Because Of Cyprus A New Movement To Demand Collateral Before We Deposit Money

With the advent of turmoil in Cyprus, what we need to understand for ourselves is just how the banking system works. The lesson we need to know is about the status of the money we deposit in the banking system. Well, it is clear that these deposits are loans to the banks. The money is not technically ours while it is in the banking system.

Banks are not for keeping our money safe as a primary task. Banks are for borrowing and lending to make profit.

Well, we know that the ECB has demanded a confiscation of some money from the accounts in Cyprian banks. We know that the deal is being worked out and that the trump card is owned by the ECB. It has the power just to shut the banks down. It isn't your money in there anyway. It doesn't belong to you, the people of Cyprus or the wealthy Russians.

So, in the face of this confiscation, it is my view that people should not deposit money into banks without some collateral in return. After all, banks require collateral when they lend. Why should we not require the same? The collateral could be a set percentage of the bank equity and the depositors should be first in line ahead of the bank bondholders if the bank goes under.

Secured bondholders have collateral pledged to them. What makes them special and of greater importance than the depositors who are lending the bank their hard earned dollars?

Have you noticed that the bondholders never take a hit when banks are on shaky ground? After all the pledge of collateral makes the banks care about these folks. You depositors? The banks could care less about you.

When you think about it, the system of banking is quite perverse. With the turmoil in Cyprus, we learn that plan B of the bank bailout regime is to confiscate bank accounts the world over. If there is fatigue in the bailout plan A, the confiscation of taxpayer money, then plan B represents a whole other risk to many.

Ellen Brown has said that this plan B bailout has been in the works since the Asian crisis of 1997! And Ben Bernanke, when pressed as to whether this solution would be applied to the United States said it would be highly unlikely. So it isn't off the table here, either. And the US interest rates are so low that the confiscation here is ongoing. Joe Kernen of Squawk Box said that the Cypriots would have made a better return with the confiscation in the past 10 years than American savers without an explicit confiscation!

So, the bottom line is, we are creditors to the banks, and put our money into the banks with risk. Therefore, we should have a collateral position, in my opinion.

So we have austerity in the form of bad returns on our savings, just like there is austerity of another form in Italy, Spain, Ireland, etc.

At the very least, savers should be boycotting banks with all or part of their money, as a protest over not having a better stake in the banks besides a measly return that amounts to nothing.

Bypassing the banks for state banks who have the interest of main street at heart would be a second movement of protest that is worthwhile. Ellen Brown has been in the forefront of this movement.
The lack of respect that banks show to their depositors could be fixed by people just buying safes and leaving some of the money at home. Over time, the bankers would have to fight for your deposits. There is no competition now at all.

When a bank lends to another bank, secured collateral is required. When a private creditor, you and me, lend to banks in the form of deposits, it is against the law for the bank to provide us with collateral. Isn't that convenient?

And not only that, but we stand second in line to trillions of dollars of derivatives if the FDIC insurance ever had to kick in with the Bank of America. That is Ben Bernanke just failing to give an ounce of respect to insured depositors. FDIC could prove useless if you have your money in Bank of America!

This turmoil in Cyprus and a renewed interest in how banks work is bad PR for banks. It is likely to cause diversity out of bank accounts and could hurt the bottom line of the banks.

And as Ellen Brown said, if JP Morgan can behave badly in gambling with depositor money in the whale fiasco, where does that leave the less successful TBTF banks regarding their behavior?
Companies with lots of cash should be demanding bank collateral for all of us. Their money is potentially at risk. That means your stocks in these companies are at risk. Can you imagine a large US corporation losing 500 million dollars to a billion dollars in a confiscatory haircut of banks here?

The fact that plan B is a reality proves there is much more risk in the system than is admitted to. Investors should behave accordingly.

Update: Fed president Fischer said that bailins would be proposed. He did so on August 11, 2014. That means of course, that the Cyprus issue could hit home with your money depending on whether this is adopted. In order to prosper, be careful how much money you trust to the banks!

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