delegitimization as a new world order
Imagine going to the ATM and discovering you can’t withdraw your money because the ATM is out of cash. Not only that, but the bank is closed because of a national holiday so you can’t use the bank teller to withdraw money, electronic transfers of funds are frozen, and the stores refuse to accept credit cards out of concerns that electronic payments won’t be made. If you are able to get to your money, you learn that 6.75% of your funds (or 9.95% if you are a lucky ducky with over 100K euros in your account) will be converted into bank shares under a compulsory levy intended to prop up the banking system. The mortgage payment that you scheduled, the student loan check that you deposited to pay for your education, the vendors that you need to pay for your small business – all are up in the air.
Even if you are told “nevermind, we’re re-evaluating that policy, back to the drawing board!”, what’s the rational thing to do? Most likely, you as a depositor will lose trust in the banking system and pull out as much as you can. If you are in an adjoining country with a shared currency, the mattress, precious metals, and alternate currencies are looking like more attractive places to keep your money. This is the scenario currently unfolding for residents in Cyprus and those who were parking their money in what seemed like a safe haven.
Less than a year ago, Greece was in a similar situation and is still dealing with the consequences. Now, it’s Cyprus’s turn. These supposedly one-off, “unique” situations involving untested interventions are becoming regularities as banking and governance systems around the world are becoming more tightly coupled together. Although Chick Perrow‘s Normal Accidents: Living with High Risk Technologies discusses nuclear plants and chemical plants, his concept of how reactions, once started, are hard to stop (much less understand) in tightly coupled systems, is a helpful read. Add to his concept the erosion of a shared understanding and belief in institutions for a potent mix – that is, the delegitimization processes of trust in banking and governance that we may be seeing in the EU.
For those of us who have been living under the various rocks of committee work/teaching/research/other commitments, a little background reading: Dealbreaker’s take, with plenty of links to others’ analysis, Reuters,and Zero Hedge’s mordant posts.
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