Austerity, Sub-Prime Lending, and the Safety of Savings Accounts

“It is hard to imagine a more stupid or more dangerous way of making decisions by putting those decisions in the hands of people who pay no price for being wrong.” – Thomas Sowell

Austerity has not worked well in the EU if you ask Keynesian economists and supporters; they will tell you that austerity does not work, citing the EU experience. Italy, Greece, Portugal, Spain, and the U.K. governments claimed that austerity measures resulted in stratospheric unemployment rates and slow economic growth.

Jeffrey Dorfman, using data from Eurostat, the official statistics agency of the European Union, and calculating government spending in EU countries between 2008-2012, found that only eight of the 30 countries listed have actually reduced government spending (austerity), most prominently Iceland and Ireland. The elected officials responded to rallies, protests, sit-ins and strikes, by spending more money to appease the masses. Dorfman reported that the average spending increase has been 4.9 percent, with Greece at 8.3 percent, Spain at 13.3 percent, and Portugal at 5.8 percent. In European countries which have reduced government spending, Iceland, Ireland, Bulgaria, Latvia, Lithuania, Hungary, Poland, and Romania, their specific austerity measures have worked. Dorfman concluded, “Austerity cannot have failed in countries where it was never tried.”

As far as Greece is concerned, President Obama, following his meeting with the Prime Minister Samaras, downplayed austerity measures. “We cannot simply look to austerity as a strategy. It’s important that we have a plan for fiscal consolidation to manage the debt, but it’s also important that growth and jobs are our focus.” Not to be outdone, Samaras blamed Greece’s economic problems on illegal immigration, “I believe that the problems have to do with illegal immigration, internal turbulence in various countries, and even, unfortunately, the problem of terrorism.” According to Craig Bannister, Samaras called for the U.S. and Europe to “liberalize” their economic potential.

The EU countries continue to be prisoners of the Euro, the common currency of 27 countries that gave up their monetary policy making powers to Brussels and no longer have the luxury to print their own money to extricate themselves from over the top government spending.

The Cyprus lawmakers were confiscatorily creative with their citizens’ money deposited with the Bank of Cyprus. Lawmakers agreed to receive a 13 billion euro loan from the European Commission, the International Monetary Fund, and the European Central Bank, dubbed the Troika, to bail out Cypriot banks that engaged in poor betting on Greek sovereign debt.

According to Robert Romano, the loan represented 20 percent of Cyprus’ 66.8 billion euro in deposits. Depositors were levied (confiscated) 37.5 percent of savings, with another 22.5 percent confiscation at a later date, in exchange for shares in the Bank of Cyprus. Depositors did not want shares in the Bank of Cyprus that acted so irresponsibly in its financial dealings but had no choice but to accept.

John Kemp said, “Bailing-in depositors with banks in Cyprus is a serious policy error that will destabilize the European banking system and threatens to accelerate bank runs in future.”

Jose Manuel Barosso, current President of the European Commission, Herman van Rompuy, President of the European Council, and Dalia Grybauskaite, President of Lithuania, unveiled on August 1, 2013, the new EU plan to deal with the possibility of a bank collapse.

The German Economic News (Deutsche Wirtschafts Nachrichten) reported on August 7, 2013 that, under this plan, if a bank goes bankrupt, small depositors can only get their money out of the bank after 20 working days, withdrawing in the interim only 100-200 euros per day. The limit on daily withdrawals “may last up to three weeks.” Depositors with accounts larger than 100,000 euros can withdraw their money in full in five days. The EU Council President, Herman von Rompuy, had proposed to let savers wait 4 weeks for their money.

The article, “Neue EU-Regel: Sparer müssen um Guthaben unter 100.000 Euro bangen” (New EU Rule: Savers must fear credit under 100,000 euros) warned people who were planning on making major purchases, ran a business, the elderly with big medical expenses, or those who liked to have cash available.

The agreement did not address the contribution of banks into the EU deposit insurance. It is easy to see why Europeans who are informed are spooked about this new infringement into their right to keep the money they’ve earned.

According to John Ward, the new banking rules were implemented “to help protect the taxpayer and move the burden of bailing out the banks onto shareholders and junior debt holders.” It is evident that the junior debt holders would be the depositors who saved their money for a rainy day. Ward calls it “global looting.”

Meanwhile, across the Atlantic, President Obama’s Residential Mortgage Backed Securities Working Group (set up last year) is going after “prosecutions of fraudulent underwriting activity by banks that contributed to the financial crisis.” Criminal investigations of ‘too big to fail banks’ include JP Morgan Chase and Co. and Bank of America who allegedly “failed to disclose risks embedded in $850 million in mortgage-backed securities issued in 2008.”

New York Attorney General, Eric Schneiderman, the co-chair of the Working Group, pointed out the “efforts to hold banks accountable for the crash of the housing market and the collapse of the American economy” five years after the fact. (Greg Farrell, Phil Mattingly, and Karen Gullo, Moneynews, August 9, 2013)

When Fannie Mae and Freddie Mac required bailouts after the housing market crash, Fannie and Freddie were bought by the Treasury for $188 billion and the FDIC (a private insurance corporation that insures ‘each depositor to at least $250,000 per insured bank’) absorbed the losses of smaller failed banks. The biggest banks were bailed out by the Treasury and the Federal Reserve System.

President Obama’s Mortgage Initiative’s goal is to get banks to use depositor and investor funds to write 30-year fixed-rate mortgages at affordable rates, assuming the risks the government now bears. According to Peter Morici, the President “won’t admit that in today’s economy mortgages are simply too risky for private investors” who are unwilling to lend to people with less than stellar credit. (Peter Morici, The Hidden Agenda Behind Obama’s Mortgage Initiative, August 9, 2013)

This leaves the possibility of retirement accounts confiscation to solve any financial crisis the government may encounter. Experts agree that there are at least $19.5 trillion in retirement accounts. Some argue that Executive Order 13603, National Defense Resources Preparedness, signed on March 16, 2012, provides the opportunity, the authority, and the framework to allocate any resources, if a national emergency is declared. This executive order gives the President power to allocate commodities, all forms of energy, civil transportation, usable water from all sources, health resources, labor such as military conscription, and “federal officials can issue regulations to prioritize and allocate resources.” Allocation could include savings as a resource since the definition of national emergency is very vague.

Sen. Phil Gramm (R-Texas) wrote in The Wall Street Journal that presidential candidate Bill Clinton suggested in 1992 to use “private pension funds to ‘invest’ in government priorities, such as affordable housing, to generate long-term, broad-based economic benefits.” Gramm continued that Clinton’s radical proposal eventually led to the sub-prime mortgage disaster. “Seldom has such a radical proposal been so ignored during a campaign only to later lead to such devastation consequence,” the financial crisis of 2008, the result of “a lot of banks making a lot of loans to a lot of people who either could not or would not pay the money back.” There is plenty of additional blame for the greedy and unscrupulous brokers and realtors who knew they were selling homes to people who did not qualify for a loan and to the Americans who sought the loans they knew they could ill-afford.

Could holding money into retirement accounts be deemed “hoarding?” President Franklin D. Roosevelt signed Executive Order 6102 on April 5, 1933, “forbidding the Hoarding of gold coin, gold bullion, and gold certificates within the continental United States.

Roosevelt’s order criminalized the possession of monetary gold by any individual, partnership, association, or corporation” under the excuse of hard times. Artists, jewelers, owners of rare collections, and dentists were exempt. Violations of the order were punishable by fines up to $10,000. The Executive Order 6102 was revoked and superseded by Executive Orders 6260 and 6261 of August 28 and 29, 1933 but the confiscation had already taken place.

Because the price of gold for international transactions was set by the Treasury at $35 per ounce, everyone who was forced to surrender personal gold incurred an immediate loss. The government profit which resulted from this confiscation of gold funded the Exchange Stabilization Fund under the Gold Reserve Act of 1934.

Woodrow Wilson’s Executive Order 2697 passed on September 7, 1917, gave the Federal Reserve Bank and the Secretary of the Treasury the authority to regulate the exportation of coin, bullion, and currency, and the Federal Reserve Bank to make decisions whether such exportation is “compatible with the public interest.” How is the “public interest” decided and where does it stop?

How safe is your money? Considering the massive redistribution of wealth in the last five years, the loss of value of savings and pension funds due to low interest rates and the deliberate devaluation of the dollar following endless quantitative easings by Bernanke and the Fed, the picture is not very rosy. The Stock Market is doing well (15,000 level); the Fed purchase of $85 billion worth of bonds every month is artificially propping up the stock market and does not reflect the actual economy.

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