The euro exodus from Greece and Spain
Wary depositors have been hauling billions of Euros out of Greek and Spanish banks over the past few weeks. 聽Since 2009, Greek depositors have withdrawn $4 million a month from that nation鈥檚 banks, while Spanish bank customers pulled 31 billion euros from Spanish banks in April alone.
More than any election result, bank runs reflect the mood of the people. 聽After all, depositors consider bank deposits their property. 聽The bank is just holding the money for them. 聽Any bit of nervousness, and it鈥檚 run first and ask questions later. 聽There is no upside to trusting the bank. 聽If it goes broke, the depositor鈥檚 property is gone. 聽At best, the bank doesn鈥檛 fail and the property remains. 聽There is no compensation for the sleepless nights.
Murray Rothbard explained in Making Economic Sense
But in what sense is a bank 鈥渟ound鈥� when one whisper of doom, one faltering of public confidence, should quickly bring the bank down? In what other industry does a mere rumor or hint of doubt swiftly bring down a mighty and seemingly solid firm? What is there about banking that public confidence should play such a decisive and overwhelmingly important role?
Deposit insurance and the Federal Reserve have made banks runs in America a historical relic of the Great Depression. 聽The result is that bankers can lend increasingly high percentages of deposits with little fear that lines of anxious depositors form at the front door, not matter what the economic environment. 聽聽There鈥檚 no competitive advantage for a bank to maintain high reserves in the era of deposit insurance.
Systemically important banks are bailed out if their loans don鈥檛 work out, while small banks that topple over are seized on Friday evenings, with the deposit liabilities most likely assumed by another bank. 聽A new sign is put on bank over the weekend and many deposits don鈥檛 notice the difference.
Deposit insurance is only as good as the private entity or government that stands behind it. 聽As Rothbard points out, private and state deposit insurance schemes have not worked because all banks with fractionalized reserves are unsound and susceptible to bank runs, no matter how profitable they may be. 聽No private system has the monopoly of force required to cover all deposits.
If Greece announced a return to a drachma backed by gold or silver and 100% reserve banking, deposits would come flooding into Greek banks.
Instead, what the bank runs in Europe expose are the unsound nature of those banking systems, the fragility of the euro, and the uncertain viability of the individual fiat currencies that may be forced upon the public. 聽All of which is a good thing. 聽These runs provide a natural check on the banks鈥� ability to inflate.
On the bank run, Rothbard writes,
It is a marvelously effective weapon because (a) it is irresistible, since once it gets going it cannot be stopped, and (b) it serves as a dramatic device for calling everyone鈥檚 attention to the inherent unsoundness and insolvency of fractional reserve banking.
According to Wikipedia, deposits are insured in Greece and Spain, but there must be some doubt about the viability of those deposits, the currency, the deposit insurer, and the government itself.
Not wanting to let a good crisis go to waste, European Central Bank President Mario Draghi is urging European leaders to form a 鈥渂anking union鈥� that would include deposit insurance for depositors and 鈥減revent failed banks from threatening the financial system,鈥� the WSJ reports. 聽This is code for having the EU bail out systemically important banks, 聽because individual country finances are not capable of funding these bailouts.
Olli Rehn, the economics head of the European Commission, claims,
We need both a genuine stability culture in the euro zone and its member states, and a much upgraded capacity to contain contagion and reduce borrowing costs for its members. This is the case if we want to avoid a disintegration of the euro zone and instead make the euro survive and succeed.
The money Draghi would like to get his hands on is the European Stability Mechanism, the euro-zone鈥檚 permanent rescue funds. Right now these funds can only be used to lend to government, the ECB President would like to use the funds to re-capitalize banks. 聽聽In addition to providing euro zone-level deposit insurance, Draghi would also like to centralize banking supervision and regulation.
鈥淭he latest EU funding program does not solve the longer term problems of the solvency or funding of the banks, which now remain heavily dependent on the largesse of the central banks. One European economist calls 聽鈥渁 government-sponsored Ponzi scheme where weak banks are supporting weak sovereigns, who in turn are standing behind the banks 鈥� a process which can be described as two drowning people clinging to each other for mutual support.鈥�
Bank customers who have decided to take their money and run, are looking out for themselves while leaving the bankers and the bureaucrats to drown.
The euro is a political construct that has the full backing of Europe鈥檚 political elite. 聽If the market was allowed to prevail, the euro and all of Europe鈥檚 banks would be history. 聽Even London bookmaker Ladbrokes has the odds at than even-money the euro will be gone by the end of 2015.
Allowing the bank runs to continue would bring about a collapse of the banking system throughout Europe, paving the way for sound money. But don鈥檛 underestimate government force. 聽Draghi鈥檚 bank union plan can take the fate of euro, temporarily, out of the public鈥檚 hands, allowing the inflating to resume and the charade of a united Europe to continue.
