What was proposed in Cyprus was more of a bankruptcy settlement than a “tax”, the use of the term “tax” was unfortunate, and ill-advised. I suppose someone imagines that it somehow instills confidence in the banking system to attribute losses to a mysterious and unfair tax than to mismanagement on the part of the banks and laxity and incompetence on the part of bank regulators. Easier to call it a tax than to say “boy did we screw up”.
Cypriot banks are insolvent, Cypriot deposit insurance is inadequate to cover the losses. The government of Cyprus is either unwilling or unable to cover the difference. Under the proposed settlement the losses would be spread 10-7-6, with foreign governments accounting for 10 parts in 23 of the loss, the Cypriot government 7 parts in 23 and the depositors 6 parts in 23. (Actually 5.8 in 22.8). The depositors and Cypriot government balked, so they may only be getting something like the seven billion Euros promised by the Cypriot government. For good or ill, the Cypriot government cannot just print Euros, so that’s were they are.
The argument is made that “ordinary people” are “not sophisticated enough” (i.e., too stupid) to make judgments about the solvency of a bank. Especially when they expect the German taxpayers to bail them out. The whole mess should appropriately be laid at the feet of Bwaney Fwank and Chris Dodd and the power mad Eurocrats.
This has little to nothing to do with 401k’s, though I suppose if the Government of Cyprus appeared to be getting away with the “seizure” of bank accounts, then Democrats would see a precedent for retroactively taxing 401k’s. Unless your 401k is with Madoff & Sons, it’s more or less certain that it has the assets it claims to have. These assets are not insured, and if the value of the assets falls, you are SOL.
Be wary of dollar denominated assets, especially long term bonds. The value of a bond can vary as much or more than the value of a stock if interest rates change, and they WILL change. That’s why you can refinance your mortgage taken out in 2005 for about 50 cents on the dollar in terms your payment. By repaying the old mortgage and taking out a new mortgage at a lower interest rate, you are effectively forcing the bank to sell its asset (your mortgage) at about 50 cents on the dollar. Which is why banks are in trouble.
bttt