Friday, June 28, 2013

Cyprus and the Quest for Safe Havens

John Buell is a columnist for The Progressive Populist and a faculty adjunct at Cochise College. His most recent book is Politics, Religion, and Culture in an Anxious Age.

As the European financial crisis waxes and wanes, one hears a familiar refrain in the business press and on such business-boosting media as CNBC. When the risk of default in Greece or Spain appears imminent, US Treasury bonds increase in value and thereby decline in yield. The popularity of and extraordinarily low yields on such bonds are explained as manifestations of a "flight to safety."

Unfortunately the media seldom ask whether there is any safe haven any more and whether individuals managing their pension accounts can or should be asked to find the havens on their own. The latest twist in the saga of the European union's single currency, the Euro, is anything but reassuring on this score.

Is there any safer haven than money in an insured saving account or certificate of deposit? The decision by the government of Cyprus---albeit later amended---to tax, i.e. partially confiscate, even small deposits exposes one more finger of instability in the world financial structure. Ellen Brown, president of the Public Banking Institute, reminds us that: "Although few depositors realize it, legally the bank owns the depositor's funds as soon as they are put in the bank. Our money becomes the bank's, and we become unsecured creditors holding IOUs or promises to pay."

If we do not have an absolute title to the money we deposit in a bank, what happens if the bank experiences a run? In this context it is important to recognize that even prudent, well run banks---and there are many---can experience runs started by false rumors regarding the bank's solvency. The bank may face more demands for deposit redemption than it has in reserves and thus becomes bankrupt, one more ugly manifestation of the self-fulfilling prophecies that can grip social life.

In the process of the bank's efforts to survive it may call in loans and thus endanger the "real" goods and services economy. Thus one of the most important lessons of the 1930's was the need for not only a central bank that could loan money to banks facing temporary liquidity problems but also a well- financed bank insurance program and regular bank inspections by federal regulators. These could guarantee depositors their funds and thus eliminate any need for depositors to worry constantly about the solvency of their banks.

Even if there is no further fall out from Cyprus's hint that it might repudiate its obligations to depositors, the very suggestion that governments and banks might rob ordinary depositors may eventually roil world markets. Greek economist Yanis Varoufakis points out that this episode is one more indicator of the depth of the financial crisis and of how desperate elites have become to retain their power.

It is even more disturbing when we recognize that this incident was hardly an aberration. Brown points out: "Confiscating the customer deposits in Cyprus banks, it seems, was not a one-off, desperate idea of a few Eurozone "troika" officials scrambling to salvage their balance sheets. A joint paper by the US Federal Deposit Insurance Corporation and the Bank of England dated December 10, 2012, shows that these plans have been long in the making..."

True, central banks in nations that control their own currencies, such as the US or the UK, can print and inflate their way out of such dilemmas, but inflation can damage not only wealthy creditors but also some middle class retirees whose major "safe" investment was in government bonds.

These concerns are music to the ears of the gold bugs, those guys on television urging us to buy gold as a hedge against the collapse of our "fiat money." Presumably we can stash our gold under the mattress rather than in a bank. (Brown warns safe deposit boxes at banks are already subject to search in the event of a national emergency, and a financial panic would surely be deemed one.) We can then use it to purchase necessities when all the banks are closed and depositors are denied their hard earned dollars. But now we must watch our homes like a hawk in the realization that our whole life's earnings may evaporate through theft or fire. All that is solid does melt into thin air. For me, politics and the world seem to have come full circle. During the Great Depression my father went through medical school on $4,000 in gold his grandfather had stuffed under a bed.

There is a deeper lesson here. There probably is no safe haven for the individual retiree or investor. Our safe money in a bank depends on the political decision by bank regulators and ultimately the Federal Reserve and/or the US Congress to adequately fund deposit insurance programs and more generally to issue sufficient funds for the government to pay off its debts. Republicans in Congress have threatened the latter with their absurd and dangerous debt limit blackmail. If the political stink about taxpayer bailout of banks ever became sufficient, banks and their servants might pick on ordinary depositors. As one extraordinarily honest investment banker put it in an e mail exchange with me, "The issue with currency is when the 'full faith' fails. The institution of money is only as sturdy as the institutions that have grown up around it. There is risk in any and all investment be it government securities, corporate bonds, or equities."

The best safe haven remains universal, government financed programs like Social Security. Hence the desperation of the financial community to argue against all logic and evidence that it is becoming insolvent. The existence of this universal, nation-wide program is a major reason the US has weathered the financial crisis far better than the Eurozone, whose nation states have widely disparate social insurance programs. Here in the US Social Security as well as unemployment compensation act as automatic stabilizers, keeping private consumer demand from total collapse.

When I get into a survivalist mode---and all of us must from time to time---I think it best to invest my surplus earnings in tangible energy savings like solar collectors, photovoltaics, insulation etc. Here the returns to the pocket book and environment are tangible and tax- free. But many are not fortunate enough to have the capital for such initial investments and the success of such investment strategies still depends on subsidy levels and the skill sets of others.

My father used to say that stocks and bonds were just paper the value of which could disappear at a moments notice. The only true wealth was one's education. Today stocks and bonds are if anything even more ephemeral, mere keyboard strokes. I would add that our wealth is not only education but also the collaborative relations we can frame today to sustain universal safety nets and a more ecological infrastructure. Retiring to our basement safes, our ethnic enclaves, even our green bungalows won't get that done.

How do we come together to form a collective safety net in this world of rapid population flows, pluralizing modes of dress, family arrangements, styles of music and art? Some hope to restore a notion of idealized communities held together by a set of "core values" that emerge through and are refined by democratic discourse. Paul Krugman appeals to a Rawlsian vision of the social norms we would arguably all choose if we had no foreknowledge of the genetic endowment and family wealth into which we would be born. Both perspectives have their strengths and weaknesses. Debates in which both sides acknowledge the elements of uncertainty in their own positions will need to play a large role in any successful struggle for an effective safety net.

My wish is for an even more genuinely ecumenical and open ended conversation that moves not only beyond the vision of stable market equilibriums but also the certainties of the Rawslian and communitarian moral perspectives. My suspicion is that these sides share more than either acknowledges and both need some fresh challenges.Rather than seeing ethical awareness as flowing from a fixed teleology or some absolute imperative some contemporary theorists, often mislabeled "postmodern" and characterized as nihilists, present an alternative but clearly affirmative ethical perspective. Thus Jane Bennett, author of Vibrant Matter, suggests: "the starting point of ethics [may be] less the acceptance of [the impossibility of full knowledge and control] and more the recognition of human participation in a shared, vital materiality... The ethical task at hand here is to cultivate the ability to discern nonhuman vitality, to become perpetually open to it." And William Connolly, author of A World of Becoming, sees ethics as "anchored first and foremost in presumptive care for the diversity of life and the fecundity of the earth. ...Our goal is to intensify or amplify a care for this world that already courses through us to some degree...One advantage of an ethic of cultivation in a world of becoming is that it can bring this care to bear on new and unexpected situations."

We need to act in minor and major ways to build a militant assemblage of minorities of multiple types who are dedicated to ecology and equality. My aspiration is to cultivate appreciation for a world of proliferating life style minorities. Such a world would emerge and be sustained by already evolving debates among various theistic and nontheistic ethics. This may seem to be a utopian dream, but it strikes me as a more humane and even more attainable "safe haven" than any offered by the market or the conventional moralists.



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