Banks & Govt. protect themselves - The Daily Reckoning

Banks & Govt. protect themselves

Jun 22, 2015

- By Bill Bonner

Bill Bonner
Paris, France

Dear Diary,

Stocks wandered around last week, ending the week back over the 18,000 mark on the Dow. When last spotted, gold seemed to be sailing back to its harbor at $1,200 too.

It is a wait-and-see period. We are waiting to see what will happen with Greece, for example.

But before we get to the Greeks, we rise to our own defense. Last week, a reader leveled a heinous accusation...dirty pool, beneath the belt, outrageous and hideous.

Yes, he accused us of being a 'closet Democrat.' Can you imagine? Our escutcheon sullied...our dignity impugned...our intelligence and savoir faire challenged in such a defamatory manner!

Let us assure readers we are not now nor have we ever been a Democrat. Not even with a small 'd'. We confess that in our youth - our lungs filled with the gas of civic virtue and our head with delusions of democracy - we once pulled the lever for Jimmy Carter. As Presidents go, he was not the worst. But we quickly realized our error and swore off voting for evermore - a pledge which we have solemnly honored ever since.

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And if our barbed words seemed to prick Republicans lately it is only because - at least as far as the zombie wars are concerned -they are the loudest and dumbest jackasses in the field. Yes, there are plenty of Democrats in this pasture too. But you get the impression that their motives are purer. They are just in it for the money. And the Imbecile Vote - which is, of course, decisive.

Meanwhile, back in Europe, it is like a showdown in an old western. Greece on the one side, Germany on the other. Each in the street, facing off, waiting for the other to blink an eye or draw his gun. And waiting. And waiting. One deadline passes. Another approaches.

There are complex and confusing details in this confrontation, just as there are in the zombie wars. But if we were in Syria or Iraq, we'd probably want to get out. And if we had money in Greece, we'd definitely want to make sure its passport was up-to-date.

Apparently, there are a lot Greeks with the same idea. The Wall Street Journal reports that cash outflows from Greek banks doubled in the last 4 days. The smart money is voting - to leave.

Big banks are private businesses. But they are so closely connected to the government and so heavily regulated that they might as well be considered public utilities. They help the feds finance their deficits. The feds bail them out when they get in trouble. And in a crisis, banks become tools for 'public policy' implementation -- that is, for clumsy and counter-productive central economic planning.

You may think you have 'money in the bank.' You don't. You have a contract with the bank. You lend it your money. It agrees to pay you back - under certain conditions. And it can change those conditions - unilaterally - when it has the backing of the feds.

As the crisis nears, first they will limit withdrawals to a certain amount per day. The amount will seem reasonable; most people will see the need and not be inconvenienced. A growing number, however, will see the handwriting on the wall and begin taking out as much cash as they can. Then, the maximum withdrawal amount will be reduced. And, then withdrawals will be stopped completely.

When the banks reopen, your deposits could be subject to a tax (a negative interest rate) or could even be transformed into a different currency. That's what happened in Argentina and could happen in Greece.

We were involved personally, in a minor way, in Argentine situation. It was the late '90s. The government of Carlos Menem had pegged the peso to the dollar. But debt was rising. And the smart money was beginning to bet that he couldn't hold the peg.

We visited Menem in the Casa Rosada. (The US has a White House. Argentina has a Pink House.)

"Are you going to keep the peg," we asked.

"Of way we would ever abandon it. It is now the heart of our economy. It is why foreigners such as you are willing to invest in Argentina, because you know the currency is safe. It is the reason we have such a booming economy."

A few months later, Argentina dropped the peg. It closed the banks. People had tried to protect themselves from a peso devaluation by opening accounts in dollars. But when the banks reopened, they discovered that their dollars had been converted to pesos - with a 66% loss!

The important insight is that government and banks always work together to protect themselves - not you.

In Cyprus, for example, the government (working with the big banks) changed the terms of the deal - suddenly and, for depositors, catastrophically. It gave big depositors - over $100,000 - a haircut and a shave equal to nearly half their money.

Why? The Cypriot banks had bought the Greeks' government debt. Then, Greek bonds were falling in price (because the Greeks couldn't pay then, either), leaving the banks on the edge of bankruptcy. The loss was real. Who paid it? The banks, who made the bad investments? The government that regulated the banks and practically forced them to buy government bonds? Nope. The depositors! Innocent - but perhaps naive, the depositors got scalped.

And now, Greek depositors - the smart ones, at least - are taking precautions.

In the US, the FDIC guarantees deposits of member banks up to $250,000. How good is that guarantee? In a pinch, all sorts of things that you took for granted become suddenly have question marks behind them. What's the bank's collateral really worth? How much does the bank have in reserves? How much does the FDIC have? How long will I have to wait to get my money? What will it be worth then? What will I do in the meantime?

You may want to take precautions too.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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