Ron Paul's Texas Straight Talk 4/1/13: The Great Cyprus Bank Robbery
The Great Cyprus Bank Robbery
by
Ron PaulThe dramatic recent
events in Cyprus have highlighted the fundamental weakness in the
European banking system and the extreme fragility of fractional reserve
banking. Cypriot banks invested heavily in Greek sovereign debt, and
last summer's Greek debt restructuring resulted in losses equivalent to
more than 25 percent of Cyprus' GDP. These banks then took their bad
investments to the government, demanding a bailout from an already
beleaguered Cypriot treasury. The government of Cyprus then turned to
the European Union (EU) for a bailout.
The terms insisted upon by
the troika (European Commission, European Central Bank, International
Monetary Fund) before funding the bailout were nothing short of highway
robbery. While bank depositors have traditionally been protected in the
event of bankruptcy or liquidation, the troika insisted that all bank
depositors pay a tax of between 6.75 and 10 percent of their total
deposits to help fund the bailout.
While one can sympathize with
EU taxpayers not wanting to fund yet another bailout of a poorly-managed
banking system, forcing the Cypriot people to pay for the foolish risks
taken by their government and bankers is also criminal. In their desire
to punish a "tax haven" catering supposedly to Russian oligarchs, the
EU elites ensured that ordinary citizens would suffer just as much as
foreign depositors. Imagine the reaction if in September 2008, the US
government had financed its $700 billion bank bailout by directly
looting American taxpayers' bank accounts!
While the Cypriot
parliament rejected that first proposal, they will have no say in the
final proposal delivered by the EU and IMF: deposits over 100,000 euros
are likely to see losses of at least 40 percent and possibly as much as
80 percent. "Temporary" capital controls that were supposed to last for
days will now last at least a month and might remain in effect for
years.
Especially affected have been the elderly, who were unable
to use ATMs or to transfer money electronically. Despite the fact that
ATMs severely limited the size of withdrawals during the two week-long
bank closure, reports indicated that account holders who had access to
Cypriot bank branches in London and Athens were able to withdraw most of
their funds, leading to speculation that there would be no money
available when banks finally opened up again. In other words, the
supposed Russian oligarch money may well be already gone.
Remember
that under a fractional reserve banking system only a small percentage
of deposits is kept on hand for dispersal to depositors. The rest of the
money is loaned out. Not only are many of the loans made by these banks
going bad, but the reserve requirement in Euro-system countries is only
one percent! If just one euro out of every hundred is withdrawn from
banks, the bank reserves would be completely exhausted and the whole
system would collapse. Is it any wonder, then, that the EU fears a major
bank run and has shipped billions of euros to Cyprus?
The elites
in the EU and IMF failed to learn their lesson from the popular
backlash to these tax proposals, and have openly talked about using
Cyprus as a template for future bank bailouts. This raises the prospect
of raids on bank accounts, pension funds, and any investments the
government can get its hands on. In other words, no one's money is safe
in any financial institution in Europe. Bank runs are now a certainty in
future crises, as the people realize that they do not really own the
money in their accounts. How long before bureaucrat and banker try that
here?
Unfortunately, all of this is the predictable result of a
fiat paper money system combined with fractional reserve banking. When
governments and banks collude to monopolize the monetary system so that
they can create money out of thin air, the result is a business cycle
that wreaks havoc on the economy. Pyramiding more and more loans on top
of a tiny base of money will create an economic house of cards just
waiting to collapse. The situation in Cyprus should be both a lesson and
a warning to the United States. We need to end the Federal Reserve,
stay away from propping up the euro, and return to a sound monetary
system.