Have you heard about a nation so in debt, it is seizing assets from the bank accounts of private citizens? On the other side of the world, a modern-day Greek tragedy is taking place now on the island of Cyprus that has implication here at home. This is especially timely as Americans grapple with a government that borrows 46 cents of every dollar it spends.
Consider the significance of the Federal Reserve announcement last week of its plan to maintain a policy of cheap debt — continuing its “stimulus” plans that camouflage a stagnant economy by purchasing $85 billion a month of a variety of forms of debt. Troubling elements of such a policy include the fact that American taxpayers own a larger and larger share of all mortgage-backed securities thanks to the government takeover of Freddie Mac and Fannie Mae. Remember, these government service organizations were declared insolvent as recently as 2008 during the subprime housing crisis.
At some point, this shopping spree must come to an end. It did in Cyprus.
Cash-strapped Cyprus was drowning in debt and looking for a life raft. So officials decided to target private citizens, not simply for a tax increase, but for their personal assets. Accounts in that nation’s two largest banks were frozen as the government took the unprecedented step of considering whether to reach into private accounts for public debt.
Ultimately, the answer was yes. Those with smaller deposits suffered less but the savings of uninsured savers became fertile ground for desperate government officials.
In a struggling eurozone, Cyprus became the first country to hit up depositors to fund its survival. The Wall Street Journal reported: “Cyprus Popular’s uninsured depositors will probably take losses of as much as 80 percent of their holdings over the guaranteed limit of 100,000 euros; Bank of Cyprus depositors stand to incur losses of as much as 60 percent of their uninsured deposits, according to initial government estimates.”
Still, the problem did not originate with the Cypriot government; a get-rich-quick mentality in banking also caused havoc. The Bank of Cyprus made a play to appeal to international financial players who didn’t mind putting large sums of money in a small, island bank. No one considered it a serious problem to have cash within reach of a financially stressed government.
One can imagine that the Cyprus banking industry has suffered a deathblow as the accounts of its customers have been looted to keep the government afloat. While authorities have imposed restrictions on moving money, only a fool would want to throw good money after bad and add to their holdings. Cyprus should be a wake-up call for the world, especially as Canada has also considered such a move on private accounts.
Those taking comfort in the larger number of banks active in the United States should know that while 98.5 percent of all American banks are community banks, they hold only 12 percent of the banking assets. Megabanks, which make up only .21 percent of all banks, have 69 percent of all banking assets. Our economy also teeters on the brink of too-big-to-fail banks that could implode from too much debt. At this point in our national and personal conversations about debt, it is time to acknowledge that a terrible price eventually must be paid when too many resources are required to pay for past excesses.
Unlike the United States, Cyprus is tied to the confines of the European Union and the euro, making it impossible for that nation to print money without EU permission. Many so-called progressives have relied on the ability of the U.S. government to manipulate the money supply to deal with debt, but eventually, those options will come to an end. New York Mayor Michael R. Bloomberg’s famous quote that America “could owe an infinite amount of money,” implying that we don’t have to be overly concerned with our debt, will one day sound like insanity. For the record, we don’t have an infinite amount of taxpayers to support an infinite amount of debt.
Lessons can be learned by individuals in the United States who don’t want their assets seized through such drastic means:
Never deposit more money in any bank than the FDIC will insure. That is $250,000 per depositor per insured bank. If you are blessed with more resources than that, spread the money across reputable financial institutions.
Never put money in a distressed bank. Most of us have had our credit checked for major purchases by a bank or lending institution. You should return the favor by checking Bankrate.com for more information on your bank.
Always consider all your investment options. Be sure to diversify and consider investing in a business where your money will go to work and is not so easily available to seizure.
The real question, however, becomes whether the federal government has learned anything from this Greek tragedy. Ultimately, the gap between resources and debt will be too large to fill, and our own government will consider all options — and all available resources — public and private.
Like the rest of the world, our government needs to learn to live within its means and stop piling up more and more debt on its citizens. Otherwise, the Cyprus banking disaster will be repeated here.
Chuck Bentley is CEO of Crown, a nonprofit business and personal finance policy and educational organization.