March 18, 2013

Cyprus Deposit "Tax" Experiment

In the latest round of European bailouts, Cyprus has agreed to accept a $22 Billion bailout with one incredible stipulation: a one time “wealth tax” on all bank deposits.   This is not so much a tax but a blatant confiscation of private property.   But putting the moral issue aside, let us analyze this government decision based on two economic “laws”: 1. When intervening in the economy, government policy always creates more problems (unintended consequences)  2.  Problems created by government intervention lead to further government intervention. 
So what is the government try to solve?  Bank Insolvency.   It is beyond me how policy makers can’t see the obvious ramifications of this “tax”.  Instead of solving bank insolvency, they are going to create bank insolvency!  Individuals will obviously want to pull money out of the banks that just stole their money, and park their money elsewhere.  A.K.A. Bank Run.   What do bank runs cause?   Bank Insolvency.   
This government policy will create the very problem they are trying to solve, only to a much worse degree.  What happens next?  More government intervention!  Next they will need to solve the bank run, so they will probably have to make it illegal to withdraw money.  Problem solved, right?  Wrong.  It’s hard to predict where things will go from there, but one thing we can be sure of: it won’t go the way the policy makers intend.  It will only create another significant problem that requires further government intervention, and on and on it will go. 
What we will see in the coming days and weeks will fit perfectly with the two “laws” of government interventionism: bank run problem followed by further government invention.  What exactly happens and how it happens is anybody’s guess.  But my question is: how can the policy makers not guess that confiscating bank deposits might cause people to remove their bank deposits?  Perhaps they do know and their intentions are not what they seem…..

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