Call it the Cyprus Solution: A bankrupt nation with an insolvent banking system lives yet another day by confiscating the assets of its savers.
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It's a game plan so communist, it even has Russians complaining about it. And when capitalists do it, through private investment firms, it's called a Ponzi scheme. But if the greatest financial minds in Europe think it will work on the tiny Mediterranean island nation of Cyprus, why not try it here in a nation closing in on $20 trillion in debt?
Call me a doom-monger, if you will. Yes, the world still has plenty of faith in America's printing press. Nevertheless, I've prepared a Q&A on the concept:
--Q: Isn't taxing bank deposits a little extreme?
--A: Not as extreme as losing all your money in a complete banking system meltdown. Thanks to years of corporate and government folly, Cyprus bank depositors are down to one choice: They can lose all of their savings to a collapse, or some of it to a pesky tax.
--Q: When will the European crisis be over?
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--A: Maybe never. Cyprus is the fifth of 17 euro-union nations to need a bailout. Every month, some eurocrat discovers a new way to avert a seemingly inevitable collapse. The Cyprus Solution is the most creative innovation yet.
--Q: How would this work in America?
--A: One day, you would read your bank statement and some of your hard-earned savings would be gone. But your nation's financial crisis would be gone, too--at least for awhile.
--Q: So the bank just confiscates its customers' money?
--A: Of course not. That would be misappropriation. In the Cyprus Solution, the government levies a tax on bank depositors to facilitate a bank bailout. It's all legal. See?
--Q: Why not just cut out the middlemen and declare that the customers' money is the bank's money. Voila, instant solvency!
--A: That sounds too much like theft.
--Q: But that's what it is, right? The Daily Mail, a British newspaper, called it "The Great EU Bank Robbery." Russian Prime Minister Dmitry Medvedev called it confiscation. "This practice, unfortunately, was very well known during the Soviet period," Mr. Medvedev said.
--A: Theft, confiscation, taxation--these are all really harsh terms. It's better to think of this as a negative interest rate.
--Q: What's a negative interest rate?
--A: It's when you pay the bank to hold your money. It's what many U.S. savers and bond investors already receive. The Federal Reserve holds interest rates near zero to prop up the banking system and the stock market. Savers then receive less on their deposits and bond investments than the rate of inflation. It's just a more sophisticated form of the Cyprus Solution, really.
--Q: Why should savers be punished like this?
--A: Savers are chumps. They don't know what's going on. They must not read the global financial news. There's more cash in the world than assets to buy. Besides, they've turned a blind eye to institutionalized corruption for decades? What did they think was going to happen?
--Q: Shouldn't the bondholders who loaned money to insolvent banks also take a hit?
--A: No. They are not chumps. They are often bankers themselves, and they usually get bailed out first in any crisis.
--Q: So why should the gamblers, deadbeats, bankers and overpaid corporate executives who cause financial crises be rewarded?
--A: In the dicey game of international finance, it's their game board.
--Q: And why do governments think they can overspend until they reach the breaking point?
--A: They think lobbyists are constituents. They think corporations are people.
--Q: Isn't there another idea here?
--A: Yes. In Cyprus, officials also discussed tapping pension funds. A similar idea worked in Illinois for a while, too, until the Securities and Exchange Commission recently charged the state with securities fraud.
--Q: And on Monday, a Boston couple, Steven and Lori Palladino, was charged with running a Ponzi scheme. Their company, Viking Financial Group Inc., took money from new investors to pay off old investors, and then they went on lavish vacations and gambling trips, prosecutors alleged. You read stories like this all the time. But at least the Palladinos were honest enough to name their company after Vikings. And like Cyprus, they were probably just trying to stay solvent. Why should they be criminally charged?
--A: They will not be missed. They were not too-big-to-fail.
--Q: If bank depositors see this coming, won't there be a run on the banks?
--A: No. Eventually, ATMs will stop spitting out money. Then you have a bank holiday. Then you say the banks are closed until lawmakers can sort out the mess. It's like the Enron 401(k) plan. You can't just cash out just because the sky is finally falling.
--Q: Won't financial markets panic?
--A: Not really. All you have to do is insist this is a one-time event. Markets love one-offs. For all the talk about laissez-faire capitalism, markets prefer confiscation to liquidation.
--Q: What about all these people protesting in the streets?
--A: There are always people protesting in the streets. They can get in line with all the other people protesting in the streets.
--Q: How do you get around the basic unfairness of all this?
--A: Declare that money is evil. Cyprus has been called a Russian money-laundering machine. You may have also read that Slobodan Milosevic funneled money through Cypriot banks to pay for his genocidal acts of war in the former Yugoslavia. The EU says it doesn't want to bailout evildoers and money launderers, so it insists on taking some of their loot for the bailout. Money, being fungible, is always used for some evil purpose. You only have to say so.
--Q: This might work in a communist or socialist country, but could it really work here?
--A: What? You thought you were living in a Democracy? The Cyprus Solution is an example of what happens when banks run out of money and an overspending government can no longer afford to bail them out.
--Q: So why put money in a bank?
--A: What else are you going to do? Stuff it in a mattress? Tempur-Pedic International Inc. (TPX) on Monday said it completed its $1.3 billion acquisition of its competitor Sealy Corp. (ZZ). Maybe the combined company is anticipating a sharp spike in sales.
(Al's Emporium, written by Dow Jones Newswires columnist Al Lewis, offers commentary and analysis on a wide range of business subjects through an unconventional perspective. The column is published each Tuesday and Thursday at 9 a.m. ET. Contact Al at email@example.com or tellittoal.com)