Is Your Money Really Safe In The Bank?

(Note – there have been lots of developments since we first posted this story, and we’ve been updating it semi-realtime ever since, to keep it current.)

In the US, one of the bedrock values of our society and our commercial system is the safety of our money when we deposit it in a bank.

Every time we walk into a bank, we see the FDIC promise – often on the very doors we walk through – reassuring us that the first $250,000 of our money in each different type of qualifying account at each different participating bank is ‘backed by the full faith and credit of the United States Government’.

Clearly this guarantee counts for something.  Since the start of the FDIC program on 1 Feb 1934, and not withstanding a dismayingly large number of bank failures over the years, no depositor has lost a single penny in an insured account as a result of a bank default.

The government doesn’t just do this out of the kindness of their heart – although, to be accurate, the cost of operating the FDIC program is paid for out of compulsory bank levies rather than by the federal government.  The government enacted the legislation and continues the FDIC program because there are sound public policy reasons for allowing people to feel confident in their bank deposits, and sound economic reasons for encouraging people to save money in a bank rather than under a bed.  Indeed, a cynic would point out that one of those reasons is that money in a bank is public, visible, accountable money which the IRS can focus on.

Maybe you’ve heard about occasional problems in other countries at other times.  But they’ve either been many decades ago, or else countries not like the US – countries with dysfunctional economies and capricious governments that clearly don’t respect private ownership of property and money.

For example, some people may be aware of the several stages of Argentina’s financial crisis, which included a run on the banks in late November 2001, which caused the Argentinian government to freeze all bank accounts for a year in December 2001, allowing only small weekly withdrawals.  Subsequently, the government converted all US dollar denominated bank accounts into Argentinian pesos at an ‘official’ rate which caused the real value of the funds in the accounts to be massively reduced.  (Details of these events can be read here.)

Such situations and actions seem impossibly removed from our stable environment in the US, and few people here see them as posing any meaningful warning lesson.

Indeed, we almost never really stop and think about the underlying reality of how safe our money actually is, because – and happily – it is unthinkable that our money is anything other than 100% safe.  Right?

The Cyprus Situation

Wrong.  As you may have read, on Saturday 16 March the EU forced the Cyprus government to agree to the terms of a €10 billion (US$13 billion) ‘bail out’ of their economy, which would require the Cyprus government to take a slice of every person’s bank account balances as their contribution to the bailout.

Cyprus is both a member of the EU and of the Eurozone (ie it uses the Euro currency) and its financial problems impact on the Eurozone as a whole, with other Eurozone members increasingly asserting what would formerly have been sovereign powers held by the individual member nations.

Although it makes economic sense to have matched monetary policies if you also have a shared common currency, it was not countenanced as part of the EU and Euro agreements, and the citizens of countries such as Cyprus, Greece, and other countries needing economic help are now finding their national governments are being dictated to by other EU powers (most notably Germany, causing some countries to wryly note that Germany’s failed power grab during WW2 is now being replaced by a more successful economic rather than military power grab).

So, anyone with a bank account in Cyprus, whether a Cypriot national or not, is now liable to have 6.75% of their funds under €100,000 taken from them, plus a larger 9.9% slice of all deposited amounts greater than that.

The unfairness of this is breathtaking.  Bank balances are totally unrelated to wealth.  Many super wealthy people have no money in the bank at all – maybe indeed they only have overdrafts (question to the EU – if you take money from people with deposits, will you give money back to people with overdrafts?), but they probably also own much property, stocks and bonds, and other assets galore.  On the other hand, a small businessman’s bank balance might be money that is not his – it is money that he has received from selling goods which he will have to subsequently remit to his suppliers.

But, at the behest of the EU, Cyprus is now poised to take up to 10% of every bank balance in the nation, without any adjustment for what the type of funds may be, and equally from retirees living off their savings as from young mega-millionaires, equally from non-citizens as from citizens.

Of course, as soon as word leaked out about this, there was a run on the banks and ATMS.  So the ATMs were switched off, and the banks, which were closed over the weekend anyway, have also been closed today (Monday) and will remain closed tomorrow (while the government passes the law to enable the compulsory taking) and on Wednesday also.

The even unkinder thing is that the EU has a similar deposit guarantee program to the FDIC program in the US, guaranteeing the safety of a person’s first €100,000 in their account.  That guarantee will be over-ridden and ignored.  Apparently the one thing the EU guarantee won’t guarantee is its own illegal actions.

Implications

Although the EU says they’ll never ever do this again, it being a unique ‘one off’ event, the reality is that they’d have to say that, wouldn’t they.  If people believed they might lose 10% of their bank balances at any time with no warning, who would keep any money in a bank any more?  Especially with banks paying almost no interest, there’d be a resurgence of people hiding cash under the mattress, and a growth of a cash economy which would reduce tax collection rates as well.

So the official word is that for who knows what reason, the EU decided to do this once and once only, in the tiny island nation of Cyprus, but never again, and nowhere else.

And if you believe that, I’ve some ocean-front property in Arizona, and a bridge in Brooklyn that you might like to buy.

Whether the EU might do this again or not is anyone’s guess.  But the key thing is they are doing it now.  They have vividly broadcast to the world as a whole that even a seemingly ‘secure’ and ‘stable’ and totally bound-by-the-rule-of-law federation of nations such as the EU is willing to engage in an unlawful taking of money from its citizens, on the most unfair and inequitable of methods, and with no prior debate or decision-making process.  The sanctity of private ownership has been cast aside.

Such an act would have been unthinkable on Friday.  If you’d told your friends that on Saturday the EU would unilaterally decide to force Cyprus to steal 10% of its citizens’ bank account funds, you’d have been laughed at like you were a crazy fool.

If Cyprus does indeed bow to EU pressure when its government votes on the matter this Tuesday, let’s think about what we’ve seen :

(a)  A disruption in the banking system from Saturday through at least Wednesday – how would that work for you if for five days, maybe longer, all the banks were shut and you couldn’t get a single penny in cash?

(b)  Government guarantees about the safety of your deposits being ripped up and ignored.

(c)  An arbitrary capricious and colossally unfair taking of up to 10% of all the funds in your accounts, whether the money is yours or not, and no matter what your overall financial net worth or wealth may be.  Oh – and this money is taken with no notice or warning.

And now for the really big question.  What happens in Argentina is of admittedly little relevance to what we can expect to happen here in the US.  But if Germany and the other EU giants force Cyprus to do this, they’ve made it into a bona fide government tool for emergency revenue collection.

What would stop our own government from doing the same thing?

Some Wild and Crazy Conspiracy Theories?

Lastly, just to think out loud – bank and economic crises and unpopular government actions such as those in Argentina, those in Greece over the last few years, and now in Cyprus currently, have been greeted by mass civil unrest and rioting.

If the same thing occurred in the US, it is reasonable to assume that a similar violent response would result.  Now I’m not saying that you and I would react violently, and hopefully we wouldn’t.  But there’s an entire ‘underclass’ of people in this society that happily goes violent at any opportunity for any reason, and you just know for sure that they’d gleefully seize on the opportunity, sweeping up naive ignorant other groups of people with them (the ‘Occupy Wall St’ types, the anti-global trade types, and so on).  We’d definitely have our fair share of civil commotion.

Now think for a minute – why exactly is the new Department of Homeland Security – an enormous government department that didn’t even exist until some ten years ago – buying up billions of rounds of ammunition at such a rapid rate that we normal citizens can’t find any ammo on the shelves when we go to buy some for ourselves?

Why is the DHS also buying up more fully auto battle rifles, and why is it buying 2,700 armored vehicles – light tanks?

This isn’t the army, buying up equipment for foreign wars.  This is the Department of Homeland Security, that only operates within our borders.

It isn’t to protect us against a foreign invader – that again would be the army and the national guards.

It shouldn’t even be against normal criminal threats and activities – that’s what we have city, county and state police forces for, plus a bevy of federal agencies too.

The only ‘enemy’ the DHS has is us – the ordinary normal US public.  How are they going to use the 2,700 light tanks against us, and why do they think they will need to?

We don’t have answers to these questions.  But we do think the questions are valid and need to be considered.

Summary

The bond of trust that we have in our banking system has to be seriously questioned based on what is going on in Europe.

By all means keep some money in the bank, but spread your funds around, both in banks and also in smaller credit unions too, and keep a reasonable amount of cash and other ‘liquid assets’ on hand so that if your bank accounts are frozen, or if banks undergo an extended closure, you can still buy the things you need.

Note that we refer to cash and also to other liquid assets.  Something else we’ve seen happen in other countries is a country demonetizing its entire stock of banknotes and replacing them with new banknotes.  Sometimes it is part of a revaluation of the currency (eg in Russia on 1 January 1998 with each new rouble being worth 1,000 old roubles), and other times, it just happens ‘because it can’.

We’re halfway to that point already – with the claims (that may well be without any truth behind them) of our currency being victimized by foreign counterfeiters, and we’re on the way to the other half by claims about the problems with money laundering being used to fund international terrorists and drug dealers.

So it is easy to see how one day the government could surprise us all and say ‘Okay, all old money is no longer valid legal tender, and you have 30 days to convert your old money to this new type of money, and on the 31st day any remaining old banknotes will be valueless’.  You just know that if you then turn up at an official exchange point with an unusually large amount of cash, questions will be asked about where you got all that money from.

We point out in our several articles about the economic system after TEOTWAWKI that we don’t think that either regular US currency or gold and other precious metals will be of any value at all.

But prior to that point, we do agree that gold and other precious metals are a good way to store your cash, safely away from the uncertainties of the banking system.

Update 1, March 19 :  The headline on this article says that New Zealand is also considering a ‘Cyprus Style’ theft of bank depositors’ funds, but if you read the article, you’ll see that actually what the country is planning is a ‘self insurance’ scheme whereby if a bank fails, all depositors of that bank are affected equally, rather than the more common type of bank insurance scheme such as FDIC.  Nonetheless, while not an arbitrary government confiscation, it does show that the concept of the absolute safety and sanctity of bank deposits is being challenged not only in Cyprus, but on the opposite of the world too.

Update 2, March 19 :  It is Tuesday evening in Cyprus and the country’s legislators are still hesitating to vote on the proposed legislation.  It seems the proposal has been varied to now exempt people with balances of under €20,000 from the levy, but exact details are not currently known.

Update 3, March 19 :  Cyprus’ parliament met and astonishingly roundly rejected the EU dictat.  36 members voted against, 19 abstained, and one member was absent.  None of the members supported the bill.

But what will happen next?  The EU support was conditioned on the bank funds seizure.  This ain’t over, but the first battle has at least been won.

Meantime, public confidence in the Cyprus banking system has been done more harm (by the initial acceptance of the proposal by the Cypriot President and his advisers) than good (by the rejection of the measure by parliament).

Update 4, March 20 :  At the end of Wednesday, 24 hours after the Cyprus parliament voted against the levy on bank deposits, no alternate way of raising the €5.8 billion that Cyprus needs to raise in order to qualify for the €10 billion from the EU has been agreed upon.  There is some thought that Russian interests might end up buying Cypriot assets at fire-sale prices, but currently, banks remain closed,  and some politicians are speculating that they might never re-open.  The UK is air-freighting in cash for its citizens, the rest of the country is being forced to make do any way they can.

Update 5, March 21 :  Cypriot ATMs are now disbursing small amounts of cash to bank account holders, but the banks remain closed for normal business, and are not now expected to open until Tuesday next week.  Meantime, there is growing political support for a new attack on the country’s citizens – the government is now considering nationalizing major pension funds.  This would give them access to the cash stored in these funds, meaning that the funds would now have to promise to make future pension payments to their members based not on their liquidity and assets, but rather on government promises.  If that sounds familiar, it should be.  That’s a sad but accurate description of how social security currently works in this country.

Update 6, March 23 :  It is now Saturday again, a week since the first proposal to steal a slice of everyone’s bank accounts in Cyprus.  After being overwhelmingly rejected by their Parliament on Tuesday, guess what?  The proposal is back again, except this time, it might be an even larger 25% levy, but only on deposits over €100,000.  Cyprus has until Monday to meet an EU deadline for somehow devising a plan to raise the €5.8 billion share of its bailout the EU is requiring.

Update 7, March 25 :  A new agreement has now been reached with the EU, barely avoiding the Monday deadline imposed by the EU.  Avoiding a nasty legal fight over the EU’s obligation to guarantee deposits under €100,000, the new agreement only attacks deposits larger than that amount.  According to the linked news item, it seems that in Cyprus’ largest bank (Bank of Cyprus), those depositors may lose up to 40% of their deposits, whereas in Cyprus’ second largest bank (Cyprus Popular Bank), those depositors may lose everything.

It seems this new agreement does not need ratification by the Cypriot parliament, and in any event, it would likely be ratified if it came to a vote.  The reason this is more popular – most of the owners of accounts with large sums in them are not Cyprus voters but rather foreign nationals – typically Russians.  So with brilliant political acumen, Cyprus has fine tuned its approach to inflict least harm on voters and most harm on non-voters.

Nonetheless, the genie is now out of the bottle.  In Europe, at least, politicians have displayed a willingness to countenance seizing bank funds without any type of underlying equity or fairness, and to ignore the bank deposit guarantees when doing so.

Update 8, March 26 :  Banks remain closed and account holders are being limited to €100 ($130) a day in cash withdrawals through ATMs.  Meanwhile the EU, delighted at its ‘success’ in Cyprus, is now threatening similar seizures of bank savings in other countries, too – please see our new article ‘We Got Away With It in Cyprus, So We’ll Do It Again‘.

Update 9, March 28 :  Today – Thursday – the banks in Cyprus hesitantly opened, and we’re guessing they’ll be closed again tomorrow for the Easter weekend.  Citizens can now withdraw up to €300 at a time, although the country’s stock exchange remains closed, and there is a ban on taking money out of the country – a ban that is almost certainly contrary to EU and Eurozone rules.

Meanwhile, Russia has announced plans to force its citizens to put their money into banks – or, at least, much more of it than at present – by introducing a ban on cash payments over $10,000.  This is not as easy as it might seem, because credit cards are rare to non-existent, checks are similarly unknown in Russia, and bank wire transfers cost up to 4% of the amount being transferred.  The Russian government says, unsurprisingly, that it is doing this to crack down on the ‘shadow economy’ – details here.

Note that in our own experience in Russia, both living there and working there, the shadow economy is considerably greater than officially estimated, although when Russia switched from a typical tax system with escalating rates of tax as your earnings increased to a simple flat tax of only 13% in 2001, this caused a surge in taxes paid – an increase of tax collections by 25% in the first year alone.

Unless something substantial occurs, we will end our ongoing updating of this article today.