Any bank depositor in Cyprus who had over 100,000 euros has just lost 47.5% of everything over 100,000 euros. He now owns equity in the bank he put his money in. This is equity in a failed venture.
Uncertainty has now been transferred to large depositors. This is good news for those of us who do not believe in government insurance of bank accounts. In the USA, 100% of everything over $250,000 can be lost. But the FDIC never allows this. The idea that large depositors could lose their money might scare other big depositors.
Why shouldn’t depositors go to the trouble of finding out if their bank is not run well? All fractional reserve banking is fraudulent. All such banks are technically insolvent. A bank run could bust all of them. They counterfeit money as a business model.
Why should the FDIC or any government use taxpayers’ funds to insure that counterfeiters are not at risk for their lending policies?
What is new about Cyprus is this: the government of Cyprus just stuck the rightful uncertainty-bearers — depositors — with the uncertainty that the free market says they all deserve.
In a free market, depositors would be at risk of losing 100% of their deposits. But we do not have a free market. We have the FDIC. It was a creation of the New Deal. There is nothing remotely free market about it. It is part of the welfare state.
If the principle of “depositor beware” were allowed to spread across the world and down to every dollar or euro deposited, the world would then have something resembling a free market in banking. Every banker would know that a bank run on his bank could wipe it out at any time. Bankers would become far more careful with depositors’ money. Banking would become less inflationary. The world would be better off.
The bankers in the rest of Europe are terrified that the “Cyprus solution” will spread to their nations. That would place final authority in the hands of depositors. This thought terrifies bankers. They want government guarantees for depositors, which transfers uncertainty to taxpayers. It puts depositors to sleep. That’s what bankers like: sleepy, trusting depositors. “No problem. We’re in good hands with big state.”
When we trust the state, we can be sure that there will be a disaster, and when it hits, it will be worse than what would have taken place if we had not trusted the state. When we transfer risk to the state, the risk winds up in our laps, collectively. Meanwhile, bankers get rich.