Yes, of course Cyprus should go bust: or at least the banks

When an institution, person or country is bust then the obvious thing to do is say, well, yup, you're bust. Then clean up the mess and start again. So it is with the situation Cyprus is in (or at least, that it's in as I write, on Friday afternoon). The place is bust and someone is just jolly well going to have to take the losses that cannot be paid back. Paul Krugman (this is the Good Krugman, the economist, not the NY Times pontificator. Even if the economist is speaking through the NYT) says that Iceland did well when it simply agreed, yes, we're bust, and then dealt with cleaning up the mess:

Like Cyprus now, Iceland had a huge banking sector, swollen by foreign deposits, that was simply too big to bail out. Iceland’s response was essentially to let its banks go bust, wiping out those foreign investors, while protecting domestic depositors — and the results weren’t too bad. Indeed, Iceland, with a far lower unemployment rate than most of Europe, has weathered the crisis surprisingly well.

The Wall Street Journal points out that it doesn't actually have to go quite that far:

The European Central Bank on Thursday gave Cyprus until next Monday to reach a deal on restructuring its insolvent banks. Our suggestion: Let them go bust. Cyprus's two biggest banks, Laiki and the Bank of Cyprus, are deeply insolvent. While the EU, the IMF and Cyprus could spend the weekend trying to negotiate a deal to inject billions into the banks, the time would be better spent arranging for their bankruptcy. Here's how it could work: Shareholders, along with senior and subordinated debt holders, would be wiped out. Deposits up to €100,000 that are insured would be protected. Larger depositors would take a haircut in the range of 40%—somewhat more for Laiki depositors, somewhat less for account holders at Bank of Cyprus, reflecting the extent of the losses and the capital needs at the two banks.

Madsen made a similar point earlier in the week:

The bank levy punishes savers but leaves the bond-holders untouched, violating the principle that small savers should be protected, while the bond-holders who knew they were taking a punt should take a hit.

I was recommending something close to the WSJ solution last weekend elsewhere. And this leads me to two points I want to make.

The first is that all of us making these sorts of suggestions are the capitalist neoliberal running pig dogs (yes, Good Krugman qualifies for that). You know, the people who are supposedly only the apologists for the rich and powerful. And we're all singing from the same hymn sheet here: let the rich take the beating. We're all resolutely opposed to these bad debts being heaped on the taxpayers' shoulders for decades to come. Against small savers getting gouged. Entirely in favour of rich people losing their money. It's yet another example of what is the most underappreciated fact about this capitalist neoliberal running pig doggery: how incredibly, massively, pro-poor it all is. It is, after all, the only politico-economic system that has ever raised the average man and woman up above a subsistence level income. And I really cannot think of anything more pro-poor than that.

The second is still capitalist dog running: the defining point of the system isn't in fact the way that assets are owned, the competition red in tooth and claw. Rather, it's the way that it cleans up the inevitable failures.  For in any structure of human affairs there will indeed be failures. And I take bankruptcy to be one of the most valuable and defining points of this whole capitalist/market system that we've got. When failure does happen, when debts are unpayable, then we all agree, yup, those can't be paid. Oh dear, all you investors, you lost. Better luck next time. It's the quid pro quo that if the investors get it right then they make out like bandits. And if they put their cash into banks which then lend all the money to the Greek Government to default upon (which is indeed what the Cypriot banks did) then they lose large chunks of it.

So, the Worstall solution to Cyprus is that we should indeed be pro-poor and capitalist. Those banks are bust. OK, so, the large depositors lose much of their money, the small depositors were protected under law and so should be protected (yes, the rule of law is indeed important) and that's about the best we can do. Because failure really is failure and it has to be treated as such.

The hollow case for bank bonus caps

Members of the European Parliament on the Economic Affairs Committee have agreed to introduce legislation to extend the bonus cap on bankers to fund managers as well. This is an indication of the envy, ignorance and economic illiteracy that drives much European policy.

The supposed purpose of the bonus cap on bankers is to make banks safer by reducing banks' ability to reward people for taking risks. It will have the opposite effect (as nearly all regulation does). Remember when Gordon Brown and the authorities in the United States were flooding the world with cash and a boom was raging? Then, certainly, the banks did reward people for simply doing deals because every deal succeeded. We are far from that situation now, and banks are no longer taking such risks. So why limit bonuses? Pure envy at the thought of bankers earning £1m bonuses.

Well, I know the feeling. But bonuses are how businesses in volatile sectors keep their salary costs under control. In bad years people earn less, in good years they earn more. If firms cannot manage those costs because of politically-imposed caps, and have to raise basic salaries instead in order to retain staff, the policy actually increases the risks that the banking sector takes.

But what about fund managers? They do not actually take the same risks as the banks at all. So why introduce a bonus cap on them? Again, it is just envy, not logic, that motivates the new move. The customers of fund managers are savvy, large-scale, well-heeled investors. Funds played absolutely no role in creating the financial crisis: they actually took much lower risks than the banks. Wealthy customers tend to want to conserve the fortunes they have built up over a lifetime, rather than gamble with them.

It is plain that MEPs do not understand the financial industry, which is largely based in London – much to the irritation of those in Paris, Frankfurt and Amsterdam, who seem to think that if they hobble London, the business would transfer to them. It wouldn't, of course: it would probably go to New York, Hong Kong, Singapore, Shanghai or at best Zurich.

The British government should read Tim Ambler's new ASI paper on financial regulation – and follow his advice to resist this latest, spite-inspired regulation and instead get the EU and other regulators to endorse proper competition in banking and financial services.

Why 'Heavens on Earth' is a very important book

I've just been re-reading Jean-Paul Floru's "Heavens on Earth."  (I should declare an interest in that I am one of two that the book is dedicated to).  It is a superb book, not least for being highly readable and packed with engaging anecdotes.  More importantly, though, it puts its message across with a wall of supporting evidence.  The message is that microeconomics works.  Every single country that has tried to achieve rapid economic growth by cutting taxes and red tape has succeeded. 

The formula is simple.  You don't achieve growth by massive public works and government spending.  You do it by making it easier for private people to innovate, to invest, to spend on what they value, and to build for the future.  Whether it is post-war Germany, the US, Hong Kong, China, Chile, New Zealand, Singapore and industrial revolution Britain, it has always worked.  It achieves all of the choices and the chances that wealth brings with it.  It creates "Heavens on Earth," and you do it by motivating people, by increasing the rewards of success, and by removing the barriers that stand in the way of human achievement.

I really wish that some well-to-do business-person would fund the cost of sending a copy of this book to every Member of Parliament.  If sufficient numbers of them dipped into its pages or told their assistants to read it and summarize its findings for them, the governance of this nation would be much improved.  I am recommending to everyone I meet that they should read it and absorb its lessons.

Allemannsrett in Britain?

Allemannsrett (literally 'All Man's Law') is an ancient custom, most clearly found in Norway, Sweden (Allemansrätten) and Finland (Jokamiehenoikeus), where it has been formally enshrined in law.

Currently, in Britain I am largely restricted in my freedom of movement, despite thousands of miles of footpaths, bridleways and other rights of access,. Furthermore, in England and Wales, I cannot camp in the 'wild' – instead I must pay to use a campsite.

Implementing Allemannsrett in Britain would change this: it allows everyone to use rural, uncultivated land for walking, camping, foraging and other outdoor activities, regardless of who owns it.

An objection might be that this infringes on the right to personal property, but I believe Allemannsrett is in accordance with J.S. Mill's harm principle. The laws of the Nordic countries clearly demand that those taking advantage of the Allemannsrett are respectful to the land they are using: there are rules concerning littering, the lighting of fires and so on. The saying 'take only pictures, leave only footprints' sums it up well. Therefore, those who use Allemannsrett properly are acting within the basic libertarian principle. The rules on foraging, and other more controversial aspects could be adapted as desired.

Another issue is that of privacy: landowners would not want hikers peering in through their windows. The Nordic laws cover this as well: any 'trespassers' must maintain a respectful distance from houses or cabins at all times (at least 150 metres in Norway).

A final objection is the claim that it would be pointless to introduce the Allemannsrett in Britain as it is in Scandinavia, since here we have a much higher population density. But the vast majority of the British population lives in urban areas, and the country has many places of natural beauty and sparse population where greater rights of access could allow much greater appreciation of them.

Allemannsrett in Britain would allow each individual to enjoy the countryside to its full extent. It would out us back in touch with our ancestors, by allowing us to camp 'wild', away from the mod-cons of everyday life. All this could be achieved without infringing on the basic principle of liberty, as clear rules would ensure respect for the land and its owner.

Two regulators aren't better than none

I’ve been working recently on the regulation of banks, insurers and financial advisers. I’ve concluded that these industries are over-regulated, and regulated in the wrong way – which causes more problems than it solves.

There is a strong case for financial services regulation. With many products you can see plainly what you are buying. But buy a pension or an insurance policy and you don’t know if you’ve been sold a pup until it’s time for it to pay out.

Kitemarking – by independent agencies – could probably solve that. And you want to make sure that the banks and insurers stay honest, get the Bank of England to do that – they are close to the market. Then let the Financial Ombudsman Service deal with consumer protection.

We should be regulating the products, not how they are sold. That makes regulation so complicated, with so many tick-boxes, that it strangles the life out of the market. It’s fine to insist that client money must be held in a separate account and suchlike. That’s a simple rule of honesty and probity. But you don’t need much more.

We should recognise that competition is the best regulator. And that brands offer consumers an important guarantee of quality. Trouble, is, if sellers are minutely regulated, then brands make no difference and customers are done a mis-service.

Problems like Libor-fixing and PPI-misselling were caused by regulation. Bank regulation has raised the costs of market entry and killed competition – it’s so hard to start a new retail bank that only one has been created in the UK in 130 years. If there were proper competition, cartels wouldn’t stick. And PPI was caused by the Financial Services Authority demanding it be offered to mortgage and loan customers, then not checking how it was actually being sold.

Regulators expand their empires by creating more and more rules for themselves to police. If they can pass the cost straight on to the regulatees, as in financial services, there is no cost control at all. And regulations make people feel safe, even when they are not, so people take more risks in what they buy. Regulations undermine competition and brands and everything else that might actually protect customers.

George Osborne wanted to scrap the FSA, which was so mesmerized by its own tick-boxes that it didn’t see the banking crash coming. But as of 1 April we will have two regulators instead of one. That’s bureaucracy for you.

Budget 2013: The good, the bad and the ugly

It’s not saying much, but this was George Osborne’s best budget yet. These tax cuts are long overdue, though they are not significant enough to solve Britain’s growth problem. Cutting taxes for businesses will stimulate investment and job creation, and reducing the tax burden for low- and middle-income earners will make life easier for them.

But government spending is still rising by £20bn this year. The government’s plans to meddle in the housing market are staggeringly misjudged, and we risk repeating exactly the same policy mistake that led to the US subprime mortgage bubble. And we’re still going to be borrowing £108bn this year – that’s £295m a day, every day, with no end in sight.

The Good

Personal allowance raised to £10,000 by 2014. Income taxes are smothering workers. The taxman takes more than 30p out of every pound earned by low- and middle-income workers above the personal allowance. Raising the personal allowance to £10,000 ahead of schedule is a significant step to reducing the tax burden for low- and middle-income workers, and creates the tantalising prospect of the personal allowance being pegged to the minimum wage rate in 2015.

Corporation tax to be cut to 20% by 2015. At last, an encouragingly bold tax cut for business. The corporation tax rate will be falling from 28% to 24% this April, then from 24% to 21% next year, and finally from 21% to 20% in 2015. Although this does indeed put Britain ahead of other ‘major economies’, small countries like Ireland (which has a corporation tax rate of just 12.5%) will still be able to outcompete Britain in attracting investment from multinational corporations.

Employers’ national insurance bills cut by £2,000 for every firm. Employers' NICs are a direct tax on jobs, so tax relief should allow some businesses to take on extra employees. The cut will have the most pronounced impact on micro-businesses, 450,000 of which will reportedly be taken out of tax altogether.

Beer duty to be cut by 1p, and the ‘beer duty escalator’ to be scrapped. Two weeks ago the government was pushing for minimum alcohol pricing, and now it’s cutting the price of beer. It might not be cutting duty by much, but it’s a welcome change after years of miserable, anti-poor paternalism. And scrapping the outrageous ‘beer duty escalator’ is long overdue. No Chancellor should be able to pretend that a tax hike is out of their hands.

The Bad

The Bank of England’s 2% inflation target to stay in place. Inflation targeting has failed. It creates invisible excess inflation during boom periods (by keeping prices rising by 2% when prices should be falling because of productivity gains) and cannot offset changes in velocity in bust periods, leading to secondary deflations that amplify the damage caused by the initial bust. An alternative, rules-based system (such as an NGDP target based on a futures market instead of the discretion of the Monetary Policy Committee) would be a much less harmful mandate for the Bank of England. Mark Carney had indicated that he was sympathetic to this kind of reform. By giving up the chance to rethink British monetary policy, the Chancellor has snatched defeat from the jaws of victory.

20% tax relief on childcare vouchers up to £6,000 per child from 2015. Expensive childcare is a consequence of the costly regulations, such as mandatory maximum children-to-staff ratios (3:1 for under-5s and 1:1 for infants under one year old). If the government wants to make childcare more affordable, cutting these sorts of regulations back would be a better place to start than using taxpayers’ money to pay for childcare for parents earning up to £300,000/year.

Tax avoidance and evasion measures aimed at recouping £3bn in unpaid taxes. Tax avoidance is a legal and legitimate response to the perverse incentives of a complex tax code created by politicians trying to exempt a pet project or special interest that they favour. Tax evasion, too, is a rational response to high taxes and is only possible because of the complications in our tax code. The best way to reduce evasion is to simplify the tax code, not to persecute people taking advantages of a corrupt system.

£3bn extra for new projects every year from 2015-16 until 2020, totalling £15bn. Capital spending projects are always popular with politicians who want to leave a expensive railway line, bridge or motorway as a legacy, but there is a long history of infrastructure projects doing little help their flagging economies. Barack Obama’s $800bn stimulus package, launched in 2009, focused on ‘shovel-ready’ projects and did virtually nothing, as did successive Japanese stimulus programmes in the 1990s and 2000s. Any extra money from spending cuts should be given back to the private sector through tax cuts, where it can do the most good.

…and the Ugly

Bank guarantees to underpin £130bn of new mortgage lending for three years from 2014. Apparently the Treasury has not learned the lesson of 2008: injecting taxpayer money into the housing sector will simply inflate prices, distorting price signals and stoking the housing bubble that already seems to be growing in the housing sector. Houses are expensive because supply is restricted by the planning system. Instead of throwing money at the problem and driving prices up even more, the government should have the courage to liberalize planning to allow more development, including on green belt land.

Government ministers picking winners. Fiddling with tax breaks for specific industries is a mug’s game. There is no way the government can know which industries to promote, and these projects inevitably collapse into a mess of overcomplicated grant schemes and politics-driven bailouts of failing firms. Only consumers can pick winners.

Government spending is still rising. Despite all the talk of cuts, the government will still be spending £761bn this year, nearly £20bn more than last year. By leaving healthcare alone and failing to carry out the big structural reforms needed to reduce social security spending, the government  is not matching its rhetoric on spending with the action needed. We’re still going to be borrowing £108bn this year – that’s £295m a day, every day, with no end to the borrowing in sight.

Regulating the press

Libertarian regulation theory shows us how state power, apparently used for benign purposes, ultimately results in the exploitation of consumers and the misallocation of resources. Of the two great threats to our economic progress and liberty - state spending and regulation - I would argue that it is regulation that is the greater threat.

State spending is often contested and its results are at least clear to see (although the fact that state spending in the UK is vast and growing should not be forgotten). Regulation, on the other hand, is a far more subtle threat and seems to gain approval across the political and public spectrum. The corporatist pseudo-markets created by regulation in banking, energy, rail and so on are decried as evidence of the failure of capitalism when they are anything but.

As we have a current example of new regulation, it is interesting to apply the theory and see what might be the result. Regulation* is often introduced when there is assumed to be a case of 'market failure'. Broadly, the impact of regulation is to create barriers to entry which protects existing market players and tends to promote consolidation within the industry. Small and more innovative firms, which would otherwise enter a market where large profits are to be made, are thus excluded. Existing players are thus able to dominate the market and drive up prices or prevent innovation. 'Government failure' is thus ignored but it is the consumer and the society at large which suffers.

In the case of Press regulation, many of these features may occur. We cannot call the print media a 'free market' but it is freer than, say, the broadcast media which is dominated by the BBC and bound by tight regulation on objectivity. An instance of perceived 'market failure' in the form of phone hacking was used to justify regulation, ignoring the fact that phone hacking was illegal under existing laws. We can already see how regulation might drive out small players who are currently undermining the profits and market share of the established Press.

The position of small internet bloggers and innovative media news outlets is jeopardised - will the Pin Factory blog be forced to sign up to the press regulator? What influence would we have there? What if the new regulator imposed punitive fines on us?

In many markets, it is the large occupants who welcome regulation and - in fact - connive at its introduction. While they have to sacrifice some control to regulators, they are guaranteed a protected market share and healthy profits whilst avoiding the trouble of innovating against and out-competing small rivals. Further, large firms often have a 'revolving door' to regulators and are able to undertake expensive lobbying to further protect their positions.

Some portions of the Press are opposed to the new regulation, a condition which probably stems from an ideological position unique to this industry. However, it is clear that, under the system of state regulation, it is the large, extant players who would dominate the regulator and be in a position to use this power against potential rivals. In many industries, the emergence of corporatism would be unfortunate. In the case of the Press it threatens to be fatal to liberty.

*We must take care to distinguish 'regulation' from 'law'. Regulation is intervention designed to control the size and shape of a market, prices and quality. Law is (or ought to be) solely concerned with property rights. 

Budget 2013: Six pro-growth policies from around the world

Ahead of tomorrow's Budget, we look at six pro-growth policies from around the world that we'd like to see the Chancellor follow.

1) Abolish capital gains tax, like Singapore

For the meagre revenues it raises, Capital Gains Tax (CGT) is possibly the most economically harmful tax in existence. High CGT rates depress economic activity and prevent the flow of capital to where it can be most productively used. This lowers both economic growth and government revenue. We have found that there was a 76% drop in normal disposals in the period following the government’s CGT hike from 18% to 28%, a clear sign that the government’s high taxes are costing it money.

A model for Britain to follow is Singapore. Singapore has no CGT and has proved to be a magnet for foreign investment. The Asia Pacific region attracted 33% of global foreign direct investment (FDI) in 2011, up from 18% in 2005. Thanks to its low tax regime, tiny Singapore attracted 13% of all FDI into the Asia Pacific region.

To restore Britain’s status as a global leader in competitiveness, the Chancellor should follow the Singaporean example and cut CGT back to pre-2010 rates. In the long-term, the government should aim to abolish CGT altogether.

2) Cut spending faster, like Canada

The Coalition is losing control of its deficit reduction strategy because of its overreliance on growth that has not materialized. Government spending cuts do not need to hurt the economy. Economists at Harvard University, Alberto Alesina and Silvia Ardagna (2012), have found that fiscal contractions paired with structural reforms, such as labour and goods market liberalizations (see below), can be expansionary if they signal a “decisive” change in government policy.

Canada’s experience with spending cuts in the 1990s offer a useful example of how deep spending cuts can be implemented to strengthen the economy. Chris Edwards has described how in just two years between 1995 and 1997, Canada cut federal spending by 10%, including defence, business subsidies, local government grants and unemployment insurance, shrinking total federal and local government spending from 53 percent of GDP in 1992 to just 39 percent by the mid-1990s.

The Canadian government implemented a comprehensive ‘Programme Review’ of every department. This was a root-and-branch rethink, not just short-term adjustments like those being carried out by the UK’s Coalition government. Welfare was the biggest saving with 40% real terms cut 1990-99, and every dollar rise in taxes was accompanied by a six to seven dollar cut in government spending.

A 2010 IMF study has shown that a 10% lower debt burden correlates with 0.2% higher growth, and Canada’s economic boom following its cuts supports this. Unemployment plunged and the formerly weak Canadian dollar soared to reach parity with the U.S. dollar.

Canada’s cuts coincided with the beginning of a 15-year boom, and Canada has bounced back from the global financial crisis robustly. It is a model for true cuts to spending that leave no department untouched. The Coalition should learn from the Canadian experience and make deeper cuts to spending immediately.

3) Simplify taxes and regulation, like Georgia

While the UK remains a pretty good place to do business compared to most other Western European countries, by international standards it is slipping behind. In many categories of the World Bank’s Ease of Doing Business Index, the UK performs dismally, including basic things like registering property (where the UK is 73rd in the world), enforcing contracts (21st), dealing with construction permits (20th) and starting a business (19th). The Chancellor should commit to getting Britain to the top of the Ease of Doing Business Index within five years.

One model for a dramatic improvement in these rankings is Georgia. Georgia has climbed from 112th overall in the world in 2005 to 9th overall in 2012. To do this, Georgia sharply reduced the number of licence-protected professions, simplified its tax code and reformed property registration to reduce costs and waiting times by 70%.

Every politician claims to want to cut red tape for business, but by committing to improve on an independent measure like the Ease of Doing Business, the Coalition could signal a real commitment to reducing regulatory barriers to business.

4) Liberalize employment law, like Germany

Unemployment has been a persistent problem for the UK since the 2008 recession, particularly youth unemployment. By making it easier to hire and fire workers, and to take on temporary staff as self-employed under contract, the government would reduce the risks associated with hiring new staff, which can put many businesses off employing extra workers altogether.

Germany’s Agenda 2010 reforms, implemented during soaring unemployment in 2005, limited wage rises to regain competitiveness and liberalized temporary work regulations to allow more firms to take on short-term employees. By 2011, unemployment had fallen to its lowest level since the early 1990s. Encouragingly, the number of short-term employees has fallen without a corresponding rise in unemployment.

One notable point about Germany’s labour laws is that Germany does not have any minimum wage laws. This avoids a situation where low-skilled workers are priced out of the labour market altogether. Combined with the Agenda 2010 labour reforms, this has helped to make the German work force significantly more flexible and robust to downturns than other European countries.

5) Cut corporation tax, like Ireland

The government’s corporation tax reductions are a welcome step towards making Britain globally competitive, but the cuts should be faster and deeper. Corporation tax falls almost entirely on workers’ wages: a recent study of European countries by economists at the Universities of Warwick and Oxford found that, in the long run, 92% of any rise in corporation tax falls on wages, not profits.

In Ireland, corporation tax receipts more than doubled after it cut corporation taxes from 40% to 12.5%, thanks to big increases in foreign direct investment by multinational corporations. Ireland still has the lowest corporation tax rate in Western Europe, and even in its recession has attracted big name firms like Google, Amazon and Twitter to headquarter there instead of London. Ireland is making the strongest comeback from its recession of any Eurozone country, thanks largely to its business-friendly tax regime.

To attract investment from outside Europe and grow its tax receipts, the Chancellor should reduce corporation tax to 10%, making Britain the most competitive country in the world for business.

6) Cut taxes for the working poor, like Australia

A full-time minimum wage worker currently pays £1,588 of their £12,875 gross earnings in tax. If low-paid workers were lifted out of tax, every full-time worker in the country would earn an effective ‘living wage’. By making work pay, this tax cut would partially pay for itself by increasing the number of people in work and reducing welfare dependency.

In 2011, the Australian government raised the tax-free personal allowance to AUD$18,200 (£12,513). By letting its citizens keep more of the money they’ve earned and targeting tax cuts on the poor, Australia is mitigating increases in the cost of living that would otherwise hit its working poor hard.

The cost of living is rising quickly in Britain too. Though this could be significantly mitigated by liberalizing planning regulations, allowing workers to keep the first £12,875 they earn every year and taking minimum wage workers out of income tax altogether would go a long way towards ensuring a basic standard of living for all workers in Britain.

Chart of the week: 25 fastest growing countries, 2015-2050

The 21st Century may well be Africa’s Century – not Asia’s

What the chart shows: The chart shows the 25 countries with the fastest forecast population growth over the next 25 years. Only one – number 25 in the list – is not African.

Why is the chart interesting: Demographics are not an absolute science, but the trends are broadly easy to forecast. With numerous exceptions, population growth should lead to economic growth and that in turn to a rise in political importance. Economic growth is also over the medium and long term a pre-requisite for return on investments. We are frequently told that the 20th Century was the American Century and the 21st will the Asian. But from a demographic perspective, Asian countries are almost in the same bad state as European. The fastest population growth over the next generation will be in Africa. This is also where we are already seeing some of the fastest economic growth. Whether Africa’s governments and peoples will build on this is impossible to say – but the conditions for growth are there. The 21st Century may be Africa’s.

Chart and comments provided by Stein Brothers (UK), www.steinbrothers.co.uk.

Making a complete mess of Cyprus

The people in charge of economic policy in the EU appear to believe that they can create economic reality by passing laws and reaching decisions through negotiation.  Their knowledge of human psychology seems to be even more flawed than their understanding of how markets actually work in practice.  The decision they forced upon the Cyprus government is flawed on many levels.  The bank levy punishes savers but leaves the bond-holders untouched, violating the principle that small savers should be protected, while the bond-holders who knew they were taking a punt should take a hit.

It is also a wealth tax, violating one of the principles of fair taxation that it is OK to tax transactions such as making money or buying goods, but not OK to take money from someone simply because they have it.  A state might claim to justify a transaction tax by saying that it provides and maintains the infrastructure that makes it possible for people to deal with each other to mutual advantage, but not a wealth tax.

If the Eurocrats had studied game theory or psychology they could have anticipated the anger and outrage that their move has provoked.  People mind losses more than they value gains.  They mind precipitous losses more than they mind gradual ones.  They mind visible losses more than invisible ones.  People do not like it if their €200 in the bank will, through inflation and currency fluctuations, only buy them €180 worth of goods in the future.  But they dislike it almost infinitely more if government removes €20 from their savings account.  Indeed, 'dislike' is too mild a word.  They are outraged because their government has stolen their money, even though they were not responsible for the crisis.

The signals this move sends out are that it is foolish to save, and foolish to keep money in banks.  These signals are spreading to countries other than Cyprus.  A precedent set in one place could be followed in another.  It is entirely possible that this action will set in motion runs on several banks as savers seek to place their funds beyond the reach of predatory governments.  The reaction of outsiders to this move can only be one of shocked incredulity.