Mar 29 2013

The Repercussions of Cyprus on the United States Banking System

ROUGH TRANSCRIPT:

HARTMANN: I’m curious about your thoughts on what’s going on in Cyprus and how this is all playing out and why.

FINGLETON: Well, I think we’re all very curious Thom. I wrote a blog for Forbes amidst the original news about this saying this is inexplicable and it’s still inexplicable. I can’t understand why they are being so clumsy basically, if that is the right interpretation. There are so many unanswered questions.

HARTMANN: We saw this report in the Guardian that Mario Draghi the European Central Bank President gave a presentation to the leaders of the European nations a year or so ago saying that austerity was actually necessary and it was going to work. He showed two graphs. One graph showed wages and the other showed productivity. He showed that the debtor countries, as it were were, actually had this large gap between wages and productivity, where wages had gone up faster than productivity. He said this shouldn’t be and so we need to dial them back.

But it turns out that his wage number were not inflation adjusted and his productivity numbers were. So he was comparing apples and oranges and when you inflation adjust both numbers they were actually tracking perfectly. He was lying. But he shut down Francois Mitterand. Mitterand had gone to the meeting ready for a fight and he totally blew him up.

Could it be that this is all just part of a plan? Not wanting to sound like I have too much of a tin foil hat on but it doesn’t seem like they would do something as large as demanding a chunk of the hide of depositors in Cyprus without thinking it through.

FINGLETON: It is extremely curious, as you know, a fundamental rule of banking in the post World War 2 era was that small depositors are sacrosanct. One of the things that goes through my mind is whether the tax thing is the issue. In other words, I think that Germany, the Netherlands, Finland many of these countries in continental Europe are rather upset about the way that countries like Ireland have low corporate taxes and therefore get a lot of corporate investment through that route. Also a lot of banking goes through places like Ireland these days. I think that from a German point of view this is something of a tax ripoff and therefore maybe there’s a message here that these countries on the periphery that are being propped up now maybe they should start thinking about obliging the Germans on the tax front and raise their corporate taxes and stop this tax tourism.

HARTMANN: It’s interesting this article in the Guardian says that this is the key point using the correct figures. In other words, when you inflation-adjust both wages and productivity, it transforms Germany from the wage productivity paragon, so portrayed by the Central Bank, into what it really is, a country that has systematically undercut the stability norm for balanced growth in a monetary union and has thus been a major contributing factor to the crisis.

FINGLETON: Well, unfortunately I have not seen the article. I think my understanding of Germany is that it is very productive and I would have to take a close look at any argument that says that it isn’t.

HARTMANN: I would agree, Germany is incredibly productive.

FINGLETON: You just have to look at that country’s exports to know that they’ve got a reasonably efficient economy. And when you visit Germany you see an economy that frankly works.

HARTMANN: Could Cyprus come to the United States?

FINGLETON: I’ve been thinking about this. I think there are two issues here: one is the big banks and the other is the smaller banks. Ordinary banks in the United States that don’t do international business, that are not up to their ears in these derivatives will still obtain the FDIC guarantee of up to a quarter of a million dollars. It would really be an earthquake if the FDIC reneged on that. So I think that the regional banks etc. are relatively safe up to a quarter of a million dollars. But these major banks do business across international borders and they are much more of a problem for regulators and they have all these derivatives that are impossible for anybody to value. So you can have shocks that suddenly emerge with these things and I would not have my money in some of these banks. But I think Americans with regional banks are probably okay.

HARTMANN: Or presumably credit unions and savings and loans?

FINGLETON: Yeah, the smaller the bank in general, the more secure in terms of the FDIC guarantee. The bank itself may not be solvent necessarily, but the guarantee will bail you out.

HARTMANN: Do you think it’s possible if somebody had their money with one of the big six banks that control assets equal to 2/3 of the GDP of the entire country, if those banks were to be shaken badly (I mean they control assets of around 10 to 12 trillion dollars but their exposure to these collateralized debt obligations is hundreds of trillions of dollars) if they got wiped out, wouldn’t our Federal Government at least cover their small depositors?

FINGLETON: Um, I think on balance, the answer to that is that the FDIC would try very hard. The problem is that these things are such unpredictable entities that there might be an overwhelming crisis.

Listen to more of the discussion between Thom Hartmann and Eamonn Fingleton about the situation in Cyprus.

Eamonn Fingleton is author of ‘In The Jaws of the Dragon’. He is an economics journalist and contributor to Forbes.

Visit Fingleton’s website.

Visit Thom’s website.

SONALI KOLHATKAR IS ON MATERNITY LEAVE.

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