is exactly that modern-day banking entails.

It is high time that the Man on the Clapham Omnibus realised that his banker is nothing more than his, the depositor's, creditor—and not a very reliable one, at that. Nor will it do our Everyman any harm to be shown once more that, for all the marbled halls and pseudo-classical gravitas of the banker's typical premises, his profession is nothing more than a highly-leveraged, actuarial gamble, largely reliant not so much on the shrewdness of the banker himself as upon his cynical awareness that he can stretch to almost no enormity of bad judgement or abused trust such that it will pierce the carapace of privilege and protection with which he is furnished by a venal political class itself hopelessly in hock to the lenders of the counterfeit monies with which it buys the votes necessary to keep its members in the enjoyment of the many perks of office. 

A further lesson might be drawn from this last assertion which is that, far from being the soundest of borrowers, sovereign entities throughout history have been the worst, zero risk-weighting and mandatory 'liquidity' holdings notwithstanding.

Though there has been much expression of outrage at this 'assault upon private property', the sorry truth is that this is only the most recent—if also the most blatant—of the many transfers of wealth from the populace at large to the balance sheets of their bankers. Should you need any convincing of this, I am sure the poor, put-upon Irish could quote you chapter and verse about the miseries of the debt slavery imposed upon them by their overlords in Frankfurt, while it is beyond human wit to reckon the number of the prudent and thrifty now being denied a due return on their hard-won savings by the arrogance of the central bankers to whose crass, 'reflationary' redistributionism they are now subject.

It should also be emphasised that it is no more than just that the owners and creditors of a failed institution share proportionately in its ruin, or conversely contribute in due measure to its rescue—though, naturally, the choice between these alternatives should lie with them as individuals. That the institution in question is a purveyor of banking services, rather than of beauty products or bed linen is totally beside the point. 

As the latest of several heavyweight commentators (such as members of the Chapter 14 group or Richard Fisher of the Dallas Fed in the US), Willem Buiter endorses this view in his latest piece where, he says, it is high time we 'resolved' our commercial banks à outrance, relying on the near limitless power of the central bank to maintain the basic stock of money and to staunch any systemic haemorrhage as and where needed. After all, if we are to be saddled with the institutional evil of a central bank, we may as well enlist its baleful power in a good cause for once.

That the powers-that-be, having driven the masses through the drip-drip torment of 'Fauxterity' in the attempt to save their own banks, have only now dared to try to implement such a process of 'bail-in' in a small , politically-impotent country such as Cyprus certainly reeks of hypocrisy and double standards. Nor is it exactly a matter of justice that the admittedly nugatory exposures of the banks' stock and bond holders have again gone unscathed, or that even depositors of healthy banks (assuming there are any) are being compelled to pay for the sins of their less sanitary peers. Nevertheless, as we have said several times before, the lesson that must be taught when dealing with bankers, as with any other recipient of one's funds, is Caveat commodator! Let the lender beware!

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Stalwart economist of the anti-government Austrian school, Sean Corrigan has been thumbing his nose at the crowd ever since he sold Sterling for a profit as the ERM collapsed in autumn 1992. Former City correspondent for The Daily Reckoning, a frequent contributor to the widely-respected Ludwig von Mises and Cobden Centre websites, and a regular guest on CNBC, Mr.Corrigan is a consultant at Hinde Capital, writing their Macro Letter.

See the full archive of Sean Corrigan articles.

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