Ycilop Cimonoce

March 19th, 2013 at 9:29 pm

That’s Greek for “economic policy.”

Look, long-time readers know that I’ve been relatively hesitant to lash out against European economic policymakers.  Life is a lot harder when you’ve got a currency union that’s neither a fiscal nor a regulatory union.  And the inability to devalue the currency—because it’s not yours alone—means a key exit ramp from recession highway–external demand—is shut down.

But I just find it a massive head scratcher as to why, given a debt crisis on top of a shaky-balance-sheet banking system, you’d think of taxing bank deposits.  Surely someone around the table raised bank runs as a response.  Certainly, history is very clear on this point: put almost any restriction on savings deposits and people will want them back.  And such responses are amplified in a time of financial crisis.

The thing is, you don’t have to look far to find similar policy errors, though not as egregious: austerity, of course, both there and, to a lesser extent, here; the insistence that every financial problem is a liquidity problem solvable through bailout, as opposed to an insolvency problem, solvable through cutting your losses.

To be fair, the European Central Bank has provided aggressive backstopping to troubled Eurozone countries, the IMF has, at least on paper, recognized that austerity under current conditions is contractionary, and our Federal Reserve, especially Ben and Janet, have been the only high ranking officials trying to do something about unemployment.

But beyond that, it looks like everyone is getting economic policy backwards, hence the title.

What happens next in Cyprus?  Here’s Wonkbook on some possibilities.

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3 comments in reply to "Ycilop Cimonoce"

  1. mitakeet says:

    I think there is a sort of conspiracy theory reason why austerity is pushed so much, though it is not the sort of smoke-filled back room conspiracy where if told about it you would have to be killed. Instead I think it is ‘simply’ a matter of the rich not giving a damn because they already have more money than sense and I outlined my theory here if anyone is interested:


    In brief, because the rich are isolated from economic downturns and have an incentive to keep what they have, they are actually negatively incentivised to promote stimulus and instead are inclined toward austerity because it helps to strengthen their already formidable hold on the reins of power.

    They don’t even have to be sneaky about it, so ‘conspiracy’ really isn’t a meaningful adjective.

  2. Nick Batzdorf says:

    Paul Krugman has been explaining what’s going on with Cyprus in his blog the past couple of days.

    A large amount of questionable Russian money is being laundered there, and the Germans don’t want to use their public money to bail out gangsters. So they’re trying to push this on the Cypriot banks as a condition.

    Meanwhile, Cyprus doesn’t want the Russians to take their business elsewhere, so there’s a quandary.

  3. Perplexed says:

    Paul Krugman has some interesting observations on the situation in Cypress in this post http://krugman.blogs.nytimes.com/2013/03/20/round-trips-to-cyprus/

    It seems that there may be some things that are more important to decision makers than risking bank runs.