Friday, March 29, 2013

But For Our Wealth, We’d Have Been Cypriots


But For Our Wealth, We’d Have Been Cypriots

Take yourself back to 2008.  One bank after another was on the verge of failure.  Stock prices were spiraling downward.  Now let’s change the story a little bit.  What if we didn’t have the financial means to forge our own bailout? Instead of holding emergency meetings in New York and Washington, suppose our financial leaders had been forced to fly to Berlin or Beijing to ask for massive loans.  What would your days have been like?  Rather than going about your business, you would have spent the day in line at your local bank branch trying to withdraw money.  Unfortunately, the ATM would have only dispensed $100, and the bank building would have been locked.  If you’d been running a business, you wouldn’t have been able to process payroll or finance your inventory. Meanwhile, foreign investors would have scrambled to sell US Treasuries and otherwise liquidate their American holdings. 

Angel Investing (2001)

This is the reality in Cyprus.  You’re probably thinking that we’re a lot smarter and more sophisticated than tiny Cyprus.  You may also believe that our financial crisis shares little with events unfolding in the eastern Mediterranean.  I think our experience is strikingly similar, except that we’re incredibly rich, and therefore, extremely fortunate.

As our financial crisis unfolded, the Chairman of the Federal Reserve Ben Bernanke, Chairman of the Federal Reserve of New York Timothy Geithner, and Secretary of the Treasury Henry Paulson were able to deal with one another without leaving the country.  Among other measures, they increased the amount of deposit insurance, removed toxic assets from bank balance sheets, injected massive amounts of low cost capital into the banks, and loaned the banks virtually unlimited amounts of money at no interest.  Cyprus, on the other hand, had to ask Brussels for a loan, and Brussels asked Cyprus to inflict severe pain on its economy and bank depositors in exchange for the lifeline.

Our financial sins were not so different from Cyprus, or for that matter, Italy, Ireland, or Spain.  We borrowed massive amounts of foreign capital in order to inflate our current rate of consumption and made incredibly massive and imprudent loans.  In our case, it was the housing sector, but every one of these cases involves large and unwise uses of credit.   Of course, we suffered through a long recession, and for those who lost their homes and jobs, a full-blown depression.  However, for the vast majority of Americans, the experience was nothing like the nightmare unfolding in Cyprus.

If our financial leaders had been forced to travel abroad to seek a bailout of the US financial system, you would have lived in a world where your ATM withdrawals were limited to about $400 per day and capped at $5,000 per month.  Your bank, if it were still in business, would have accepted your checks for deposit, but refused to cash your checks.  Your bank balance would have been debited by a healthy sum above the FDIC insurance limit, and many of your mutual fund holdings wouldn’t have just lost value; they would have been wiped out.  This is the situation facing Cypriots.

I suppose we could feel superior because we didn’t have a bunch of “dirty money” sloshing through our financial system from Russian Oligarchs.  Yet, I’m not so sure our foreign money is squeaky clean.  We have billions and billions of dollars coursing through our economy that began its journey as drug proceeds, or capital seeking a safe haven from the uncertainty of one or more emerging markets.  We know that our banks, Citigroup being the latest example, turned a blind eye to our money laundering laws.

The real difference is that even after two expensive wars and a big debt crisis, we’re still an incredibly rich nation.  For now, we’ve got enough wealth to get away with doing foolish things.  Nonetheless, our system is fraying on many levels and isn’t strong enough to withstand repeated abuses.  We might pause during this season of Easter and Passover to contemplate the plight and prospects of Cypriots, and think about how we might employ our good fortune to nobler purposes.  

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