During the financial crisis of 2008, most of us became very familiar with the term “bail-out.” Banks that were considered “too big to fail” – i.e. vital to the stability of the national economy – received truckloads of taxpayer dollars to keep from collapsing.
We now need to become familiar with a new term: “Bail-In.”
Thanks to the widespread disgust and public resentment that bank bailouts created, politicians have been trying to figure out a better way to prop up irresponsible but important financial institutions. The “bail-in’ answer was originally proposed close to a decade ago, most prominently in 2010 by The Economist, and first implemented on a large scale in 2013 during the Greek banking failures. It was adopted as the official policy of the EU in 2016.
During a bail-out, outside investors (either private or public) fill the hole in the bank’s balance sheet to keep it afloat. During a bail-in, no outside investment is required, because, guess what? Banks already have a lot of money. Other people’s money.
If that sounds like the government will be allowed to use depositors’ money to pay for the bank’s mistakes, you’ve got the right idea. According to legislation recently adopted in Canada, “bank shareholders and creditors are responsible for the bank’s risks — not taxpayers.” During the 2013 Cyprus bank bail-in, “the creditors in question were bondholders, and depositors with more than €100,000 in their accounts.” However, that €100,000 threshold was arbitrary; in a future crisis, it could just as easily be 1,000 or 100.
Economist Martin Armstrong has been waving a red flag about bail-ins for some time. In 2015, he pointed out one of the obvious contradictions with the creditors vs. taxpayers claim: “But wait a minute — aren’t taxpayers the people with deposits in banks? The bottom-line here is that they will just take your money to save bankers.”
As crude as that sounds, it’s hard to fault the logic. The creditors of a bank are its shareholders, bondholders, and depositors; a lineup that brings to mind the old saying about two wolves and a sheep voting on what to have for dinner.
Armstrong has also pointed out a parallel trend that supports the ability of governments and banks to perform bail-ins: the move to electronic money. He writes, “Eliminating cash accomplishes two things: (1) they get to tax everything, and (2) you cannot withdraw money from banks.”
If you’ve ever watched the classic Disney film, “Mary Poppins,” you’ve seen a vivid illustration of a “bank run.” In the story, a banker is encouraging his son to deposit tuppence (two cents) into the bank. The boy resists, and starts yelling for his tuppence. The other customers of the bank get spooked, worried that they will not be able to get their money either. They quickly line up and demand to withdraw their money. Thanks to fractional-reserve banking, there isn’t enough cash on hand, and ultimately, the scene turns into a near-riot.
Electronic money solves that problem for banks, because without the expectation of being able to withdraw cash, depositors don’t have a way to physically withdraw their money. According to Bank of America, in 2016, a whopping 62% of Americans “cited digital banking as their primary method of banking, up from 51 percent in 2015.” With digital wallet technologies like Apple Pay and Google Wallet gaining ground in the West, and mobile payment platforms WeChatPay and AliPay closing in on a billion users worldwide, consumers are rapidly becoming completely reliant on assets that only exist as digital ones and zeroes.
Although the change has happened gradually, it has gotten to the point that cash is now viewed with suspicion by police, customs agents, and even the general public. Where once it was perfectly normal for people to save up cash to buy a car or even a house, now simply being in possession of cash is considered proof of wrongdoing. This has been (pardon the pun) a cash cow for municipalities, as police have been empowered (and recently re-empowered) to seize cash through civil forfeiture for no other reason than that they see it.
Some pundits have called this “the war on cash.” Indeed, Bloomberg magazine has advocated for the abolition of cash, and Louisiana even went so far as to completely ban the use of cash at flea markets and yard sales. Even if all these policies are actually aimed at reducing crime, the unintended consequence is that law-abiding citizens are completely dependent on a very fragile system that relies on computers, satellites, and an absurdly vulnerable electrical grid.
While advocates of precious metals and cryptocurrencies argue in favor of alternatives to conventional money, anyone who has tried to buy food or gas in the aftermath of a natural disaster or power outage has probably learned a very simple lesson: cash is still king. History has shown that, when the lights go out, whether because of a hurricane or a civil war, you can’t eat gold, but you can probably find a local grocer or farmer who will still accept recognizable paper money.
With authorities increasingly scrutinizing cash, the glocal economy rapidly shifting to fully-electronic transactions, and bail-ins looming as a risk for anyone with money in the bank during the next (inevitable) financial crisis, it just might be time to think about making some withdrawals, or – better yet – investing in independence, instead of in the system.