Cyprus pensioners told to pay for crisis. Who will pay tomorrow?

Either bankers are so confident of their power that they increasingly can’t be bothered to disguise it, or we have to stretch the definition of “democracy” so far that the word loses any sense of meaning. This week’s news that the newly elected government of Cyprus was ordered to make its savings depositors pay for a bailout of Russian oligarchs and real estate speculators is stunning even by the standards of the global economic slump.

None of the previous eurozone bailouts had gone so far as to directly confiscate the savings of ordinary depositors. Not even in Ireland, where former Prime Minister Brian Cowen had huffed and puffed that Ireland would not surrender its sovereignty — which he demonstrated by insisting that Ireland’s ultra-low corporate tax rate not be touched. It wasn’t. European bankers had no issue with that, granting him that one concession while imposing cuts to wages, lowering the minimum wage, drastically raising water rates, raising university tuition and reducing health care services.

The intensity of Ireland’s austerity derives from the decision by the former prime minister to cover all potential losses by Ireland’s major banks, no matter how reckless their speculative lending had become. In other words, the Irish government paid off the bad loans made by its bankers and guaranteed speculators in the banks’ bonds would suffer no losses, and passed the bill onto its citizens. This represented an extraordinary warping of the idea that bank deposits, up to a certain level, are guaranteed. Other countries have had various versions of this austerity imposed on them. But now the European Union and its bankers are attempting austerity from a different angle: Partial confiscation of all savings, even if “guaranteed.”

No, that doesn’t mean that the normal austerity terms aren’t being imposed by the European Central Bank, the eurozone’s finance ministers and the International Monetary Fund. For weeks, rumors had circulated that, this time, that there would be a sharing of the cost of a bailout as Cyprus inched closer to a bailout. In the ordinary sense of this concept, that would mean that bondholders and the banks themselves would shoulder some of the burden. Not surprisingly, there had been pushback against this idea with financiers complaining that making them take responsibility for their own speculation would be disruptive to financial markets.

Finance ministers want pensioners to pay for crisis

Plan B was is to make working people and pensioners who have their life savings in banks and had nothing whatsoever to do with the latest eurozone crisis instead shoulder the burden. The Cypriot government was told point-blank to confiscate a portion of depositors’ savings or all money would be cut off, which would cause an immediate collapse of its two primary banks. No matter that deposits up to €100,000 are guaranteed. To avoid a bank run, Cypriot banks are closed for at least three days so that Cypriot parliamentarians can be hectored by eurozone finance ministers to do their duty.

The Cypriot parliament said no in its March 19 vote, but “no” votes in other countries have been reversed under pressure, so this drama has not yet run its course.

Cyprus needs €17 billion to bail out its banks, but European Union and International Monetary Fund officials are loaning only €10 billion, insisting that the remainder come from a deposit tax and other internal measures, including privatizing utilities. And why do Cypriot banks need all this money? Because they over-extended themselves on loans to real estate developers and others, the same story as in so many other countries. They also absorbed losses when Greek government bonds they owned were devalued in the wake of Greece’s ongoing crisis. An added complication is that about 40 percent of Cyprus’ total deposits are by foreigners, mostly Russians, causing extra challenges.

Cypriot banks are widely seen as money-laundering havens for Russian oligarchs, and a straight bailout of the banks would appear to many eyes as a bailout of money launderers. That in itself would not look good. In addition, German Chancellor Angela Merkel faces re-election later this year and, given repeated assertions by German right-wingers that Germany is bailing out slothful Mediterraneans, is loath to leave herself exposed to more such charges.

Imposing a “deposit tax” only on deposits greater than the government guarantee would be one way out of this political dilemma, but that would leave Russia angry. Not only does Russian President Vladimir Putin seek to protect his country’s oligarchs, but Russia has previously granted Cyprus a loan on which the Cypriot government hopes to re-negotiate easier terms. As it is, Russia strongly protested the proposed confiscation that would have affected everyone.

The Cypriot government is caught between multiple rocks and hard places — subordinate to Germany, the northern European Union countries that ally with Germany on financial issues, Russia, the European Central Bank and the International Monetary Fund. It is also subordinate to financial markets, a nice term that really means international financiers and speculators. Countries far bigger than Cyprus are subordinate to financial markets, and even large countries like Germany are not independent of market forces.

Cypriot banks hold assets estimated at eight times the country’s gross domestic product — Cyprus, like Ireland and Iceland, which had similarly bloated banks, can’t sustain a financial sector swollen to such a dangerous size. Cypriot banks offered interest rates far above rates found elsewhere, which attracted foreign depositors but also signaled significant risk. Banks that do not ask questions of people who deposit huge sums of money are not closely regulated. The downside of that risk has materialized, but rather than impose the cost, financiers and the government ministers who represent them prefer to say “never mind” to the deposit insurance counted on by working people and pensioners banking their life savings.

A crisis of financial domination, not national characteristics

The social risk here, in a broader sense, is that the Cypriot crisis will be seen through nationalist lenses. To accuse “slothful Mediterraneans” or “arrogant Germans” is to be blind to the larger structural forces at work, which pay no attention to national borders. Financiers last year imposed new unelected governments on Greece and Italy so that their preferred policies be carried out. If they can topple one government, they can topple other governments; the pious declarations that Cyprus’ confiscation of savers would be a unique event that won’t be repeated rings hollow given those precedents.

Austerity comes in many forms and no country’s workers are exempt — the German manufacturing “miracle” in fact has a down-to-earth cause — a decade of wage cuts for German workers. Germany is ever more dependent on exports as its domestic ability to consume slowly declines due to the steady drop of wage cuts. When those export markets begin to dry up, German workers will not be able to pick up the slack and German manufacturers and financiers will impose stronger austerity on German workers to buoy profits.

For now, German workers are relatively privileged, a difference exploited to foster divisions. Austerity has been much harsher in the eurozone’s Mediterranean countries and Ireland. Thus far, we have seen only the beginnings of any political fightback, in the form of strong electoral showings by Syriza (the Coalition of the Radical Left) in Greece and the 5 Star Movement in Italy. For the most part, Europeans have continued to alternate among their local dominant parties.

Frequent massive demonstrations demonstrate widespread anger — that is important, as the route to reversing austerity and the system that imposes it lies in mass action. It is a healthy sign of cross-border solidarity that demonstrators in front of the Cypriot parliament carried signs saying (in Italian and Spanish) “today me, tomorrow you.”

But anger without organization ultimately dissipates like steam released from an engine. Such organization has to translate, in part, to challenging political power, which in turn is intimately linked (and subordinate) to economic power. Austerity does not fall out of the sky; it is an expression of power to benefit those in power. Capitalists, including financiers, can remove governments and confiscate savings. What’s next? The return of debtors’ prisons? Mandatory unpaid labor to boost profits? Those might sound far-fetched, but unchecked power has a way of moving toward limitless power. Organizing to reverse this is simply self-defense.

Nationalizing banks works for the short term; why not permanently?

U.S. President Barack Obama famously sneered that “Sweden had like five banks” when dismissing the idea of a government takeover of the U.S. banks that brought down the world economy. He did so despite acknowledging that Sweden had swiftly overcome its early 1990s financial crisis by taking over its largest banks.

The president was channeling a prevailing mythology within the United States — namely, that Sweden is a socialist country. Socialist! Run, run for your life! Therefore anything Swedish must automatically be so horrifying that we must not allow any thoughts about it to enter our minds for even a fleeting second.

Sweden is actually a capitalist country (albeit one with social-welfare policies to ease capitalism’s harshness), and the solution that it used to put its big banks back on their feet was well within the confines of capitalism. Actually, Sweden did not go as far as its neighbor, Norway, which also nationalized big banks to overcome its own early 1990s financial crisis.

Sweden and Norway made the banks — and their executives, directors and shareholders — pay for the crisis they caused, rather than making their taxpayers pay for it. Unsurprisingly, deregulation and speculation were behind the Scandinavian meltdowns.

Rather than following the Scandinavian model, the U.S. government shoveled trillions of dollars into its big banks following the 2008 financial meltdown without forcing any changes in banking practices or management. Or much of anything — it was the world’s biggest blank check. As a result, the banks are bigger than ever, the bonuses executives give themselves are as big as ever, not a single financier has been brought to justice, the financial crisis goes on and we remain at the mercy of the financial industry.

Sweden and Norway may not be large countries, but, despite President Obama’s sneering comment, they are not tiny, either. Sweden, in fact, has more than 100 banks. What Sweden and Norway have in common with the U.S. is that their banking industries are dominated by a few large banks. The four biggest banks in the U.S. in the first months of the economic crisis — JP Morgan Chase, Citigroup, Bank of America and Wells Fargo — accounted for almost two-thirds of the assets of U.S. commercial banks. Thus, as Keynesian economist Paul Krugman once noted in his blog, “as far as this discussion is concerned, we’ve got, like, four banks.”

Norway wipes out shareholders, fires bankers

Because Norway took stronger measures than Sweden, let’s start the comparison there. Four banks accounted for almost 60 percent of bank lending in Norway on the eve of its crisis, and three of them would get themselves into deep trouble. Norwegian banking had been tightly regulated, but in the mid-1980s a series of measures lifted most regulation of banking and housing and eliminated capital controls, sparking a wave of speculation in the forms of a boom in new lending and a real estate bubble. Household consumption rose dramatically, based on debt incurred via the new loose credit, and bank managers began to be paid based on growth in lending.

A simultaneous drop in oil prices (Norway is dependent on oil exports) led to a devaluation of Norway’s currency (then on a fixed exchange rate) and a trade deficit. As the real estate bubble began to burst, several of Norway’s small banks failed, a problem that could initially be contained because the Norwegian government had continued to enforce a requirement that all of the country’s banks contribute to guarantee funds; these funds covered depositors. But continued financial turbulence caused two of the country’s four biggest banks to fail and a third to be on the brink of failure.

The guarantee funds had been depleted due to the failures of the small banks, and private investors were unwilling to invest with their own capital. The Norwegian parliament stepped in and injected capital directly into the banks, taking ownership and enforcing several conditions, including these:

• Existing share capital would be written down to fully cover losses — shareholders would be wiped out.
• Managers and members of the board of directors would be fired.
• Banks must reduce operating costs and downsize some activities.

The banks were now owned by the government, which acted like an owner. But that ownership was exercised not directly by the government, but through a special agency created for the purpose of managing the taken-over banks and staffed by specialists to avoid political interference. Eventually, the Norwegian government sold all the shares of two banks and retained a minority interest in the third to block a foreign takeover of what is now the only one of the major banks to be based in Norway. By 2001, the government had earned a net gain for its troubles.

This program specifically avoided guaranteeing bank losses. It was designed so that taxpayers would not assume the risk, which would only encourage more risk-taking by bankers. In a report on these events, the deputy governor of Norges Bank (Norway’s central bank) wrote:

“If the government injects new capital into a crisis-stricken bank, it is important that the value of the existing shares are written down as far as necessary to cover the losses. Otherwise, the government would implicitly be using taxpayers’ money to subsidize shareholders of a failed or failing bank and would give rise to serious moral hazard problems.”

Sweden forces banks to write down losses

The Swedish government did not impose conditions as stringent as those imposed in Norway, but did make shareholders absorb some of the pain and nationalized the most troubled big banks. Financial deregulation in the 1980s led to reckless lending and a real estate bubble in Sweden. When the bubble burst in 1991 and 1992, Sweden fell into a recession and unemployment quintupled in three years.

The Swedish government declared it would guarantee all deposits in all banks, committed itself to recapitalizing banks in trouble and said any bank seeking government money would have to first write down its losses. Sweden did seize the most troubled big banks, although in one case (in which it already owned a majority interest) the government paid the full price for acquired shares rather than wiping out shareholders.

Sweden then set up two “bad banks” and transferred non-performing loans made by the taken-over banks to them. Privately owned banks would have forced immediate bankruptcies to shut down and seize the assets of the small and midsize businesses that had taken out these loans they could not repay. In contrast, the government “bad banks” took control of the businesses and worked to stabilize them for eventual re-sale, the proceeds of which would recover the bad loans.

For the most part, however, Sweden forced shareholders out of failed banks and imposed stringent risk-management measures and overhead reductions. But by issuing a blanket guarantee of all bank loans, the government benefited shareholders of the banks that had not been taken over, a contrast to Norway. But, similar to its neighbor, Swedish taxpayers benefited when the government later sold its shares in taken-over banks.

U.S. rewards bankers for destroying economy

In contrast, the U.S. government, during both the Bush II/Cheney and Obama administrations, handed out vast sums of money with no strings attached. Wall Street executives, on loan to the government, “advised” the presidents that unconditional and unlimited bailouts to their companies could be the only solution. As a result, financiers remain free to speculate at will and give themselves vastly bloated salaries and bonuses. A good example is provided by a Dartmouth University professor, B. Epsen Eckbo, who wrote during the first months of the economic meltdown:

“It’s a zero-sum game: if the tax-payer doesn’t insist on the best possible deal, some other party to the bailout will reap benefits at the tax-payer’s expense. A clear case in point is the $8 per share windfall to shareholders of Bear Stearns, when the government debt guarantee of that firm caused JPMorgan to raise its takeover bid from $2 to $10. This type of shareholder windfall, which we also saw in Sweden as the stock market responded to the government’s blanket debt guarantee, would have been avoided had the government taken an equity stake in the bailed-out bank.”

The Obama administration did take an equity stake when it bailed out the automobile manufacturers General Motors and Chrysler, with the potential to earn a profit from doing so, while saving jobs directly and indirectly associated with the two companies.

Why not do the same with big banks? Or, why don’t we not be timid and go further: Why not eliminate financial speculation through public ownership of banks? Norway and Sweden did solve their banking crises, but not underlying economic weaknesses — Norway remains dependent on high oil prices and Swedish unemployment, while well below its peak, remains far above what it was before the early 1990s crisis.

In fact, there is a successful example of state-owned banking inside the United States. It is the Bank of North Dakota, wholly owned since 1919 by that state’s government. The Bank of North Dakota operates as a commercial bank, taking deposits and making loans, and also is where the state government deposits its revenue.

The state’s tax money, therefore, is invested in local infrastructure projects rather than being used for speculation by national banks as other states’ revenues are. So successful is the bank that it has given $300 million in profits to the state government in the past ten years.

North Dakota is the only one of the 50 U.S. states to have its own bank, and while the local economy is currently strong due to an oil and gas boom, it certainly serves as an example. Why not replicate this success elsewhere?

As long as we are asking questions, why should something so critical to a modern economy as finance and banking be in private hands for private profit, and be conducted recklessly at the expense of everybody else? Why shouldn’t banking be a public utility, operated for public good? Otherwise, it is only a matter of time before the next financial crisis, when, once again, the profits will be privatized and the losses socialized.