George Friedman sees banking problems that need to be solved in Europe & Asia with the fear of loss of deposits 'stalking countries'

George Friedman sees banking problems that need to be solved in Europe & Asia with the fear of loss of deposits 'stalking countries'

By George Friedman*

The Italian banking crisis has moved to its next inevitable stage. European institutions have started to struggle with the question of whether and how to protect deposits in Italian banks.

Italy adopted new EU-mandated policies regarding bail-ins in January. The rules for these bail-ins require a bank’s shareholders and debt holders to absorb losses before taxpayer money can be used to assist a bank. Deposits of more than 100,000 euros (US$109,000) could be affected, but those containing less than 100,000 euros are protected by European deposit guarantees and cannot be touched. As a result, individuals who hold what they believe to be relatively low-risk investments, as well as small businesses that keep more than 100,000 euros on hand, could be at risk. 

As Italy grapples with the new policies, there is a dispute within the eurozone over who should ultimately be responsible for guaranteeing deposits that, under European laws, are protected even in the case of a bail-in. This is a familiar scenario: the EU once again discovers its original dictum would lead to disaster, so it changes its course to find a solution that is acceptable to all members. In other words, we are now at the point of paralysis. But this time it is paralysis over an issue with catastrophic implications. 

We can make a distinction between investments and putting money in the bank. Investments are understood to carry with them both opportunities and risks. Putting your money into the bank is not expected to carry either. The benefit of having an individual bank account is to safeguard money. If banks cannot guarantee this safety, then there is little point in putting money in a bank in the first place. In fact, withdrawing funds from an unsound bank becomes a matter of urgency because if enough depositors become uneasy and withdraw their money, the last man to the door may be wiped out. For the middle class, insecurity in banks is an existential crisis. 

Wealthy individuals and corporations have experience in managing risks. They diversify not only among banks, but among countries or among asset classes. They can be hurt, but rarely completely devastated. Although the middle class may have money in more than one bank, most risk-management tools are both out of their reach and outside their experience. 

For the middle class in Euro-American culture, banks are where those assets that are accumulated over a lifetime are stored and kept secure. Once they are seen as insecure, various stratagems emerge, from buying homes or gold, to buying foreign currency, to getting the money out of the country. When this occurs on a massive scale, the result is a contraction of lending by banks, bank failure, and depression. 

But the most important result is the loss of confidence in social and political institutions by the middle class. We are seeing this happen now in some export-oriented countries and some European states. There is a social contract between the middle class and society as a whole, where the middle class agrees to work hard and save their money. In return public institutions guarantee that the fruits of their labour will be secure. If they were to lose their deposits, it would be a financial catastrophe. But the violation of the implicit social contract would lead to political catastrophe. This is why US President Franklin D. Roosevelt, in his first fireside chat, focused on the need to restore confidence in institutions such as banks. Stripping the middle class of their assets-or making them afraid this might happen-leads to massive political unrest. 

The fear of loss of deposits is stalking countries besides Italy. As exporters across the globe experience reduced revenues and as the European Union’s financial troubles continue, governments in East and Central Asia and across Europe are growing worried about the public’s confidence in their banking systems. Reduced confidence would not only have immediate financial consequences, but could also have far-reaching geopolitical implications as the ability of governments to manage growing crises diminishes.  

Deposit insurance is at the core of government efforts to maintain confidence in banking systems. What sets deposit guarantees apart from other government tools for stabilising financial systems is that these schemes are a direct pledge to each deposit holder to safeguard some of their assets. 

The massive crisis that the US financial system faced in the early 1930s led to the creation of the Federal Deposit Insurance Corporation (FDIC), which protects deposits if an FDIC-insured bank or savings association fails. The FDIC is backed by the US government and can insure up to US$250,000 in deposits for individuals. Deposit insurance schemes around the globe differ in their design and coverage, but fundamentally they are designed to maintain public confidence in the system. 

Both the economic crisis facing exporters and the eurozone’s ongoing financial difficulties are increasing the significance of deposit insurance. For example, in Azerbaijan, a major energy exporter, deteriorating economic conditions have already led to protests throughout the country. Azerbaijan’s government announced on Jan. 28 that the country’s central bank may provide financial assistance to the Azerbaijan Deposit Insurance Fund (ADIF) if it is unable to pay compensations to depositors. The statement came after the central bank revoked licenses of six Azerbaijani banks and was likely intended to alleviate fears following their closure. The central bank’s pledge to provide extra funding for the ADIF signals that the regime is worried that public confidence in the banking sector could be undermined. Should confidence erode, the out come could be not only a run on the banks and significant disruptions to the country’s financial system, but also an erosion of the regime’s position.  

Russia is also experiencing concerns over the public’s confidence levels. It is no coincidence that the Russian government took initiatives to help boost guarantees for bank deposits in December 2014, as low world oil prices and sanctions were beginning to have a significant impact on Russia’s economy (particularly on the value of its currency). The Kremlin moved to allocate extra funds to the country’s Deposit Insurance Agency (DIA) and increase the deposit insurance coverage limit for individuals to 1.4 million rubles, the equivalent of about US$18,300 under the current exchange rate. 

Russia’s DIA is a busy entity: over the past two and a half years, the country’s central bank has shut down over 150 banks, with many others under crisis watch. In fact, on Jan. 29, Russia's Finance Ministry announced that it is considering requiring bail-ins of large depositors. While the move is designed to help protect the overall stability of the system, it indicates that the ministry expects more significant banks to face bankruptcy. With reduced energy revenues intensifying Russia’s economic problems, the importance of deposit insurance as a tool for maintaining public confidence, and therefore limiting social unrest, will grow.  

Concern over internal stability also played a role in China’s decision (in May 2015) to introduce deposit insurance for the country’s banking system. Large bank failures are mostly unheard of in China, as the government generally steps in to assist banks and investors and implicitly guarantees deposits, especially at bigger banks. Politically, Chinese decision-makers feel that they cannot allow banks to fail, as such a move would further undermine confidence in the leadership and China’s economic system as a whole. 

Nevertheless, the Chinese government recognised that by implicitly making guarantees, they are also failing to discourage banks and investors from making risky choices. China’s decision to introduce deposit insurance, therefore, was designed in part to highlight that there is a limit to government assistance and to encourage better investment decisions. While China’s system differs greatly from its Western counterparts, the Chinese leadership also aims to use deposit insurance to boost confidence and stability in its banking sector. 

In Europe, as in the US, deposit guarantees have become a part of the social contract between the people and the authorities. But the question of which authorities are ultimately responsible for guaranteeing the deposits-and thus for safeguarding financial stability-has become significant. The future of deposit guarantees is one of the main points of contention between Germany and the eurozone’s other members. 

Currently, there are EU-wide regulations on deposit insurance, but those are implemented on a national level. In November 2015, the European Commission officially presented its proposal for a European Deposit Insurance Scheme (EDIS). Under the plan, a European fund would be created, financed directly by bank contributions, and adjusted for risk. At first, the European fund would only be used if national-level deposit insurance funds exhausted their own resources but, over time, it would take on a greater role and fully insure all national deposit guarantees by 2024. 

Germany opposes the scheme on the grounds that risk within the eurozone has to be reduced before such a risk-sharing plan could be viable. Fundamentally, for Berlin, the EDIS would represent a financial obligation to assist eurozone countries with troubled financial systems. 

Countries such as Italy support the plan because it would provide a much stronger layer of security for depositors than simply relying on national-level insurance schemes. Deposit insurance is thus one of the elements of Germany’s geopolitical dilemma: on one hand, Berlin wants to safeguard the stability of the eurozone, but on the other hand, it would like to minimise its own financial contributions to other eurozone countries.  

We saw a drama of this sort unfold in Cyprus in 2013. Cypriot banks were failing, and the Europeans, led by the Germans, refused to bail them out. The result was that banks were closed for several days and parts of deposits exceeding 100,000 euros were seized. The Germans argued that the Cypriot banks were being used by Russian money launderers, hence they deserved to fail because of imprudence and Russian corruption. 

However, the Cypriot banks held deposits for entities that contributed significantly to the economy-including the hotels at the centre of the tourism industry and British retirees who had saved a few hundred thousand euros in a lifetime of work and retired to Cyprus. The latter were devastated. The former could not pay their employees for weeks, and many never recovered from the crisis. What had been an uncertain proposition-putting their money in a bank in Cyprus - became a suicidal position. Cyprus has still not recovered. 

Now Italy (which represents about 11% of the EU’s GDP) is also finding itself in a banking crisis. Its banks are linked to all of Europe’s banks that have bought Italian paper. It is possible for the Italian government alone to bail out the banks - a move not allowed under current EU rules. But at the end of the day, Italy does not own the printing press that can help monetise the banks because that belongs to the European Central Bank (ECB).

The political reality is that the ECB is heavily influenced by the Germans. In other words, the Germans control the monetary supply, but they intend to push the responsibility of solving the banking problem to the Italians. This could lead to a crisis similar to the one experienced in Greece… but on a much larger scale. Essentially the Germans are demanding that, if Italian banks fail, a form of the Cyprus solution be implemented in Italy. The potential consequences for the European financial system are hard to calculate, but at the moment, German Chancellor Angela Merkel is reassessing her political position, which has eroded since the onset of the refugee crisis. 

The international dimension of the banking system is also at a critical stage. As the exporters’ crises deepen, the ability to maintain comprehensive deposit guarantee schemes is key for countries like Azerbaijan and Russia. Two factors to watch are deposit levels and capital flight. Russia has struggled with high levels of capital flight, and further outflows could indicate that efforts to promote confidence in the system are failing. 

At the same time, negotiations over the future of the planned EDIS will be a key indicator, both for the stability of Southern European banking systems and the relationship between Germany and the rest of the eurozone. From Russia to China and the European Union, public confidence in banking systems is a factor that affects not only financial stability, but the survival of regimes and political institutions. 

There is no international financial institution that can possibly deal with all these potential failures… and certainly none that can deal with the social consequences. When we look at Eurasia, we see banking problems that need to be solved. The solution has three layers: first, to maintain a prudent banking system; second, to provide a reliable insurance system for deposits; third, to provide security for deposits through the government, which ultimately has the resources and an interest in political and social stability. But if prudence has already collapsed and if the insurance system is incapable of coping with the flood, only the third layer remains. However, if it is beyond the state’s will or capacity to act effectively, simply put, there will be hell to pay.

---------------------------------

*George Friedman is editor of This Week in Geopolitics at Mauldin Economics. This article first appeared here and is used with permission.

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25
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At last people are starting to wake to the con job that banks carried out on Governments. Fundamentally the law states that money deposited into a bank belongs to the bank, not the depositor. The depositor becomes an unsecured creditor. As discussed previously on a number of occasions on this site, most members of the general public seem blithely unaware of this little snippet, and would likely make their feeling known loudly if they did. I cannot help but wonder though, taking into consideration the huge profits declared by banks (and likely the even bigger undeclared ones), if Governments changed the law to state that the ownership of any funds deposited into a bank was the property of the depositor/account holder, I wonder if bank behaviour/attitudes would change at all. Certainly their liability would be dramatically impacted.

17
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Spot on Murray. This is fundamental to the rort. If deposits were held in trust by the banks as Mervyn King suggested then we would have a much less predatory banking system.

Why not a con job that banks carried out in conjunction with governments?

Which entities monetise government debt in the first instance?

The events starting in August 2007 dared the Fed to finally put up or shut up. It did the former and was thoroughly disproved. People, especially economists, have convinced themselves that there were exogenous or extenuating circumstances to explain being humiliated in such stunning fashion, but the truth is as explained at the outset – the entire theory of economics, especially monetarism, is simply cartoonish unreality. It may work on the chalkboard but it has been proven, via repeated and broad central bank experimentation across the globe, no less, to be complete bunk. Read more

If you read what he is saying.
The government will not guarantee deposits but they will guarantee the insurance companies that guarantee you deposits.

Here is what he said
"he FDIC is backed by the US government"

So its just smoke and mirrors AGAIN

Isn't about time the Government guaranteed our deposits, i think this is well over due.If its as safe as they say is , whats the problem , otherwise there will bank be runs on the money and who can blame them, they only trying to protect what they have.

The "Government" only has taxpayer money, so in other words, taxpayer guarantee. If Governments "guarantee" deposits, the banks will, again, go on a no risk crazy binge that will ALWAYS end badly, as proven repeatedly. Even more simply, privatise the profits, socialise the losses. The current corporate culture is very socialist in many ways........ generally speaking.

If we let the market set interest rates, most of these problems would go away.

South Canterbury Finance.....
That is the risk.
I'm sure that at the moment, the Govt is happy enough with the status quo. So if an individual bank were to go bust it could choose whether it bails out the depositors or not. The risk is if multiple big Oz owned banks were to fail. This scenario would only occur if NZ was in deep recession and for house valuations to plummet. Unlikely but nevertheless, possible.
I for one recommend keeping deposits in individual banks moderate. Retire early if possible so as not to amass an unnecessarily large amount of term deposits.

I stayed in my 'safe' bank at %6 while friends with SCF were getting %11.5, where's the justice?

10
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No justice. Purely a reflection of the panic implementation by Cullen of the deposit guarantee scheme in NZ without proper planning or oversight once implemented. The NZ Treasury officials overseeing this scheme performed abysmally (being generous in my evaluation). Minimal regulations and oversight would have prevented the rapid distortion in SCF operations - and minimized the loss to taxpayers.

The failures of The Treasury should not be used as immutable argument against a proper deposit guarantee scheme.

Read some of the background RBA public discussions on their web site about the absolute need for the public to have confidence in banking stability - at least in Australia. Somehow the RBNZ has taken an opposite approach with regard to depositors in NZ.

double post it seems

Justice has left the building Aj

umm, No, I never left anything. I remain in the background at all times waiting for my opportunity

Diversification is a good move obviously, but beware of false diversification. The bad thing that might bust a bank is highly likely to be the same bad thing that busts them all at the same time. So spreading it across banks is not really effective.
In recent history many people spread their cash across several finance companies for safety. Only to find all went bust in the same period. False diversification is a trap.

Alan Hubbard and South Canterbury finance define the problem janisa

The taxpayer should be allowed to lift the lid of SCF and see what was going on inside. The way it has been handled, makes one think that certain people have things to hide.

Westpac was the largest creditor, and got 100% recovery. Government services bank......

An internal bank report in September 2009 noted Allan Hubbard was a significant Fonterra shareholder, and that his company, Dairy Holdings, contributed more than 1 per cent of the country's dairy production.

"There is an argument that a forced sale of Dairy Holdings farms or Allan Hubbard's shareholding could have systemic implications due to a collapse in farm prices and resulting collapse in collateral values held on mortgages by other financiers."

http://www.interest.co.nz/news/51127/scf-lent-4th-mortgages-greymouth-pr...

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1070...

http://www.interest.co.nz/rural-news/76773/finance-minister-agrees-nz240...

Second Mortgages – Syndicated farm investor ‘MyFarm’ has teamed up with German fund manager Aquila to offer a second mortgage financing facility to NZ dairy farmers and will offer wholesale investors the opportunity to be investors in the fund (lenders). If the scheme is wildly successful I guess it is possible that they might extend it to retail investors.
http://www.chrislee.co.nz/newsletter/display.php?list=1&year=2014&month=...

Investing in second mortgages to dairy farmers would be a recipe for disaster - can imagine many retired people moving their 3% term deposits into a say retail second mortgage fund offering 6% and then losing their life savings when it all comes crashing down - people never learn. In the meantime the Germans will probably parcel it up and sell it off to others and make a killing.

I strongly suspect that a number of politicians on both sides of the house stood to lose quite a lot if SCF was not bailed out; Bill English said he would support Michael Cullen's bailout to show solidarity with the outgoing govt. (Tui moment??)

Why do I as a tax payer need to guarantee your money?

Why as the owner of your capital can you not do so yourself?

Depends. Is it your debt?

yes Steven, you have debt, which is the asset securing our deposits. Cough it up.

Indeed my mortgage debt would be classed as an asset, especially as its < 10% of the face value of my home.

In extremis, that of course raises an interesting possibility, that of the bank forcing me to sell to recover their money resulting in me taking a huge loss. Such a situation however would entail no mortgages being available at any price, ie it was impossible for me to re-mortgage with someone else, or the receiver could not on-sell my mortgage, both are really "out there" and so pretty un-realistic.

There would be no huge loss. You house would sell at market (auction) and you would receive the net proceeds after your mortgage and sale costs were paid.

incorrect IMHO as you are failing to see the enmass effect. If there is indeed such sales its likely there would be 10s thousands of hosues being sold and with few buyers (no one could get a mortgagedont forget) my losses would probably be staggering, ie i'd be lucky to see 10%.

I didn't fail to see the enmass effect, you just changed the scenario.

Why does any tax payer have to guarantee anyone's deposit? Why is it you repeatedly fail to acknowledge that all investment is a risk?

Steven we have discussed this before. What choice does the public have? Trying getting paid in cash today. As identified earlier, any crisis that will sink one bank is likely to take others too. Essentially the options are either a bank (any) or the mattress. If the mattress is the choice then this has ramifications of public safety and crime, which will have a huge cost on society. The current law creates an unfair imbalance that ignores reality. As identified in my earlier comment depositors funds in a bank in law belong to the bank. the law that does this means that any bank collapse due to unethical action on the behalf of the bank (read GFC) puts the funds of the voting public at risk. Is any government prepared to allow that? By simply re-writing the law to make any funds deposited in a bank the property of the depositor/account holder, bank will be more accountable and will likely take more care in their behaviour and actions, as well as being more liable to their customer base. The banks will squeal like pigs denied their meal but they will still be in the position of putting that money to work and taking a cut off what they make on it. Might actually drag them back to the fundamental principle of what a bank is/should be.

Indeed but being paid a wage has nothing to do with the depositor, ie with the OBR the bank is split into 2 services, deposit and chequeing. So in an event my wages do not get frozen but my deposit accounts do.

An investor has choices such as Govn short term debt but that should be considered with professional advice. I keep wondering why ppl seem un-willing to get professional advice on how to protect themselves.

Even if all the banks keel over with the OBR (in theory) the recovery is faster and critically businesses like pak-n-save and households can still mostly function. In the old system the entire bank goes to the wall.

"unethical" well in that case I have to ask if you think NZ "banksters" are acting un-ethically and even illegally why allow that to continue? maybe because its because the saved expect the younger working generations to bail them out with decades of paying it back when with peak oil, CChange they will already be badly off (in fact they will default I think). I still fail to see why such an expectation if fair and moral.

ie 2 wrongs do not make a right.

Also where does the Govn get the Billions from? it would have to raise a massive amount of public debt going out 20~30years? would anyone lend? and if so at what rate?

If not that leaves printing doesnt it?

So what would the state of our economy be with massive tax hikes needed to pay the interest? I mean most ppl accept that Govn debt past 7% is simply un-doable so just how does this work?

I dont agree with changing ownership of the deposit, why should a deposit be so considered when all other investments are not?

Now lets look at who made the current mess, the saved basically by being incompetent voters happy to take Govn handouts / promises and then not look ahead for 3~5 decades past. So really they should indeed be paying for their losses IMHO.

So if we all opened cheque accounts we would get our money back?

It's not a saving problem it's enthusiastic lending policies which need capital gain to build equity, where it starts going wrong in a downturn. That and the numbers are a bit scary.

Why are you asking me? go get professional advice on how to ride out the OBR. Otherwise go read the OBR theory as was posted earlier. I would assume that if you tried to move deposit money into your chequeing account "fast" that it would get moved back and frozen. Not even sure what happens if you move your deposit to a different bank cheque account.

"enthusiastic lending policies" and you voted for whom for decades? Why did/do voters not insist that Pollies change this? Mostly because as long as things appear to be going well and they are getting a good return (even while companies are bled dry short term to achieve it) no one bothered to look and ask.

Totally wrong. "Banks split into 2 services" ???? can you show me where this is set out? You are inventing something that sounds fair to you. But no, Money in a bank is fair game under the OBR. No exception bar a "Minimus" that isn't set out - possibly in the order of $1,000 to $2,000.

Many 'chequing' accounts pay ( a minimal amount of ) interest. As do many 'Current' accounts seeing as most of us haven't used a cheque book for many decades.
Even money held in non interest bearing accounts are subject to the OBR. Even non interest foreign currency accounts. Everything you put in a bank you lose ownership of and become a creditor of said bank.

If you read what he is saying.
The government will not guarantee deposits but they will guarantee the insurance companies that guarantee your deposits.

Here is what he said
"he FDIC is backed by the US government"

So its just smoke and mirrors AGAIN

FDIC - a fine institution

not quite which 'smoke and mirrors' are referenced here. The FDIC managed the closure of more than 200 banks in the USA during the GFC of 2008 - 2010. Accounts are covered up to $250,000 per FDIC institution per account category (e.g. a married couple can have accounts in each name and in joint names - giving $750,000 cover per institution and can have accounts of this type across as many institutions as they want.)

To counter some claims, these bank closures rarely impacted any depositor more than a weekend bank closure where another bank took over operations of the failed bank.

And (officially at least) no government tax funds were used to cover the deposit insurance invoked in this period, or since.

It was a good program to the effect that the banking financial system was secure for depositors in times and complications which could have been far worse.

Not saying that FDIC is an answer for NZ, but saying that NZ is unique in not even trying to provide confidence to depositors. NZ in a way is even more vulnerable - given its severe reliance on a few foreign owned banks - which are more strictly regulated in their home country than here - and provide deposit insurance in their home country, with no obligation to do the same in NZ for their NZ depositors.

1. Unlikely scenario however here goes.
I have 100k on term deposit,
i have 100k loan from same bank.
What happens if bank starts to fail
Could there be a trade off or is it one way traffic.
2....Where else do you put your money,property?

1. 100k deposit - You lose it all.
100k loan You still owe it all, plus penalties when they call it in and you cant refinance.

2. Spend it!!!!!!

Been a wild ride for ANZ shareholders, what if the value of the banks shares is destroyed by the market before the OBR get enacted?

Jan 2009 $12, April 2015 $36.80, today after a %2.9 fall $23,35

Yes, it really is a case of those that sell first, sell best.

"Why should depositors bail-out banks?

The OBR policy is designed to ensure that first losses are borne by the bank’s existing shareholders. In addition, a portion of depositors’ and other unsecured creditors’ funds will be frozen to bear any remaining losses. To the extent that these funds are not required to cover losses as more detailed assessment of the position of the bank is completed, these funds will be released to depositors. At a high level, this outcome replicates the outcome that would apply in the event that a failed bank was liquidated. The primary advantage of the OBR scheme, however, is that depositors would have access to a large proportion of their balances throughout the process. This contrasts with what would happen under a normal liquidation, where depositors might not have access to any of their funds for a significant period."

So the shares would appear to be over-inflated in value as the investor(s) mis-judged the safety of moral hazard.

OBR is one RBNZ policy. As is their policy of excluding many of the best performing mortgages from being available to NZ depositors in case of bank difficulty. These mortgages have been guaranteed to overseas lenders via covered bonds and are essentially set up as a separate 'good' bank. Individual mortgages which become non performing are removed from this pool and replaced as a regular process being passed back to NZ depositors.

Read the RBA on-line discussions on the inequity of even having covered bonds prior to having deposit guarantees.

The moral hazard has been increased by the unique implementation of OBR in NZ. Banking financial stability has been undermined.

Hopefully this will never be put to the test - it isn't in anyone's best interests - but the invocation of OBR will be a dismal indictment on what could have been avoided by more prudent regulation and oversight. The RBNZ sets the rules of the road for all NZ banks.

Only 10%? (15%?) of the "best performing" mortgages can be put aside. However the investor then gets a lower return as the risk is significantly reduced. that investor is also locked in to a (lengthy?) fixed term i believe where a depositor is not.

No the moral hazard is contained as depositors now should realise they cannot be lazy and have to take steps to protect their capital.

"never put to the test" in that case why worry? My view is its 100% certain sometime inside the next 20 years due to peak oil and I think its most likely inside 5 years.

You park your car in a parking building at nights. One morning you find your car has been sold because the owner of the parking building went broke overnight. Would this seem fair to you Steven.

Don't see why not, if I had been clearly advised of the possibility by the car park building owner and had nevertheless chosen to park there in preference to paying more for an alternative car park where there was no such risk

you should think of it as a put option.
a put option over your car
the car parker ought be paid a premium to enter such an arrangement.

your preference comparison thinking is weak - are you a financial adviser or mortgage broker?.

You're just haggling over price, not principle.

We are both requiring that the car parker is rewarded for entering into the arrangement - that he should better off financially, than if he parked his car in a place where there was no possibility that his car would be taken in the event of the building owner going bankrupt.

He is. He pays a lower price for his car parking space.

Fair enough ask for a premium, or insist your capital is insured, if not move it elsewhere.

Where is this alternative car park building ? Most Kiwis wouldn't know that their savings aren't insured. NZ is the only OECD country not to.

You go ask for and pay for professional advice. The excuse that its someone elses job to pay the costs because you either stuck your head in the sand or were to tight to seek professional advice is not an adequate stance.

You should seek professional advice re your invention that your wages will be safe in a 'chequing account' in the event of an OBR

Paying for professional advice is NO guarantee that any investment etc is going to be safe Steven.

a) This is not the same thing as you are not getting a reward for parking your car but in fact form a contract at your cost.

b) If the contract actually says this and you choose to ignore it then yes.

is it not already "live"?

However he is broadly right in that a depositor will lose a % and even up to 100% of the capital where a debt is still 100% owed.

Good link - reminder thanks.

Of course I am right!!!!
Then the bankers will get a bonus when the government bails them out.
Or am I wrong?

Hopefully in NZ you are wrong.

So what you are saying is that in the event of a bank failure, the OBR is already effectively government guaranteed, by the taxpayer - again. Remember that the context of the question is likely referring to a major bank - one of the 4. In that event, we are pretty stuffed anyway. There are many examples of banks failing and all deposits are lost. Look at Greece, only with the intervention of the EU money machine, were the population able to draw out their deposits. Government intervention. Without government (taxpayer) you would lose your deposit as I said. The liquidators will ring you the next day to activate the "call" on your loan. You will not be able to raise alternative funds so your security will be called on.
There is only so much money in the pot, unless you print more of course. Dilution.
Am I wrong?

2. Anything but property. Buy a safe and some gold.

and if someone puts a knife to your throat?

Gold, not so sure but at least it looks somewhat stable these days after 30~40% losses that is.

Friedman's article is one of a series on the dangers facing the Eurozone. It highlights once again the relentless rise of Germany, which gives them the ability to have an effective final vote on whatever EU diktat issues from Brussels. Hence the ancient (and, indeed current - see http://www.telegraph.co.uk/finance/economics/12116429/Crippled-EU-is-no-... ) suggestions from the likes of AEP, that the EU be split into a DM-dominated Northern EU, and a Mediterranean EU (which takes in the PIGS), and.....

Because Mutti Merkel, her open-door mis-steps rapidly turning into a festering social slow train wreck, is still subject to (oh, the horror) a vigourous parliamentary democracy when it comes to munny....

German proposal to limit cash transactions put forward to deter those thinking vault case is an alternative to negative interest rates. Read more Totalitarism is on the march.

Shades of the Decline of the Austrian Empire. The Franco German Empire, otherwise known as the Eurozone ends in overindebted colonies (Greece, Portugal, Italy, Spain, Ireland) unable to repay debts to its creditor overlords. An irreversible decline ensues.

Currently unemployment for those under 25 stands at 22% across the Euro Empire.
http://www.telegraph.co.uk/finance/economics/12136090/Mapped-Europe-divi...

http://www.telegraph.co.uk/finance/economics/12116429/Crippled-EU-is-no-...

Yes agree AJ.
Punctuated equilibrium. Look it up.
Populations will withstand a gradual slide in standards of living. Then something unpredictable will happen, then everything changes.... Tunisia and the humble street market man wanting to feed his family (if that is actually true is maybe irrelevant). Arab Spring.

Why would i think this article is an attempt to flush savings into the sharemarket casino just as the rumoured russia opec negotiations were a sharemarket scam

Yes, this OBR mania column proudly sponsored by "Your Fund Manager"

I will say it again, The debts are going no where but up, thus the interest rates will be going no where but down, fore as the debt (private & government) begins (as it has for a while) now to continue to take its huge toll on EVERYTHING from living costs, jobs, trade, currency and ofcourse the last haven of the desperate to make a buck for doing nothing........housing then we will be witnesses to a sinking ship. It may sink slowly or in a sudden rush, who knows, but sinking it is and no dodgy TPP will be able to save it.
Depositors have choices now, but soon enough those choice may evaporate. The Reserve Banks of this world are only deluding themselves thinking they have solve anything fundamentally wrong with our banking and monetary systems. They were designed to fail and fail.....they are.

The issue about who should wear the losses in the event of a bank failure is a symptom of the problem Central Banks have created.

By falsifying interest rates CB's have moved interest rates from being a measure of risk to a stimulator of economic activity. As a result the Finance sector has grown to become out of proportion to the actual economy. Over a number of decades continued falsification has fuelled many bubbles.

With interest rates now at record lows continued inflation of these bubbles is becoming more difficult and volatile. The consequence of these massive bubbles across many asset classes has become so big any failure of one bubble is likely to take down other bubbles, and push banks into insolvency.

Who where the losses will likely be immaterial as the next crises will be too big to bail out. CB's will do all they can to ensure that a new crises or what is actually a continuation of the last crises does not occur.

Currency devaluations, helicopter money, the banning of cash to lock money inside banks will probably be implemented. We already have calls for peoples QE, forms of minimum incomes for every one, implementation of a cashless societies and banks not writing assets to market values all to try and fend of the deflation of asset values and the consequences on bank insolvency.

In my opinion none of these measure will work. We are witnessing the failure of current economic thinking which had every one believe a free lunch is possible.

The economy is like the environment, you mess about with one sector results in unintended consequences in another requiring a fix there then a bad outcomes occurs some where else.

For me the biggest concern is that free market capitalism will be blamed, yet we don't live in a free market system we have crony capitalism, too little competition, too much regulation, too many jobs for the boys and too much government.

I don't know of any solution without much pain and worse will be the grab for power by totalitarian lunatics.

I am sure many will think I am over dramatic, but look around. Can you really believe that lending money at negative interest rates could ever work out well? Debt growth has outstripped GDP growth, debt is up 57 trillion USD since 08. I could go on and on. I will say this though in ending, the rise of non insider politicians is no coincidence, large numbers of people feel left behind, struggling from pay check to pay check and Central Banks still see the solution is to reduce the purchasing power of middle class incomes via currency depreciation. Madness!

Fischer's primary thesis is that society and the economy expand in times of plentiful resources and credit, and this increased demand eventually consumes all available resources. When demand exceeds supply and excesses of credit reach extremes, inflation and social disorder arise together.
Though we have yet to see inflation on a global scale, it is inescapable that demand will soon outstrip supply of essential resources and that the global credit bubble will pop, depriving the economy of the means to buy resources regardless of cost.
The Upside of Down describes the process of increasing complexity adding fixed costs to the system, and the way in which this diminishes returns: more and more labor, capital and resources must be devoted to maintain production. At some point, the yield is negative--costs are higher than the output.
At that point, systems start unraveling, and people simply abandon costly complex systems because the means to support them no are no longer readily available.

http://charleshughsmith.blogspot.co.nz/2016/02/the-opaque-process-of-col...

Great article. Thank you Mr Friedman. Now if only we could get Tony Fiennes to read something other than elite fantasy novels we might improve the perceived instability of the NZ banking system.

I'd like to see Banks made less likely to fail by reducing the Banks' leverage and presumably risk by more regulation(which is contrary to the current govt's ideology)
See http://www.interest.co.nz/saving/bank-leverage