There’s two bulls standing on top of a mountain. The younger one says to the older one: “Hey pop, let’s say we run down there and f*** one of them cows”. The older one says: “No son. Lets walk down and f*** ‘em all”.
- Robert Duvall in Colors
The world was shocked this weekend to learn that the European Union would fund the bailout of Cyprus by confiscating the assets of ordinary bank account holders. Core Europeans and Americans no doubt comforted themselves that such a confiscation could never happen here. They would be wrong. In fact, it already has happened here.
What occurred this weekend in Cyprus was a theft from responsible savers to benefit irresponsible banks. Small depositors get screwed while bank bondholders (largely other banks and large institutions) get made whole. Which, it turns out, is exactly what has happened in the U.S. the past five years.
Bank CD rates were around 4% in 2008. Since that time, the Federal Reserve’s interest rate manipulation has kept CD rates pinned between 0% and 1%. This has allowed the banks to borrow at near-zero, whether from depositors or directly from the Fed, and invest in Treasuries or mortgage-backed securities earning 2%, 3%, or more. Using this free-money interest rate spread, banks have indeed earned their way back to solvency. But savers have had their 4% annual interest confiscated by the Fed.
So laugh at Cyprus all you want. Those depositors lost 6.75% or 9.9% once. You’re losing 4% annually for the fifth year running. Who’s the chump?
Ben Bernanke and Eurogroup President Jeroen Dijsselbloem are standing on top of a mountain. Dijsselbloem says to Bernanke: “Hey Ben, let’s say we run down there and rip off a bank’s depositors.” Bernanke says: “No Jeroen. Let’s walk down and rip off ALL the banks’ depositors.”
SO let’s be clear. Are you claiming that, analogous to Cyprus, the US government took away those 4% CDs from people who help them? I dont remember that happening so I would appreciate a link to it. If instead, you are just claiming that because rates were 4% in 2008, they should be 4% now, or forever or whatever you are claiming, what kind of economic rationale is there to justify CD holders making 4% now? Are people being forced to buy CDs? Shouldnt investors who buy them have to evaluate their risk and ecide if it is worth purchasing them? Talk about entitlement.
Now, if you want to complain about banks making money because they can borrow cheap and buy Treasuries, I am with you. You really dont have to resort to piss poor analogies so that you can equate something you dont like with catastrophe elsewhere.
Steve
0% is not a market rate. It is an artificial rate set by the Federal Reserve for the benefit of banks and debtors, to the detriment of savers.
I know you’re not really clear on the distinction between free markets and central planning, but it is what it is.
Never said it was, and neither did you. Your claim is
“But savers have had their 4% annual interest confiscated by the Fed.”
Apparently savers should be guaranteed 4% returns if they buy CDs. That represents free markets to you, sadly.
Steve
Steve,
I’ve noticed a pattern where your comments on any thread grow increasingly weak and desperate as they go along, and I’m reminded of the old adage that when you’re in a hole, the first rule is to stop digging.
Obviously, there is no single, constant, nominal interest rate across times and geographies. Also obviously, 4% is a lot closer both to historical averages and economic theory than the current, Fed-manipulated 0%.
Your absurd, red-herring quibbling with the 4% figure in no way addresses the point of the post that rates held artificially low by the central planners at the Federal Reserve rob from savers to bail out banks and debtors.
Since you just see what you want to see, this is what I said.
“Now, if you want to complain about banks making money because they can borrow cheap and buy Treasuries, I am with you. ”
There just isnt any comparison between forcing deposit holders, in insured accounts, taking a haircut and not being able to make money on CDs. Your comparison is absurd. Go ahead and make a case against the low interest rates benefitting the banks, just make it realistic.
Steve
There actually is a comparison, which was the point of the post.
Both the U.S. and the E.U./Cyprus are screwing savers to bail out bankers.
If you choose not to see the parallels, that’s your prerogative.
CNBC’s Michelle Caruso- Cabrera disagrees with you that there’s no comparison:
http://www.wcvarones.com/2013/03/cnbc-imitates-varones.html
So why don’t I just put a large slice of my investment money into a Treasury Fund or mortgage backed securities?
Now if I were suddenly flush with cash, I would first invest in my homestead, maybe build and furnish a new house on the property. Then I’d look at commercial grade equipment to garden, move earth, forklift, etc.
Anything left over, I’d buy junk 90% US silver.
If you could borrow at 0% like the banks and earn the spread, that would be nice. But I wouldn’t recommend Treasuries for long-term holders. The 2-3% is not adequate compensation for interest rate risk or inflation.
I like your homestead & silver idea much better. I am doing similar, plus a lot of equities.
W.C.: Not for the first time, I’m thinking, “Thank god I don’t have any money to worry about.”
Yeah, freedom truly is another word for nothing left to lose.
W.C.: More seriously, a quick check finds that the situation in Cyprus is at least somewhat more complicated (situations usually are, I suspect); for one thing, the Cyprian parliament gets to vote on the measure, and may in fact refuse it. I realize that parliamentary ratification of the proposed levy, if it were to happen, might not change your feelings about “confiscation”–you might just say that the Cyprian parliament had colluded in it.
I’ll also note the following, according to the same Reuters article:
http://www.reuters.com/article/2013/03/17/us-cyprus-parliament-idUSBRE92G03I20130317
“They [depositors] would be compensated with shares in the banks. A political source told Reuters that, as a sweetener, Anastasiades would offer depositors equity returns, guaranteed by future natural gas revenues. “Half of the value of the haircut will be guaranteed by natural gas proceeds,” the source told Reuters.”
Such compensation may be worthless, for all I know, and the “equity returns” a sham. And it doesn’t change your point that depositors (who’ve already been hastily trying to withdraw their funds from banks on Cyprus) have been given no direct say about the “haircut” they’re about to be given.
Still…
BTW, I just got in the current issue of the Economist. They stated several times that these deposits are NOT insured. The depositors are considered creditors of these failing banks.
W.C.: Cypriots can breathe easier today—they won’t have their bank deposits confiscated.
http://www.nytimes.com/2013/03/20/business/global/cyprus-rejects-tax-on-bank-deposits.html?_r=0
“Lawmakers rejected a 10 billion euro bailout package on Tuesday, sending the president back to the drawing board to devise a new plan that might still enable the country to receive a financial lifeline while avoiding a default that could reignite the euro crisis.”
I wonder if there’s a plan “B”? Oh, here it is:
http://www.nytimes.com/2013/03/20/business/global/protecting-their-own-russians-offer-an-alternative-to-the-cypriot-bank-tax.html?pagewanted=all
“Meanwhile Gazprom, the giant Russian energy company, quietly acted by offering a private bailout plan. Rather than tax deposits, Cyprus could raise money to right its economy by selling Gazprom exploration rights to offshore gas deposits in the Mediterranean Sea. The fate of this proposal is uncertain. Gazprom refused to confirm it even made an offer. But it illustrates how a sprawling, wealthy company so deeply entwined with President Vladimir V. Putin of Russia that it is often called a state within a state is willing to seize an opportunity and exploit weaknesses and divisions within Europe to cement its position and power.”
Why do I think the fun is just beginning?