Long-term rates, the 10-year T-note and mortgages are approaching their 2013 lows because of Cyprus — which could disappear in a volcanic explosion (as did nearby Thera) and do no particular harm to the global economy.
New U.S. data is all housing, and debatable, although optimistic voices drown all others. The builder-opinion index (NAHB) actually fell a few points in March. Rising measures of prices are distorted by the drop in distressed sales and rise in normal ones. There is no question that housing has now turned upward, but Morgan Stanley’s caution is dead on: “The uptrend is likely to be shallow… credit is still hard to get.”
Buried in the Cyprus story is one terribly important matter, but it’s deep down. The news on the surface has been mangled all week long: Those mean Germans want to skin Cypriot depositors before giving aid to Cypriot banks, and the precedent means trouble for any other Europeans sporting a tan.
Upon excavation, it seems that Cypriot bank deposits are about seven times the GDP of Cyprus, roughly $41 billion, of which about half have been misplaced in unfortunate loans in Greece.
However, most of the deposits — by some estimates, up to two-thirds — are not Cypriot. They belong to Russian oligarchs and gangsters. Since the time of the Czars, and then the Soviets, nothing has so annoyed Russian nobility as someone stealing from them something that they had already stolen. Vladimir Putin’s howl of protest at a depositor haircut is comedy as black as his heart.
Even if Northern Europeans refuse to bail out the Cypriot banks, and over this weekend they close for good, contagion to the rest of Club Med is remote and no precedent will have been set. But Europe’s real situation is precarious and deteriorating, and any eurozone accident reminds markets of the overall sham.
Now, the important part.
Ever since the summer of 2007, the West has been caught in the greatest bank run of all time. In the crisis still underway, the idiot Left and idiot Right have agreed on only one policy prescription: Don’t bail out banks. Let ’em fail. Bust up the big ones and then let the pieces fail. No taxpayer money. Elizabeth Warren and Rand Paul, all aboard (Oh, to watch them share an office!).
But, as satisfying as let-’em-fail revenge could be, “No bailouts!” has been too rough on academic and European ears, thus the nouveau term, “bail-in,” meaning losses to be taken internally. Everyone agrees that bad-bank stockholders should lose all, and so it was with Lehman, et al. The argument begins with holders of bank bonds, long-term IOUs of the banks. The bail-inners think they should be wiped out, too.
Yet, sensible bank regulators know that banks are safer the more their liabilities are long-term, not just “hot money.” Long-term money can’t run.
Since 2007 in the U.S. we have protected bondholders as we have depositors, on the theory that if we wipe them out, we’ll make the run worse, and nobody will again take banks’ long-term IOUs. If you want to stop a run, you make depositors — and bondholders — feel so safe by government guarantee that they won’t run.
Either stop the run by throwing in new money and guarantees, or risk losing the system altogether.
The bail-inners and let-’em-failers are certain that if we punish bondholders, then they’ll take IOUs only from solid banks, moral hazard will be restored, and we won’t have any more failed banks for taxpayers to worry about. These hardheads cannot understand that banks so sound will not generate credit for taxpayers, either.
Denmark has engaged in bail-ins, and the jury is out, credit imploding. The Netherlands is fiddling with bail-in, led by Finance Minister Jeroen Dijsselbloem, who is also president of the euro-area finance ministers. He insists — with company — that bondholders should take a haircut in any bank failure, and he is the leader of the barbers of Cyprus. Along with the Germans, shears always at the ready.
That is precedent. Not Cyprus. The European trail of self-deception is also precedent and threat to all. Cyprus will find a solution, and our rates will slide back up, anticipating U.S. economic strength, but the ka-boom in Europe lies ahead.
