Monty Pelerin * EconomicNoise.com

The events in Cyprus regarding the intended confiscation of private citizen’s bank accounts to pay for the abuses and excesses of government raise enormous issues. The very concept of private property is under attack.

Just what do you own? The fact that government feels free to raid your assets to extend temporarily its unsustainable and profligate ways reflects a complete disdain for the concepts of law and private property. These are the two pillars of modern society. Remove either and social cooperation and harmony evaporate. Life reverts to a condition aptly described as “nasty, brutish and short.”

Whether governments are so stupid as to pursue such a course is moot. Even if they aren’t (and that is not a prediction, as great desperation is likely to overcome minimal common sense), the Cyprus threat has raised the consciousness of what may happen there or anywhere. The importance of Cyprus is enormous, though incalculable. Its effects on a world economy that is under-performing are not useful.

Threats against private property diminish the effort necessary to produce. If your ability to enjoy the fruits of your labor are threatened, you will supply less labor. Why extend more effort if you expect less reward? How much this threat delays an economic recovery cannot be known, however with certainty its possibility makes any recovery more difficult.

The more immediate effect of Cyprus is on an already-weak banking system. Despite the propaganda that the financial crisis has been solved, banks and other financial institutions are still in bad shape. Their balance sheets are still filled with junk carried at above market prices. The last thing a shaky financial system needed was the idea that your money might not be safe when placed there.

It is difficult to imagine that anyone feels banks are safer post-Cyprus than pre. Whatever fears and doubts regarding financial institutions were increased as a result of last week. That will result in less money going into such institutions. This amount cannot be calculated, but it is certain that some (possibly most) will be changing the storage of their wealth. Banks are inherently illiquid. Small withdrawals from banks produce large destabilizing effects. The events in Cyprus raised the risks of bank runs.

Here is an earlier article discussing bank runs:

Can We Have Another Banking Holiday?

“But most commercial banking is “deposit banking” based on a gigantic scam: the idea, which most depositors believe, that their money is down at the bank, ready to be redeemed

in cash at any time.” Murray Rothbard

One of the most painful and important aspects of the Great Depression was the failure of banks. It has been estimated that before the Depression there were more than 25,000 banks in this country. At the end of 1933, 14,207 were left.

Depositors lost all or much of their money when their bank failed. Most banks were small, not unlike the one depicted in Jimmy Stewart’s classic movie “It’s a Wonderful Life.” When a bank failed in a town, fear spread. A contagion developed that caused depositors to remove money from other banks and “hoard” it. This reaction put pressure on otherwise sound banks and the banking system. A self-reinforcing spiral reduced the availability of money resulting in additional closings.

One of the first New Deal legislative acts was the closing of the banks, known as a national banking holiday. Banks were closed for about a week. Neither deposits nor withdrawals were allowed.

continue at EconomicNoise.com:

http://www.economicnoise.com/2013/03/20/cyprus-and-the-risk-of-bank-runs/