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« Dom Armentano on Economists Speaking Truth Power | Main | Economics Is Not Merely A Game Played By Clever Professionals »


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Wow!! Some intelligent analysis from an Austrian economist.

What I find interesting is that the theory which argues that banks should not go bankrupt is based on the idea that we should not create panic among depositors, because they would create self-fulfilling insolvency prophecies at other banks. But these taxes on deposits are the best way there is to create this kind of chain reaction. I think this is a proof that European banking authorities and the ECB do not really believe in systemic risk all that much after all.

What I find interesting is that you blame governments both when they bail out banks and when they make shareholders and creditors pay.

If the banks were allowed to fail, wouldn't uninsured depositors lose all of their funds, instead of just 40%?

Maybe the way to keep the Big EZ together would be to let the troubled banks fail. Failure imposes the greatest discipline on banks and governments.

Maybe. But if you allow some banks to be backstopped by the government (let's call them ABN Amro, Commerzbank, Dexia, Fortis and so on) while you let the others fail you simply have a process of financial and economic colonization based on a scheme which isn't so different from the "loans for shares" model who benefited russian oligarchs and some foreign banks after 1995 in Russia.
Much better to internalize the effects of good and wrong decisions with a national currency.

My comment was deleted. ???!!!

Not sure what happened Mario. Nothing was deleted. Sorry about that. Try again if you have the time. Thanks.

Silvano, Or you have something like what happened in the US where the big guys got bailed out while the little ones went broke.

I do not blame governments when they make shareholders pay, Silvano. I don't see how Frederic Sautet does either. In the latest proposition that I am aware of, the plan was to wipe out shareholders and unsecured bond holders but that was stopped by the Supreme Court of Cyprus. I don't think there is such thing as an easy bankruptcy recipe, some rights are going to be in conflict in any bankruptcy. What I do know is that depositors shouldn't be the first to take the dive, and that the political process is not a robust mechanism to find a second best recipe.

But what I would like to blame, since you're asking, is the idea that these banks should be reorganized at all. It is simply not true that banks assets are always deployed in a way that is more valuable than their opportunity costs. Liquidation shouldn't be such a taboo.

Consider three things: I) we're talking about a small coutry who joined a currency area, the EZ which is basically different from a small bank run which could happen in US, II) bondholders were insignificant compared to depositors and just unsecured bond issued under UK law didn't suffered Troika's blitzkrieg (at least for the moment since they have CAC - however I advice you to not bet your money on them..), III) The Troika gave 10 billions to Cyprus Government to payback his bonds which were pledged as collateral by local banks to the ECB: that is not charity, that is a way to avoid losses into ECB balance sheet (why? was ECB uninformed about Cyprus' banks? was Draghi an "innocent bystender"?).

"But what I would like to blame, since you're asking, is the idea that these banks should be reorganized at all." In theory, I may agree with you. But in practice leaving a country with zero banks, capital controls and a "corralito" doesn't look great. So the opportunity cost to be assesed by Cypriots is if it's worth to stay in EZ or not.

"What happened in Cyprus: An interview with Athanasios Orphanides" is an interesting piece at

Well, he is basically saying "blame the government if I didn't see comin'in, I was just the Central Banker...".

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