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.

Written by katherinechen

March 21, 2013 at 2:47 pm

One Response

Subscribe to comments with RSS.

  1. A EURO-area country pays 3% more annual interest rate than Germany and investors with more than 100.000 euros in a bank account are surprised that they might lose some of it? Greater returns, greater risks. It is not so much tight coupling but the decision of Cyprus to run a casino banks — very much like Iceland did. (+ bonus money laundering operation for Russians, it would appear)
    The surprising twist is that investors with less than 100k would be taxed, but it seems uncertain who insisted on that. Some rumors seem to suggest the Cypriot president required that. FT noted that while politicians tend to be worried about their voters, Cypriot politicians seem to be much more worried about the financial sector and the Russians than their own people.
    The general interpretation/public mood in Cyprus is apparently that Germans were jealous of the banking sector in Cyprus and wanted to destroy it for their own benefit. Which would be funny if it weren’t scary.



    March 21, 2013 at 10:57 pm

Comments are closed.

%d bloggers like this: