Nonsense from Dijsselbloem and Zero Hedge on Cyprus.

Dijsselbloem has claimed in respect of Cyprus that a “levy on wealth is defendable in principle”. And Zero Hedge has chipped in with some inconclusive verbiage which lends mild support to Dijsselbloem (if I’ve interpreted the verbiage correctly).

Well banking apart, we’re all agreed that a “levy on wealth is defendable in principle”. Likewise about 95% of the population approve in principle of other taxes on the rich.

However, grabbing a portion of depositors’ money in a bank is NOT A LEVY ON WEALTH!!!!!

It’s a levy on a PARTICULAR ASSET. That is , if it’s supposed to be a levy on wealth, it’s the daftest levy on wealth ever thought of.

To illustrate, on the date of the levy some not desperately wealthy people will have large amounts deposited in their bank for a variety of possible reasons. For example they may have sold their house and haven’t yet bought another. Or they may have just received a lump sum payment from their pension provider.  In contrast, there are plenty of millionaires who far from having large amounts deposited in banks, are heavily in debt to their bank.

It’s amazing that I even need to spell out the latter point.

It’s should be blindingly obvious that the Cyprus levy was a panic and badly thought out move. But it DOES HAVE a limited amount of sense in that it is a move towards full reserve banking: that’s a system under which, first, it’s almost impossible for commercial banks to fail, and second, bank subsidies are removed, and third, the tendency of banks to lend money into existence during a boom (exactly when a money supply is not needed) is constrained.

Now a system that has the latter three merits definitely has something going for it. Thus a movement in the direction of full reserve, even if it’s done in a chaotic Cyrus fashion, has some merit.

For more details on why a levy on depositors is part and parcel of full reserve, see this Positive Money article.