Sigh. No money was seized. No governments were bailed out. The Cypriot banks simply went bankrupt because they made bad investments with the money their depositors loaned them, and now that money is simply gone forever. Pretty bard to repay the depositors when you blew all the money they loaned you.
What people don’t realize is that when they deposit money in a bank, it’s not for the purpose of the bank to hold on to THEIR money for THEIR convenience, but what they are really doing is LOANING their money to the bank! They are actually a lender and not a depositor. And once they loan the money to the bank, it’s no longer their money, it’s the bank’s money! This is all spelled out in the account agreement one signs with a bank, and by loaning your money to the bank you’re giving the bank permission to use the money you loaned them pretty much as they see fit, and there is no real guarantee that you’ll ever get back any of the money you loaned the bank!
Prior to the illusion of FDIC insured deposits (loans) and it’s equivalent in other countries, banks used to go bankrupt all the time, completely wiping out ALL investors’ deposits. That was a big part of the death spiral of the Great Depression and why it was necessary for FDIC insurance to be invented, or otherwise no sane person would ever loan their money to a bank again.
And like in the EU, the FDIC actually only insures accounts up to a certain limit, and for anything over that there simply are no guarantees you’ll ever get the money you loaned the bank back. Period.
Now when banks DO go bankrupt, there are SUPPOSED to be lawful ways in which the remaining assets are distributed to the banks debt holders in an orderly, lawful fashion, the depositors being simply one class of debt holder. That process has worked pretty well in the U.S. recently, but given the propensity of the Obammunists to ignore the law and just do what they feel like, all bets are off for the future.
And in places like Cyprus, it sounds like they didn’t have ready-made procedures for bank bankruptcies anyway, so they had to make some up quickly. One could label such ex-post facto, ad hoc measures “theft”, but the net result to those foolish enough to make giant loans (deposits) to these crappy banks would probably be pretty much the same if Cyprus had a U.S.-like process in place prior to bank bankruptcy anyway, namely the depositors money has simply completely evaporated because the banks made really, really bad investments with their depositors’ loaned money, and they’d wind up with nothing anyway.
And most likely nothing criminal has been involved here either, except maybe criminal stupidity or maybe criminal greed by both the depositors and the banks themselves. Because the depositors were chasing unrealistic returns promised by the bank, and which they the bank delivered by “investing” their depositors money in Greek bonds. Greek bonds were paying extremely high interest rates, but the high interest rates were being paid because it was likely the bonds would fail, which is exactly what happened.
The takeaway lesson here, though, is simply don’t loan your money to a bank. Just keep enough money in your bank account to pay next month’s bills. Even better switch as much of your transactions as possible to cash. It’s actually easier to do than most people think. For example, I live in a small town and pay all of my insurance and property taxes by simply walking in and plunking down the cash. I could do the same thing for my utilities if I wanted. And I never use plastic except when I buy stuff on the Internet.
Yes, money was seized - and it’s being seized by denying people access to their money. It isn’t just that there is a haircut of X% on accounts above the deposit limit - people cannot even access their money. Businesses are failing as their suppliers demand cash - because checks cannot be negotiated on accounts with funds in them.
Now, as to “who built the expectation that depositors would be protected?” Well, the various nation/states who have backstopped banks over the years, and the IMF. Since 1970, there have been 147 banking crises, and in none of those cases did anyone go after the deposits of all depositors, as was being proposed last week. This weeks’ policy of freezing deposits and accounts and giving all those accounts over the deposit limit of E100,000 is still rather harsh in comparison to past bank failure resolution practices.
It’s common practice (in the US and Europe) that the investors in a bank should lose their investment(s) before depositors are affected. In the case of the Cypriot banks being taken under, the problem was twofold:
1. The size of the deposits dwarfed the size of the bonds outstanding - so even seizing all the bonds written by the banks wasn’t going to close the hole, and
2. In the case of Europe, due to the incestuous nature in which bank debt is held by other banks, coupled with the absurd leverage gearing with which European banks operate, the Euro-zone policy makers have been loathe to come down convincingly on saying “senior bondholders lose their money before depositors lose a cent.” That’s what would happen in the US.
In short, the bondholders should have been wiped out completely before one Euro was touched in deposit accounts, but that didn’t happen. The ECB and Euro-zone eggheads will rue the day they allowed this to happen.
When banks fail to render demand deposit liabilities upon demand, it results in runs on banks. When people can’t (and don’t) trust banks, then they start stuffing money into hiding outside the banking system (which is, of course, the prudent thing to do in these situations). Once this happens, the velocity of money slows way, way down, as the payment mechanisms by which money changes hand are all mostly ignored as we devolve back to cash, as you suggest. This brings economic growth way down to a mere subsistence level, and perhaps below that. Now, I’m fine with this mode of exchange and this type of existence.
Most people are not. Moreover, many of the people who cannot survive in such an economic situation are many people who have graduated from august institutions of learning with high-and-mighty sounding degrees in perfectly useless bullcrap... but these people have the ear of policymakers because they’re especially good at writing and emoting all manner of nonsense that gives policymakers a “cause for action.” As a result, we end up going backwards in liberty and private properly pretty quickly, with history as our guide.
The ultimate source of this particular problem goes back to Cyprus being a backwater economic dung heap... until Boris and Natasha showed up with a whole lotta money to stash somewhere. Where did Boris get all this cash? Well, that’s the other thing: The Cypriot banks didn’t ask too many questions. Due to economic nationalism, the Cypriot banks took this bundle of too-easily-gotten loot and piled it into Greek paper exactly when it was time to be selling Greek paper, not buying it.
Now, this would have been acceptable and have probably worked out the way many island nations with loose banking laws works out if... Cyprus had not been part of the Euro-pact. Once Cyprus was included in the Euro, there was a yoke around their neck, and they were going to be held to German accounting standards sooner or later. And sooner or later has now come due.
The biggest problem in the Euro zone is that it is an attempt to impose Protestant work ethic and economic thrift on nations who are a) Catholic, and b) therefore given to sloth, economic/fiscal corruption, and economic frippery. No monetary or trade union is ever going to make the Greeks, Italians, Spaniards or French work, save and bank like Germans, Dutch, Danes, Swedes, Norwegians or Finns. We might as well try to cast a spell to make a duckbilled platypus fly.