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which is the restriction of the free flow of capital across borders. In Hot Money Blues, his New York Times column this morning, he says

one thing seems certain: for the time being, and probably for years to come, the island nation will have to maintain fairly draconian controls on the movement of capital in and out of the country.
 He further suggests that if shaped properly such a move might well have the support of the IMF.  It would not only mark the end of an era for Cyprus, which had heavily marketed itself as a place people could move their money with no questions asked (as a way to avoid taxes),
But it may also mark at least the beginning of the end for something much bigger: the era when unrestricted movement of capital was taken as a desirable norm around the world.
Krugman implies this will be somewhat positive.  I ponder whether it may indicate something that implies even more economic hardship for the vast majority.

Krugman provides context by reminding us that in the first few decades after the 2nd World War cross-border restrictions on the flow of capital was considered good policy, nearly universal in poorer countries, and even known on occasion in both the UK and the US:  we "briefly limited capital outflows during the 1960s."  He acknowledges that there are costs to the control of capital flow, and that traditional economic analysis (although as he notes it is hard to find support in the numbers) argues such controls will negatively affect growth.  

It is the next sentence I view as key:  

Bu it also reflected the rise of free-market ideology, the assumption that if financial markets want to move money across borders, there must be a good reason, and bureaucrats shouldn’t stand in their way.

It is ideology that has created the international financial crises - plural - that have put so many in the world in financial jeopardy.  We have seen in this country, even before the process accelerated in the Reagan administration, a driving of economic policy by an extreme free-market ideology:  remember that it was the Carter administration that began the deregulation of the airline industry under Alfred Kahn, and Bert Lance was hardly an advocate of strict government oversight of economic activity.

In fact, one could argue that the primary role of government in the eyes of free market ideologues was to facilitate the accumulation of wealth and power by certain financial interests and to protect them and their corporate partners against any liabilities, civil or corporate.  The excesses that resulted took many forms, whether in the collapse of Enron or the bailouts of Wall Street. It allowed the creation of institutions with far too much control in too many sectors of the economy, whether it was the narrowing of ownership of print and broadcast media, the concentration of airlines into what will soon be four major carriers, or the growth of financial institutions and elimination of restrictions such as Glass-Steagal designed to prevent serious crises such as those which had helped create and exacerbate the Great Depression to the point that a handful of giant institutions now control well over 50% of the banking in this country.  When the government's solution to the ensuing crisis was to further concentrate economic power in fewer hands, as took place under the leadership of Hank Paulson at Treasury, we only made a very bad situation ever more intolerable.  The lack of regulation of derivatives, for which while at Goldman Sachs Paulsen had argued strenuously, when combined with the ability to move immense amounts of financial "assets" almost any place in the world with no government oversight or restrictions has created a nightmare scenario, where no one truly knows the total liability of this economic house of cards, which may well exceed the entire global GDP.

Returning to Krugman.  He notes that when Malaysia institute capital flows they were treated as a pariah, but now?  

But the truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment.

It’s hard to imagine now, but for more than three decades after World War II financial crises of the kind we’ve lately become so familiar with hardly ever happened. Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course, the more recent run of disasters: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus.

Of the nations listed, only Greece is an anomaly, caused by financial profligacy.  Krugman argues that
best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out.
Krugman credits Harvard's Dani Rodrik with having raising this issue since the 1990s.  He then notes it is no longer possible, as Europe clearly demonstrates, to argue that this is simply a problem of poorer nations to which the wealthier nations are immune.  We have been partially protected by controlling our own currency, whereas the Euro zone is impacted by what happens with any of their members suddenly cratering and thus jeopardizing the finances of the entire zone.  Even so, we were only PARTIALLY protected, given the worst economic crisis since the 1930s is where we now found ourselves.

It is not that Krugman suggests there will be a complete shut-down of cross-border money flow.   But he thinks things may well change:  

There may well, however, be a process of erosion, as governments intervene to limit both the pace at which money comes in and the rate at which it goes out. Global capitalism is, arguably, on track to become substantially less global.

And that’s O.K. Right now, the bad old days when it wasn’t that easy to move lots of money across borders are looking pretty good.

Stop and think for a moment.  American corporations have moved profits overseas to low or no- tax jurisdictions while cleverly keeping losses on paper here, thus claiming huge profits which drive up their stock prices and result in excessive bonuses for top management while not only not paying taxes to the US and state governments, but actually receiving payments on the losses from the American taxpayers.  

Our free trade policy has also lead to a large amount of overseas money, sometimes from government entities, flowing into US financial institutions or into investments in US assets.  In one sense, were the US to attempt to restrict the flow of capital into or out of the country, this could start to dry up these additional sources of capital that have helped to cushion us from some of the impact of other parts of our economic policy.

What is clear is that no country can completely control its own economic destiny so long as it cannot control the flow of capital across its borders.   What is also clear is that simply attempting to restrict it will not work.

What Krugman's column indicates, yet again, is how little control individual governments have over the economic activities of major financial and corporate institutions.

Unless and until countries, including our own, will address this honestly, economic life for the vast majority of people will only continue to spiral in a downward direction, while the wealthy and powerful continue to accumulate ever more wealth and power in the hopes that they can protect themselves from the inevitable.

Not a pretty picture, is it?

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Comment Preferences

  •  Let's hope so - (5+ / 0-)
  •  I read William Greider's "One World (19+ / 0-)

    Ready or Not" a decade ago. Exactly on this point, the unrestrained movement of capital is wrecking economies and governments.

    Even if I knew that tomorrow the world would go to pieces, I would still plant my apple tree. -Martin Luther

    by the fan man on Mon Mar 25, 2013 at 04:53:54 AM PDT

    •  Then what is the purpose (6+ / 0-)

      of the EU?  Easy flow of labor, capital and buiness between countries in the EU is one of the main reasons it was created.


      "Justice is a commodity"

      by joanneleon on Mon Mar 25, 2013 at 05:28:31 AM PDT

      [ Parent ]

      •  The purpose of the EU, (12+ / 0-)

        not fully realized, is to avoid another European war like the last two. Unifying institutions and weakened nationalism were supposed to make war less likely by developing more easily recognized shared interests among Europeans, regardless of where they were from. Unfortunately, the EU institutions are weak. The European Parliament, especially, which has (had?) the potential to be the most politically unifying body, is nothing but a feckless joke. So all that's left is weakened economic nationalism with no countervailing common capacity to constrain the accumulation and exercise of power by private transnational entities.

        The GOP can't win on ideas. They can only win by lying, cheating, and stealing. So they do.

        by psnyder on Mon Mar 25, 2013 at 05:58:42 AM PDT

        [ Parent ]

      •  I should clarify (6+ / 0-)

        that the point I'm making is -- one of the main purposes of the EU is to make capital flow easier, not more restrictive, which makes Krugman's article all the more odd.  I'm not disagreeing that unfettered capital flow (without unfettered labor flow) creates an imbalance destructive to workers, and countries on the losing end of it.  


        "Justice is a commodity"

        by joanneleon on Mon Mar 25, 2013 at 06:01:00 AM PDT

        [ Parent ]

        •  My thought is this has more to do with Russian (3+ / 0-)

          oligarchs and monied players elsewhere than intra-EU politics. The EU is considered one economy.

          Even if I knew that tomorrow the world would go to pieces, I would still plant my apple tree. -Martin Luther

          by the fan man on Mon Mar 25, 2013 at 06:37:21 AM PDT

          [ Parent ]

        •  EU vs US (2+ / 0-)
          Recommended by:
          the fan man, elginblt

          What he's talking about is the danger of bubbles when it's super easy to move capital in and out of a country at a whim.

          Any such activities intra-EU can still happen -- i.e. German investors could smell an opportunity in Spain, for example, and get their economy booming again. And then if they see the winds changing and decide to pull out, it could crash their economy in short order.

          Companies do this inside the US from time to time for different reasons. Another state offers up great tax incentives that another state can't and they relocate. This can devestate local economies.

          When it happens inside the US borders, we have safety nets managed by the federal government to handle shifting sands within our own borders. As we know, this severely strains our government when those jobs move overseas.

          Within the EU, they have a bit of a worse problem -- all the benefits of intra-state movement similar to the US and yet there isn't one government helping out citizens in one area when jobs move to another. Instead, you get Germany trying to put other countries in servitude. Something I haven't seen discussed is the poetic justice of it given how Europe screwed Germany over after the first world war, but that's a different topic altogether.

          The larger point of course is that the more free people are to move capital at a whim, the more vulnerable any one individual and especially small country is to the whims of extremely big money investors.

  •  As long as labor (24+ / 0-)

    cannot move freely across borders, the movement of capital needs to be restricted as well.

    "Let’s just move on, treat everybody with firmness, fairness, dignity, compassion and respect. Let’s be Marines." - Sgt. Maj Michael Barrett on DADT repeal

    by kyril on Mon Mar 25, 2013 at 05:20:17 AM PDT

    •  In the case of the EU (2+ / 0-)
      Recommended by:
      Loge, kyril

      labor is, relatively speaking, free to move, and it isn't going to save Cyprus, which is destined to become an emigration country.

    •  Theoretically correct (3+ / 0-)
      Recommended by:
      AoT, mkor7, kyril

      The reality is that, human beings being human and all that, there are endless social reasons  why labor can never flow freely.  That's not to say that by mid-century we should expect fewer than half a billion economic semi-nomads flooding back and forth across the face of the earth.  It does tell us, as just one facet of the problem, that as that number of transient workers grows, so will the levels of hostility and resistance they will encounter from sedentary workers wherever they may go.  Routine outbreaks of large-scale communal violence between migrant and settled workers will almost certainly be characteristic of the 21st century in most of the world.

      Ever get the feeling you've been cheated?

      by ActivistGuy on Mon Mar 25, 2013 at 09:33:44 AM PDT

      [ Parent ]

  •  It looks more like (9+ / 0-)

    Krugman finding a way to defend the Troika.  

    I have been really surprised at the way Cyprus and Greece have been demonized, especially when Cyprus is not the only country to pump up its banking system.  Their banking assets were 8x their economic output. In Luxemborg, it's 24x and yet they are not demonized.  Why? Because they are northern Europeans?

    The Cyprus government was not irresponsible or spending out of control.  In fact they had no problems in that arena.  But they are southern Europeans and it's all the rage in northern Europe to look down on southern Europeans and "teach them a lesson".  It seems like widespread bigotry, borderline racism.

    Krugman is looking for a silver lining in a very bad situation, I guess.  There is no shortage of people writing about the downside of all of this.  But it's odd, given that the entire Eurozone was damaged by the insistence of Troika that Cyprus come up with 5.6 billion euros, about .06% of the EU economy, because Angela Merkel is worried about her reelection, that he is looking for an upside. And the thing he focuses on, capital controls, which are going to be very disruptive... Take a look at this article, titled "The broken euro", which plays out some scenarios related to these capital controls.  Also note that the Troika says the capital controls are short term, but that has not been the case in Iceland and Argentina.   And Krugman talks about how the effect might be less capital flow but one of the main purposes for the EU's very existence is to make capital flow between EU countries easier.

    I just find it to be an odd article by Krugman, but then again it wouldn't be the first time that he went off on an odd tangent at an odd time.  If you read the article that I linked, it will become more clear why I think Krugman is kind of off the wall on this.


    "Justice is a commodity"

    by joanneleon on Mon Mar 25, 2013 at 05:27:00 AM PDT

    •  One other thing (9+ / 0-)

      Last week, one of the Cyprus MPs, from their Green party, I think, said he would not vote because the package had "loopholes". I've seen no further reporting on this but if there are loopholes, eventually it will come out.  I assume he meant that there were some people who would be exempted from the "haircuts" or the capital controls.  I'm waiting for more details.  All of this is still not ironed out, nor has it been approved by the authorities in the EU, nor will it, apparently, solve all the problems.


      "Justice is a commodity"

      by joanneleon on Mon Mar 25, 2013 at 05:39:03 AM PDT

      [ Parent ]

    •  Luxembourg is not demonized because (5+ / 0-)

      of their capital ratios.

      The tiny country is home to an incredible $144 billion of US Treasuries.

      http://www.treasury.gov/...

      That is about $200,000 per person.

      Lesson - buy US debt and avoid Greek debt.

      "The way to see by faith is to shut the eye of reason." - Thomas Paine

      by shrike on Mon Mar 25, 2013 at 06:03:17 AM PDT

      [ Parent ]

      •  Luxembourg was also (0+ / 0-)

        the only country supporting Cyprus over the past week.  It seems like the combination of the French Left and German Right is, at the moment, lined up against over-financialization and the business model of tax avoidance.

    •  You should read his latest blog post (5+ / 0-)

      The long and short of it is that he thinks deal is most likely a giant heap of bovine excrement from the standpoint of Cyprus and currency theory. They'll be stuck on a currency they don't control and can't devalue (the euro), but their currency isn't even as good as the currency that they are stuck with in name, due to capital controls making it harder to actually use their currency when and where they please within the union. So the "Cyprus Euro" will be strictly inferior version of the Euro everyone else is using, giving Cyprus almost none of the benefits of the currency union but almost all of the downsides.

      The Eurozone may have topped themselves in how awfully they have handled things with this one. Not to mention the fact that the Russians are going to be positively livid over this, due to how much they stand to lose when the uninsured deposits of the failing banks are having huge chunks taken out of them.

    •  I would guess (3+ / 0-)
      Recommended by:
      joanneleon, AoT, elginblt

      that Iceland is a "northern European" place that the anti-Mediterranean bigotry that the financial establishment uses to rally support doesn't get much traction.  After all, what the German and Benelux bankers dread is two, three, five more Icelands rejecting the hegemony of globalized capital, in Greece, Cyprus, Spain, Portugal, Italy and Ireland.

      Ever get the feeling you've been cheated?

      by ActivistGuy on Mon Mar 25, 2013 at 09:42:14 AM PDT

      [ Parent ]

  •  Great diary, as always, teacherken, however... (13+ / 0-)

    I think Krugman's article, while insightful, shows a major blindspot by--in some sense--depicting Cyprus, not as a nation with a populace who suffer and dream like we all do, but as an instrument to correct neoliberal error. I would really recommend everyone who is interested in the crisis du jour look at Naked Capitalism's coverage of the crisis: it's sobering, informative, and discredits many biases that are regularly portrayed in the media.

    What is happening in Cyprus, like everywhere else, it a totally optional crisis. The option is not given to the demos, obviously, but to the corrupt and ideological bankers, politicians, and trokia angels of destruction.

    An optomistic estimate has Cyprus' national wealth being roughly halved, and the immediate hit to gdp in the 20-30% range, followed by a decade or so of austerian mysery. That's probably an unrealistically hopeful scenerio.

    Another nation destroyed so that very important people don't have to admit fault. Another day passes, another day closer to the next crisis...

    •  I expect bobswern to weigh in (11+ / 0-)

      probably with something from Yves Smith, and since he does so with regularity I usually don't spend a lot of time over there.

      I think you are a bit unfair to Krugman.  There is, after all, only so much you can cover in the length of a print op-ed, and he had a lot to put out to provide the framework for his analysis.  Based on other things he has written and said, I have no doubt about his concern for the impact upon ordinary people.

      But this points at another issue, one at which I only hint in the diary, and that is the loss of meaningful democracy as control of governments is increasingly removed from the votes of the people - this can be by negotiated international agreements, it can be by mayoral control of school systems gutting the power of elected boards, it can clearly be seen in the Michigan legislature ignoring the clear will of Michiganders and reinstating an emergency manager law - this time in a fashion deliberately NOT subject to being overturned by initiative and referendum.  Another clear example is when the corporatist State Superintendent of Education in Indiana was solidly defeated by a long-time teacher - who got more votes than did the incoming governor - the legislature ignored the clear will of the people by moving to gut the authority of her office and give it directly to the control of said governor to thereby continue the policies just rejected by the voters.

      "We didn't set out to save the world; we set out to wonder how other people are doing and to reflect on how our actions affect other people's hearts." - Pema Chodron

      by teacherken on Mon Mar 25, 2013 at 06:07:03 AM PDT

      [ Parent ]

      •  On the other hand, (2+ / 0-)
        Recommended by:
        ColoTim, shaharazade

        when the People's own actual physical assets are used as collateral to secure a country, when they share only in the losses and not the gains with regard to those assets, maybe it will have the effect of greater participation in and demand for the democratic process.  I doubt it will be without struggle, but the issue is forced to a head.

        •  we can hope, but remember (6+ / 0-)

          we are already seeing serious moves to disenfranchise many.  Unless and until the vast middle class grasps how badly they are being screwed by this process I do not know how it changes.  

          "We didn't set out to save the world; we set out to wonder how other people are doing and to reflect on how our actions affect other people's hearts." - Pema Chodron

          by teacherken on Mon Mar 25, 2013 at 06:32:19 AM PDT

          [ Parent ]

      •  I have a real problem with it (2+ / 0-)
        Recommended by:
        ratzo, shaharazade

        They are taking depositors money to pay German Bond Holders. How is this good in any possible manner?  Given how both our country's and the EU's past of protecting the banks at all cost, the argument that somehow there is a higher meaning to this in terms of capital flow has to be ridiculed especially since we know  what the confiscation of deposits will be used for.

        Apparently austerity ( making people miserable) wasn't working well enough for the Bond holders , so rather then wait a moment longer they decided that just taking the money from people  to satisfy the demands of the German Bond holders who normally take second place to depositors money when a bank goes bad.

        This has nothing to do with Capital flows at all and everything to do with banks dictating policy to sovereign nations  that have suffered immeasurably because of the banks behavior .

        Lets not forget that Cyprus was forced by the EU to buy Greek bonds. They suffered a corresponding haircut and were unable to make payments on their own bonds. This is the primary reason Cyprus is in trouble.

        The whole thesis in Krugman's  higher order "analysis" is an exercise in candy coating turds.

        “ Success has a great tendency to conceal and throw a veil over the evil of men. ” — Demosthenes

        by Dburn on Mon Mar 25, 2013 at 07:03:38 AM PDT

        [ Parent ]

        •  German bond holders? What? (1+ / 0-)
          Recommended by:
          theran

          Please link FT, Bloomberg, NYT, WSJ or something credible.

          (Not NC).

          "The way to see by faith is to shut the eye of reason." - Thomas Paine

          by shrike on Mon Mar 25, 2013 at 07:19:01 AM PDT

          [ Parent ]

          •  Why ? (0+ / 0-)

            So if I linked to Daily Kos that wouldn't be seen as credible in your eyes?

            Link to the New York Times on news about WMD in Iraq maybe?

            “ Success has a great tendency to conceal and throw a veil over the evil of men. ” — Demosthenes

            by Dburn on Mon Mar 25, 2013 at 03:42:38 PM PDT

            [ Parent ]

        •  What bond holders? (4+ / 0-)
          Recommended by:
          shrike, ferg, PatriciaVa, AoT

          The fact that most of the external liabilities were bank deposits is the source of the losses on said deposits...

          •  Huh? (0+ / 0-)
            The Europeans, with the Germans and the IMF taking a particularly hard line, demanded the winding up of Cyprus Popular Bank, the country's second biggest, and the restructuring of Bank of Cyprus, the biggest financial institution.

            The parties considered new proposals that had emerged over the weekend with European officials speaking of a levy of up to 25% on Bank of Cyprus depositors with accounts holding more than €100,000, plus a further levy of up to 5% on similar deposits in other banks.

            "The numbers have not changed. If anything they've got worse," said Wolfgang Schäuble , Germany's finance minister. He said that last week's agreement to raise €5.8bn had to be achieved. This time, however, savers with less than €100,000 would be spared, meaning the burden would fall much more heavily on the wealthy than the 9.9% levy proposed for their accounts last week.

            Do you want to describe how deposits can be external liabilities?  

            They are using the deposits to pay down senior bond holders many of which come from Germany. Instead of risking a haircut like what happened in Greece, Germany is along with the EU are dictating terms to a sovereign to wipe 25%+ out of depositors accounts to senior bond holders. Deposits in a bank only become worthless assets to the depositor  when banks use the deposits to gamble or in this case go around parliament to order banks to take money out of depositors account to pay senior bond holders.

            Maybe in this case when banks where told to buy Greek bonds to show EU solidarity and then found they had no liquidity . Then taking bail out money from the German Banks who were instrumental in forcing the Greek bonds down the throat of the Cyprus banks. Now they want their bonds paid first as they see there is no equity cushion, by depositors.

            They are talking about taking money, large chunks of it, from people who have over 100,000 Euros on deposit that fall outside of the parameters of deposit insurance. Lets not forget that many times, 200,000 Euros of $260,000 dollars may be the life savings of some middle class worker. Very few Russian Oligarchs are worried about  such a small amount of money.

            Let get past the theoretical and ask your self how you would feel if $50,000 disappeared over night from your deposit account or say your business account to cover wealthy senior bond holder obligations from another country mostly Germany and German Banks. How would you feel if the banks were completely closed and you couldn't make payroll?

            Ignore the worldwide repercussions of this at your own peril if they follow through. This is the stuff that Bank panics are made out of as in if they do it in Cyprus what protects any depositor anywhere.

            “ Success has a great tendency to conceal and throw a veil over the evil of men. ” — Demosthenes

            by Dburn on Mon Mar 25, 2013 at 04:02:51 PM PDT

            [ Parent ]

      •  I don't mean to criticize you or him (2+ / 0-)
        Recommended by:
        AoT, elginblt

        I am very aware of the limits on writers, which is why I intend my comments as an addition to, not a corrective of, yours.

        It is important to make the sufferings of Cypriots the central part of any narrative on the crisis. Like the feminist critique of men who say that women are mothers, wives, daughters, etc... and that is why men should support women's rights (yes, but there is a better reason--they are people), I am wary of rhetorizing a class of people as instruments to aid the enlightenment of western men. Cyprus, like soylent green, is made of people, and we should never let the austerians forget it.

        I also lack Paul's optimism about this being a watershed moment. The eurocrats have a pattern of fucking everything up as much as possible short of a full blown financial crisis. They think this operation is a success and model for the future (check their latest comments). They won't admit error any sooner than Judith Miller will retract her claim that she was proven fucking right about Iraq.

  •  Krugman is full of shit on this one (0+ / 0-)

    Cyprus is fucked, and all the window dressing in the world isn't going to fix it. Capital is going to do one thing, exit the country as quickly as possible and never return.

    •  And that is a good thing in general (6+ / 0-)

      (not so much for Cyprus).

      Fractional reserve banking is a communal endeavor by nature.  Our deposits are loaned to others to build community wealth and is compounded over and over again.

      To work there must be strict supervision or financial panics occur and evaporate wealth.  Canada is comprised of TBTF banks that are properly regulated and they escaped the financial disaster of 2008 altogether.

      The Mitt Romneys of the world give their countries a big FU when they move their money offshore.

      "The way to see by faith is to shut the eye of reason." - Thomas Paine

      by shrike on Mon Mar 25, 2013 at 06:20:11 AM PDT

      [ Parent ]

      •  How much communal pooling of wealth (1+ / 0-)
        Recommended by:
        ratzo

        will there be when govts have decided that arbitrarily raiding the pool of deposits is acceptable?

        Would you ever invest or save money in Cyprus after this?

        •  that's not the proposal at all (6+ / 0-)

          The current proposal is basically the following:

          1. Split the bank into a "good bank" and a "bad bank".

          2. Bad assets and uninsured deposits (over $130k) go to the "bad bank".

          3. Good assets and insured deposits go to the "good bank."

          4. Bond-holders wiped out.

          When the "bad bank" sells its assets, the uninsured deposits get paid. The estimate is a 30% loss, but no one really knows.

          That's not the government raiding anything; it's a managed liquidation of the bank.

          The Irish should have done something similar.

          •  The original proposal (2+ / 0-)
            Recommended by:
            limpidglass, mkor7

            (what someone thought was a good enough idea to go public) was that all depositors (insured or otherwise) would take a 6-10% loss.

            After public outcry, they've come up with plan 2.0 which is basically that large depositors eat all of the losses. While all of these machinations are going on, everyone (even those with insured deposits) is locked out of access to their funds in Cypriot banks.

            The damage has already been done, regardless of what plan they adopt. Money is not safe in Cyprus and anyone that has any sense is going to move all of their funds out of the country.

            •  this deal effectively breaks Cyprus off (3+ / 0-)
              Recommended by:
              VictorLHKOS, Remove Kebab, mkor7

              of the eurozone. Whatever the troika may say about preserving the EZ's integrity, the currency union is functionally severed. Thanks to the capital controls, euro in Cyprus is no longer worth the same as a euro in France.

              No one will put money into Cyprus because you're no longer allowed to take it out. So the flow both ways is restricted. Those Cypriots of means will find a way to smuggle it out against the prohibitions. Everyone else will have to pay a huge premium to have euros smuggled in, or start using alternative currencies. So we will soon have a thriving black market of currencies, encouraging criminality to flourish. And people were so pissed about "Russian oligarchs" using Cyprus as a "tax haven"!

              The economy will be shot because the banks comprised so much of it. On top of that you'll have deflation because euros won't be coming into Cyprus and there won't be enough euros for people to use for their daily needs, and I don't expect the ECB will be too keen on expanding the supply of euros in Cyprus.

              No one will be keen to put any money in any banks in Cyprus, so banks will stop lending, and credit will get tight. The economy will tank thanks to the austerity that's part of the deal, and Cyprus will need a second bailout in maybe a year or so.

              Because people will have a strong incentive to use alternative currencies, and Cypriot taxes are collected in euros, tax revenue will decrease. This means the deficit will rise and so the debt will never have a chance of being repaid.

              Of course the deal authorizes:

              Any other measure which the Finance Minister or the Governor of Cyprus Central Bank see necessary for reasons of public order and safety
              In other words, Cyprus is now under dictatorship, to make sure  this truly horrendous deal is enforced. Then when unrest breaks out, we'll be told that it's just those unruly Cypriots, who can't possibly be trusted to govern themselves.

              When the time comes for the next bailout, what incentive will Cyprus possibly have to cut a deal with the troika? Better for them to leave the eurozone than have to endure this, they may reason. They came damn near leaving it this time.

              The troika had to destroy the euro in order to save it. And whether they're willing to admit it or not, they have destroyed it.

              "In America, the law is king." --Thomas Paine

              by limpidglass on Mon Mar 25, 2013 at 08:30:30 AM PDT

              [ Parent ]

          •  Uninsured deposits of Laika are likely to be (2+ / 0-)
            Recommended by:
            ferg, Remove Kebab

            a total loss.  The uninsured deposits of the major bank will get a 30-40% haircut, from the estimates I've seen.

    •  Cyprus has 400 bill in Natl Gas & 1 mil people, (0+ / 0-)

      they're the new small Saudi Arabia.

      80 % of Success is Just Showing Up!.....The Climate Change Denial Era........IS OVER.........Welcome to......CLIMATE HELL!

      by Churchill on Mon Mar 25, 2013 at 07:50:06 AM PDT

      [ Parent ]

    •  Black Market for Cypriot Euros (1+ / 0-)
      Recommended by:
      limpidglass

      A market will have develop within a couple of weeks.

      Someone with 2M will seek to transfer the money outside of Europe, and ask for takers.

      At that point, we'll have the f/x rate for a Cypriot Euro vs. a Euro.

      Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project. www.hamiltonproject.org

      by PatriciaVa on Mon Mar 25, 2013 at 08:27:01 AM PDT

      [ Parent ]

    •  What part of "Capital controls" did you not (1+ / 0-)
      Recommended by:
      elginblt

      understand? Maybe I'm reading this wrong, but the whole point is that capital can't flee because there are restrictions on capital.

      •  I guess I'm missing the part (0+ / 0-)

        where it approaches anything close to a "good" thing.

        Capital will flee, at whatever rate it can, and by whatever means are available. Unless they have proposed a system where they have basically seized all of the depositors funds (as in you can't do anything with your own money) people are going to do everything they can to get it out of the system.

        We're seeing the disintegration of Cyprus, and possibly the entire EU in the weeks/months to come.

  •  These high-speed capital flows (4+ / 0-)
    Recommended by:
    Egalitare, Temmoku, theran, ferg

    are what the Tobin Tax was designed to curtail.

    If I ran this circus, things would be DIFFERENT!

    by CwV on Mon Mar 25, 2013 at 06:20:00 AM PDT

  •  It could also be the start of something worse (2+ / 0-)
    Recommended by:
    J M F, shaharazade

    #1) This money wasn't taxed by the Cyprus government; it was seized by a foreign government

    #2) The bailout bill will not be voted on by the Cyprus government

      There are far too many negatives to accept Krugman's positive.

    ¡Cállate o despertarás la izquierda! - protest sign in Spain

    by gjohnsit on Mon Mar 25, 2013 at 06:33:02 AM PDT

    •  I think you are misreading his intent (7+ / 0-)

      he sees the positive as the possible change in climate on attitudes towards unrestricted flow of capital.  He notes that the international financial community now at least tacitly accepts what Iceland did - and Iceland is now financially stable.

      Cyprus actively encouraged inflow of unchecked capital, which makes the local situation far worse - and yes, the ordinary Cypriot is going to get badly screwed one way or another.  It also does not help that two banks basically control the financial transactions of the nation, and both are heavily involved in what has happened.

      Where I do not think Krugman goes far enough is that anytime the profit motive is allowed to operate unchecked we will see abuses.  Have we so forgotten our own savings and loan debacle?  

      "We didn't set out to save the world; we set out to wonder how other people are doing and to reflect on how our actions affect other people's hearts." - Pema Chodron

      by teacherken on Mon Mar 25, 2013 at 06:38:17 AM PDT

      [ Parent ]

      •  I get it (4+ / 0-)
        Recommended by:
        orlbucfan, PatriciaVa, shaharazade, mkor7

        It's just that Krugman is seeing a glass half-full, when I think it is about 90% empty.

          Cyprus is heading for a very deep depression. No one will ever trust their banking system ever again, at least not in our lifetimes. This important move bypassed the democratic process. And lots of people in Cyprus had their savings seized.

          That's a lot of negatives to just focus on a single positive.

        ¡Cállate o despertarás la izquierda! - protest sign in Spain

        by gjohnsit on Mon Mar 25, 2013 at 06:50:52 AM PDT

        [ Parent ]

  •  TK, did you check out the 'comments' (2+ / 0-)
    Recommended by:
    the fan man, mkor7

    thread to Krugman's column? There are some beauts in it. Basically, the comments were all about the lords vs. serfs, and the destruction caused by unbridled human greed. I wish I could share Krugman's optimism; I don't. T and R!!

    Some people make u want to change species! --ulookarmless, quoted w/his permission: RIP good man.

    by orlbucfan on Mon Mar 25, 2013 at 07:04:41 AM PDT

  •  I think it's a doomed strategy (2+ / 0-)
    Recommended by:
    ferg, mkor7

    Any effort to control the corporations at the national level is doomed to disaster. Corporations (all of them, not just the banks) are global.  National governments (even big and powerful ones like ours) are not. Anything we do to them here, they can avoid in a heartbeat simply by pulling up stakes and moving somewhere else. The corporations own the entire chessboard and can move their pieces wherever they want--national governments only own one or two squares.

    Any meaningful control over multinational corporations simply CANNOT happen at the national-government level. The corporations are global, and control over them must be global as well.

    Currently, there is only one option available to do that---write those controls into the very same global economic structures that govern international trade and the institutions that enforce them---GATT, WTO and IMF. But in the long term, we need new international economic bodies with the authority and ability to control the corporations anywhere on the chessboard. And we need those to be democratic and controlled by people--which they are not now.

  •  It may be simplistic, but I've come to the (5+ / 0-)

    conclusion that money, instead of being used as a public utility, has been employed to control the population. Congress, which is tasked with managing the currency, has promoted this control effort by rationing the supply, making a figment of the imagination or a symbol of value artificially scare.
    I've compared it to arguing that because there aren't enough marriage certificates at hand, some people (depending on their gender) can't be certified as married, even though matrimony is a private relationship between two people.
    Dollars are certified IOUs. Not having enough to certify all transactions, puts a crimp in economic enterprise. In other words, Congressional rationing has impeded exchange and trade. AND, since rationing prompts hoarding, has had a negative effect on private corporations, as well.
    Corporations aren't made insecure by the prospect of having to return some of the currency back where it came from in the first place; they are made insecure by the prospect of not getting any more, because the Congress keeps rationing, according to their irrational calculations on who's most likely to re-elect them.

    Congress has been using the dollar for political purpose, even as it maintains the pretense that the Federal Reserve and the Treasury and the President are to blame. Congress spends currency into the economy. Federal taxes are levied for the purpose of ensuring that the currency circulates and gets recycled at a good rate.
    That the currency hasn't been moving at a good rate, can be seen in this graph:

    You can see clearly the effect of the stimulus in 2009.

    We organize governments to deliver services and prevent abuse.

    by hannah on Mon Mar 25, 2013 at 07:22:36 AM PDT

    •  repost as its own diary (2+ / 0-)
      Recommended by:
      shaharazade, middleagedhousewife

      to give it more visibility

      then feel free to link to it here

      "We didn't set out to save the world; we set out to wonder how other people are doing and to reflect on how our actions affect other people's hearts." - Pema Chodron

      by teacherken on Mon Mar 25, 2013 at 07:23:36 AM PDT

      [ Parent ]

      •  Thanks Ken, but I've already made the (7+ / 0-)

        point in my own diaries. I used to think that three exposures to a new idea are needed to even register. Now I think it's even more.

        When we were first blogging at BFA, it used to take the MSM six months, sometimes, to come forward with the same information and that was quick. I don't think the rate has increased much since. There are still layers and layers of editors who have to approve stories, never mind that some of them insist on assigning topics and when the stories don't have the slant they expect, they just chuck them in the can.
        There's a sort of institutional inertia.

        When it comes to money, we have a very short history of even talking about it. Money, like sex, didn't use to be talked about. I can still remember a time when husbands drove their wives shopping because the wives couldn't be trusted with money. I can still remember shopping for a new car and the salesman not wanting to show me one because my husband wasn't along. I can still remember applying for a mortgage and being told I wasn't qualified to apply because I didn't have a job and, besides, the house was in the wrong neighborhood.

        We have made progress, but there's a lot of educatin' to do. The banksters have no incentive to make their enterprise less mysterious. I actually think they made a big mistake inventing new "investment vehicles" so they could get rich on fees. These "vehicles" turned out to be lemons and now, like the Pinto, will result in new regulations being imposed.

        My point is that repetition is all!

        In case you missed them:

        http://www.dailykos.com/...

        http://www.dailykos.com/...

        http://www.dailykos.com/...

        http://www.dailykos.com/...

        We organize governments to deliver services and prevent abuse.

        by hannah on Mon Mar 25, 2013 at 08:19:18 AM PDT

        [ Parent ]

        •  reminds me of a friend back in early 70s (2+ / 0-)
          Recommended by:
          shaharazade, hannah

          in her late 20s she had founded her own successful ad agency in Philadelphia.  To get her original line of credit several of the clients moving for her vouched for her at their own bank, and on that basis she got the line of credit even without their formally guaranteeing it.

          She then decided about 8 months later that she wanted to buy a townhouse close to her office.  Her business was booming.  But the same bank refused her the mortgage because as a single woman there was no guarantee of her income!

          As a result, they not only failed to get her personal financial business, but when she found a bank that would give her the mortgage she moved her business's finances as well.

          "We didn't set out to save the world; we set out to wonder how other people are doing and to reflect on how our actions affect other people's hearts." - Pema Chodron

          by teacherken on Mon Mar 25, 2013 at 08:23:48 AM PDT

          [ Parent ]

  •  On his blog (2+ / 0-)
    Recommended by:
    shrike, mkor7

    Krugman talks about how Cyprus basically has the worst of all worlds: a crippled financial system with a (de facto) non-convertable currency that's also pegged to the Euro.

    The crisis in Europe is, at the moment, now quiescent.  The twin specters of lines at ATMs in Barcelona and Milan and Russian navy ships in Cyprus didn't actually materialize.  The French left gets to say that it stood up to TBTF and Russian petrocrats and the German Right gets to say it dumps the losses on Russian gansters and miscellaneous tax evaders.

    On the other hand, the crisis in Cyprus is probably just getting going.  The current setup is basically a test of what would have happened if Citigroup failed messily---and the US had no other economy at all besides financial intermediation to fall back on.

    Besides all the direct job losses from unwinding the hot money businesses, the operating accounts of anything medium-sized will take a hit, most activity will switch to (probably increasingly scarce) cash until accounts in safer countries can be set up, and anybody who can will emigrate.

    This doesn't look like it's going to go well.

  •  People often use their money in anti-social ways (2+ / 0-)
    Recommended by:
    ferg, theran
    the assumption that if financial markets want to move money across borders, there must be a good reason, and bureaucrats shouldn’t stand in their way.
    Good reasons for people to move money across borders isn't the same thing as good reasons for societies to move money across borders. From evading taxes to evading regulation, people have plenty of anti-social reasons to move their money around.
  •  According to the Guardian (1+ / 0-)
    Recommended by:
    shaharazade

    The capital controls will go within a week

      http://www.guardian.co.uk/...

    At which point, everybody will sign up for some kind of online account in Germany that comes with a Girocard.

  •  If this starts slo-mo bank runs in the peripheries (0+ / 0-)

    it's the end of the EU.

  •  TL;DR (0+ / 0-)

    The start of something wonderful?

    A crackdown on the institutionalized corruption in some European countries that would send a PRI bureaucrat (or a Republican, same thing) to the fainting couch?

  •  If Krugman supports something, the right will (0+ / 0-)

    automatically reject it.  It's almost as uniform in opposition as President Obama gets from Congress.

  •  The old man in the library said, (1+ / 0-)
    Recommended by:
    BlueDragon
    "Accumulate, accumulate, accumulate, this is Moses and the prophets!"
    Of course, he was, as always, entirely wrong about everything.

    Ever get the feeling you've been cheated?

    by ActivistGuy on Mon Mar 25, 2013 at 09:16:55 AM PDT

  •  i doubt this particular insight (0+ / 0-)

    will go far towards helping anything at all

    my instinct is that cyprus will rather be a negative model for the rest of us

  •  one word (sort of): bitcoin (0+ / 0-)

    here

    here

    and here.

    not just for silk road users anymore.  more and more companies are allowing payments via bitcoin.

    drone strikes in Pakistan = Sandy Hook Elementary x10.

    by bnasley on Mon Mar 25, 2013 at 09:56:10 AM PDT

  •  Could argue? (1+ / 0-)
    Recommended by:
    mkor7
    In fact, one could argue that the primary role of government in the eyes of free market ideologues was to facilitate the accumulation of wealth and power by certain financial interests and to protect them and their corporate partners against any liabilities, civil or corporate.
    I think that exact sentiment is engraved on the Wall Street Bull statue's right horn.

    For Christ's sake, let's help more of our frightened people get through this thing, whatever it is - Kurt Vonnegut on our "faithless custodians of capital"

    by Anthony Page aka SecondComing on Mon Mar 25, 2013 at 10:02:08 AM PDT

  •  Krugman is so far out of his depths on this (0+ / 0-)

    He's trying to make a point but missed the boat.

    The Cypriot economy is destroyed, a whole population is imprisoned, and the roots of the disaster rest in a vendor-financing scam that was uncovered over 5 years ago.

    The money flows back then went to corrupt Greeks, and Cypriots, but also bank CEOs and corporate CEOs in Germany and France, and none of them felt the pain. It was passed on to the taxpayers of Europe, and the Greek common people, and now the Cypriots (and Russian depositors of course).

    Krugman's point papers over the theft.

    But even worse, it's oh so convenient to make such an argument about bankers getting killed now, AFTER German and French bank sector exposure in Greece and Cyprus has been reduced to near zero.

    So, yes, sink the investors and the risky depositors, but why does such wisdom arrive late? After certain investors and depositors are made whole?

    The Cyprus move reinscribes the theft by banks because the big investors recover all their money. Who loses? Middle class Russians and Cypriots.

    If Krugman just scratched the surface a little more, he'd realize that there is no senior paper in Cypriot banks--they don't sell their own bonds. There are no investors to soak.

    And that's why the EU went after the depositors.

    There are two kinds of people in this world. The kind who divide the world into two kinds of people, and the kind who don't.

    by upstate NY on Tue Mar 26, 2013 at 08:28:17 AM PDT

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