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After a day to rethink its bailout plan, the government of Cyprus takes some pressure off small account holders. But this may not stem the run.

Cyprus seems to have realized what I wrote yesterday: violating your deposit insurance guarantees is a better way to start a bank run than to stabilize a banking crisis.  After Cypriots rushed to withdraw their money ahead of the new rules, the Wall Street Journal reports that the government has cobbled together a new proposal: small depositors will pay a 3% "tax" on their accounts (instead of 6.75%); medium depositors (those with between €100,000 and €500,000 will be taxed at the same 10% they were supposed to pay before; and those with more than €500,000 will pay 15%.  

That may check the runs on the small accounts.  Now the question is: what about the big ones?  Will the foreign depositors view 15% as the simple cost of stashing their money out of the watchful eye of their own government?  Or will they seek a new haven?  

If the foreign money runs, it seems unlikely that Cyprus will be able to bail out the banks again; this desperate bank levy is, after all, what they were forced to do just to raise the $5.8 billion that the EU and the IMF demanded they contribute to the bank rescue.  But the higher Cyprus raises the levy on large accounts, the more likely it is that the foreign money will flee to somewhere less shaky.  

It may already be too late for Cyprus.  Government guarantees are a powerful tool for fighting banking crisis, but only if they're credible.  Once you've suggested that you might be willing to let people lose a lot of money, you've irrecoverably squandered a lot of that credibility.  The time to stop this bank run was before it started.  

Cyprus Financial Crisis

People line up use an ATM machine outside of a bank Larnaca, Cyprus, Saturday, March 16, 2013. Many rushed to cooperative banks which are open Saturdays in Cyprus after learning that the terms of a bailout deal that the cash-strapped country hammered out with international lenders includes a one-time levy on bank deposits. The move, decided in an extraordinary meeting of the finance ministers of the 17-nation eurozone in the early hours Saturday, is a major departure from established policies. Analysts have warned that making depositors take a hit threatens to undermine investors' confidence in other weaker eurozone economies and might possibly lead to bank runs. (Petros Karadjias/AP)

As Cyprus reneges on their deposit insurance guarantees, the rest of Europe is in the crosshairs.

As you probably already know by now, the banking system of Cyprus has imploded, and Europe has stepped in to provide, not a "bail-out", but a "bail-in": the banks get a capital infusion, but the depositors have to take a haircut, losing between 7-10% of the value of their bank account.  That's not exactly what they're calling it, of course; it's a "special bank levy" of 6.75% on accounts up to 100,000 (the limit for deposit insurance) and about 10% on accounts above that limit.  

The depositor haircuts seem to have been necessary to get political support for the deal in the EU--and political support in the EU was necessary because Cypriot banks had assets somewhere in the neighborhood of 8 times the Gross Domestic Product of Cyprus.  And just to bring it full circle, the banking system had grown to such grotesque, hypertrophied proportions because Cypriot bank accounts seem to be a favorite of tax-dodging Russian oligarchs . . . which is why it was politically necessary to give depositors such a large haircut.

From a technical, economic, perspective, however, this looks to be disastrous.  If we are not yet having full-scale runs on Cypriot banks, we've at least worked up to a pretty brisk jog.  No banking system can survive a bank run; if everyone tries to get their money out at once, even the soundest, most prudently managed bank in the world will fail, because they can't liquidate their loan assets fast enough to keep the cash moving out the door.

The decision to place a levy on insured accounts, in particular, seems extremely foolish. Note that it may have been necessary to prevent a run on the foreign accounts, which by some reports constitute about a third of total deposits.  But if violating the deposit guarantees was necessary to implement your "tax the Russians to pay for the bank bailout plan", that should have been a sign that the plan was a bad idea.

They won't say what

Democratic Senators apparently met with Kathleen Sebelius, the Secretary of Health and Human Services, to press her to speed up implementing various parts of Obamacare.  However, they won't say which parts . . . just that they'd like them to happen faster, whatever they are.

Implementing something as big as Obamacare, with about a hundred zillion moving parts, is a monstrous task.  The administration has had three years, of course. But they didn't know one of the most important facts--how many states would be running their own exchanges and how many would need the Feds to step in--until a month ago.

It's not surprising to me that parts may be getting bogged down.  It is, however, surprising how little anyone outside government power-brokers seems to know about the process.  Who is building the exchanges?  How long will it take?  When will they be in beta testing?  (Soonish, one hopes--they're supposed to go live in October.)  

Why all the secrecy?  Why shouldn't we know which parts of Obamacare they'd like to see sped up--do they think that no one will notice that they aren't around in six months?  The hush-hushness of it all seems to imply that whatever's missing, it's either really important, really embarassing, or both.  It's not as if this is some sort of top-secret NSA program that we don't want our enemies to know about; six months from now, we're all supposed to be able to log into the exchanges and buy us some health insurance under the new law.  Whatever it is, we'll find out about it then, so why not tell us now?

Social Security. Corporate Pensions. 401ks. They're all risky, and that risk isn't going away.

For over 100 years, the Studebaker Corporation made vehicles, from wagons for the Gold Rush to tracked vehicles for World War II.  And of course, the cars that we mostly know them for: streamlined, a little stodgy, and very much of their era.

Studebaker Advertising

Aadvertising for the Studebaker car models Pinehurst V8, Parkview V8 and Pelham, published in 'American Magazine' in April of 1956. (Apic, via Getty)

That's because their era ended, in 1963, when the company closed its South Bend plant.  That wasn't a surprise; sales had been suffering for years, due to high costs and concerns over reliability.  What was a surprise was the state of its pension fund, which was disastrously underfunded.  No, wait--hold that rant about greedy bosses looting their pension plans unbeknownst to the innocent, victimized workers.  The UAW, which represented Studebaker's employers (some of the highest paid in the auto industry, by the way), had not only allowed the company to stretch out its payments into the fund, but had arguably actually encouraged it, because the alternative was lower wages.

Nonetheless, workers were devastated.  A deal was worked out whereby those in or very close to retirement got some of their pensions, those over 40 got a fraction of the actuarial value, and everyone else got nothing.  Unions pressed Congress for some sort of government solution.  And 10 years later, we got ERISA, which regulates private pension plans, and also insures them, through the Pension Benefit Guarantee Corporation.  The idea is that sound regulation and government-backed insurance would prevent pension risk, in much the way that regulation plus insurance had stabilized the banking industry.  For a while, it seemed to be working.  But then the risk began popping up in other places.  

It's hard to test Alzheimers Drugs. But the FDA is going to make it a little easier.

Say your doctor calls you into his office and gives you some very bad news.  "We think you have Alzheimer's."

Now he gives you some very good news:  "But there's a promising experimental drug, and since we've caught it early, we can get you into the clinical trial.  With luck, it won't progress any further than forgetting where you put your keys."

"How long until we know whether it's working?"  You ask your doctor.  

"Oh, anywhere between 8-10 years," he tells you.

The forms probably can't be made any simpler. Will people be able to navigate them?

The draft application for Obamacare subsidies has dropped, and it's 21 pages of complexity.  It's reminiscent of a tax form, and since the whole point is to award subsidies on the basis of your income, that's not exactly surprising.  

In some ways, it's actually more confusing, since the IRS taxes the family as a whole; they don't require you to identify whether "Person 1" will be paying taxes while "Person 3" stays on their employers tax plan or some other plan available through the government.  And the people most likely to need subsidies are also the most likely to have difficulty negotiating complex forms.

The frightening thing is that the people who designed this form clearly worked very hard to make it easy to use.  The complexity is inherent; it's hard to see how it could be simplified further.  October 1st, when the exchanges go live, may end up more than a little reminiscent of April 15th.

Democrats blame Republicans. Republicans blame Democrats. They're both right.

Obama is having a spot of trouble getting judges through the nomination process.  So did Bush.  And Clinton.  And Bush . . .  

Naturally, when it's happening to them, each side screams that this is an unprecedented abuse of minority (or for that matter, majority) power.  Of course, when it's your side doing it, well, elections have consequences, know what I mean?  

Jonathan Adler traces the whole history of this fight, which was started by the Democrats under Reagan.  Since then, we've been locked in an escalating tit for tat war in which the loser is our increasingly empty federal court system.

Senate Democrats were not particularly happy with Republican treatment of Clinton’s nominees, particularly those that were held for extended periods, so they returned the favor as soon as they had the opportunity. President Bush offered an olive branch in May 2001 when he re-nominated Roger Gregory to the U.S. Court of Appeals for the Fourth Circuit to fill a seat that had been open when Clinton took office, and remained vacant until Clinton recess appointed Gregory at the end of his second term. Bush also nominated a prominent Clinton district court nominee, Barrington Parker, to the U.S. Court of Appeals for the Second Circuit. These gestures did not earn much goodwill, and Senate Democrats resolved to obstruct the confirmation of appellate nominees particularly those, like Miguel Estrada, who were likely Supreme Court picks. They slowed the process down — much as Republicans had done to Clinton — while they had the majority. Once they lost control of the Senate, however, they tried something new: filibustering appellate nominees. In all ten appellate nominees were successfully filibustered. Five of these were later confirmed after the Gang of 14 deal, whereas the other five were never confirmed. Of note, while the Gang of 14 deal led to the confirmation of some filibustered nominees, many Senate Democrats (including a Senator from Illinois who now sees things from the other side) continued to vote against cloture on high-profile appellate nominees.

Market Urbanism

How New York Could Get More Affordable Housing

Rent control is not the way.

The Manhattan where I grew up was an expensive place compared to the small town in Western New York State that my mother hailed from.  Nonetheless, it was a fundamentally middle class place, not the wall-to-wall display of edgy affluence that it has since become.  In the 1970s and 1980s, my neighborhood had a fair amount of petty street crime, apparently including a transvestite prostitute who used to engage clients right underneath a friend's bedroom window.  There were housing projects, and some truly derelict hotels where the very-down-on-their-luck lived.  But there were also lots of genteelly shabby buildings, lots of them rental-to-coop conversions, where you'd find professors, city workers, various sorts of bookish-but-moderately-paid professionals, and of course, the uncountable elderly Jewish ladies who had often moved into their apartments right after World War II.  They made slow, dignified daily rounds using collapsible shopping carts as ersatz walkers, and could be counted on for a few hamentaschen every Purim.

Now that same stretch of Broadway contains mostly banks, sit-down restaurants and high end chain stores; every year, the Godiva line advances closer to West 96th Street.  The housing projects are still there, some of them, but they are islands in a sea of people who call themselves "middle class" on a mid-to-high six figures income.  It's getting harder and harder for ordinary workers, much less the poor, to find somewhere to live within the five boroughs, and advocates for the poor are urging the city to do something about it:

“What you will see is overcrowding or people being forced to move to places like Long Island, Connecticut and New Jersey. The impression is that we’re talking about a small segment of the population. In reality it’s close to half of all New Yorkers that are affected. The city is sending away its growth engine.”

In her annual State of the City address last month, Christine Quinn, council speaker and frontrunner to replace Michael Bloomberg as mayor, echoed this statement. “We need to make sure that the people who want to stay in our great city can afford to stay here,” she said. “We will not allow middle-class families to get priced out of the neighbourhoods they helped build.”

Wealth Gap

Why Don't Americans Save?

Ever wonder why people buy $34,000 cars on $25,000 incomes? It's not quite as crazy as you might think.

America's wealth is very unequally distributed.  Whites have more of it.  So do older people, more educated people, and people with higher incomes.  The government homeownership policies that contributed to the housing bubble were a largely well-intentioned attempt to give poorer people access to what had been a major vehicle of capital accumulate for affluent whites.  

Unfortunately, it didn't work so well; the collapse of the housing bubble hit the poorest hardest.  Not the very poor--who had neither the money or the credit to buy homes--but the working poor and the working class, the folks who could scrape together just enough money and signing power to get themselves in deep trouble.  

Noah Smith suggests that what we really need to do is change how the less-wealthy save: how much they save, and how they save it.

If you do the math, you discover that in the long run, income levels and initial wealth (factors 1 and 2 from above) are not the main determinants of wealth. They are dwarfed by factors 3 and 4 -- savings rates and rates of return. The most potent way to get more wealth to the poor and middle-class is to get these people to save more of their income, and to invest in assets with higher average rates of return.

All wheel drive provides better traction. But they don't give you magical stopping powers if you go too fast in poor weather.

Mac Demere at Popular Mechanics on the overhyped abilities of All Wheel Drive:

I'm not anti-AWD. Rather, I'm just incensed by those who fudge its ability beyond all recognition. AWD is great at aiding accelerating on slick surfaces and keeping a vehicle moving on snowy roads. Rally racers like AWD because it helps their over-powered cars accelerate on gravel and dirt paths. I co-drove an AWD car to victory in a 24-hour race, and in the rain I enjoyed how the car accelerated off the corners.

However, my experience—hard-earned from wrecking more than one AWD vehicle during snow-handling tests for a tire company—is that AWD is counter-productive when the roads are slick. At the same time AWD doesn't improve your handling, it does offer an overly optimistic sense of available traction, and it provides the potential to be going so much faster when you need to stop. (Note to those from warm climes: Snowbanks are not puffy and cushiony.) The laws of physics mean a vehicle's cornering power is the job of the tires and suspension.

During Washington's Snowpocalypse, the back-to-back blizzards that dumped almost four feet of snow on our fair city a few years back, many drivers learned this to their dismay.  There you'd be in your little Acura, sitting patiently in the one badly-plowed lane where the pavement was at least partially visible through the snow.  Just as you started to turn left, some jerk in an AWD vehicle would come roaring past you on the left, nearly smashing into you as he demo'd his AWESOME powers of traction.  I watched more than one of these morons skid through the intersection and into a row of parked cars, as they realized that all-wheel drive does not also confer AWESOME powers of braking.  That would be the job of the brakes, which cannot actually stop hard-packed snow from being, y'know, slippery.

Antibiotic resistance is a growing problem. Here's why we may not be able to fix it.

As long-time readers know, I'm something of a fanatic on the subject of antibiotic resistance.  My generation is only the second to live its entire lifespan in the age of antibiotic miracles.  My grandparents were born into a world where the son of the President of the United States could die from an infected blister he got while playing tennis without socks.  It was a world where almost everyone over the age of 60 who got pneumonia died (hence it's moniker: "the old man's friend".)  Where surgery was a deadly risk and deaths from childbirth were all too common.  

Most of the lurid abortion statistics that you hear about hundreds or thousands of women dying every year from illegal abortions come from that era too; while the number of deaths was undoubtedly elevated by unsanitary conditions at back-alley abortionists, even abortions in hospitals would have been extraordinarily risky, because the risk of infection could never entirely be eliminated. Most of the decline in deaths from abortions actually came before the Roe decision, and the timing makes it clear that this was mostly due to antibiotics, with a small assist from better blood banking. All of which is to point out that in a world without antibiotics, you'd have to think real hard before undertaking any sort of elective invasive procedure.  

And while we're nowhere near that world yet, we are getting closer.  Totally drug resistant tuberculosis. And gonorrhea, too.  Plus, don't forget the stomach bugs.  So far, these are confined to limited populations, but they seem to be spreading.  

To be sure, we'll never get to the point that Europe reached in the 19th century, where by various estimates, up to 20% of the population died of tuberculosis.  (Thank God for ventilation, and better nutrition.)  But we could definitely get to a point where routine infections would require hospitalization for treatment with highly toxic antibiotics, where the old die quicker and even young lives are more routinely touched by death. Where deafness and infertility and all manner of other impairments are far more common.  In short, the world of childhood storybooks like Little House on the Prairie and Ann of Green Gables.

Prediction Markets

What Happened At Intrade?

The prediction market suddenly shut down, with hints of possible improprieties yet to be revealed. Why?

The betting market shut down rather suddenly a few days ago, with a rather cryptic notice about "financial irregularities" and the requirements of Irish law that they cease trading at once.  Naturally, people have been wondering what, exactly, those financial irregularities might consist of.

Intrade

Rajiv Sethi, a Columbia economics professor, suggests that they may have failed to properly segregate their trading accounts:

What on earth is going on? My best guess is that the margin posted by traders was not held, as it should be, in segregated accounts separate from company funds. When bets are made on this market, both parties must post margin equal to their worst-case loss, so that neither is subject to counterparty risk. In effect, each party is taking a position against the exchange, but these positions are exactly offsetting so the exchange bears no risk. To ensure that all promised payments can be made, these funds must be held in the form of cash, insured deposits, or safe dollar-denominated securities such as Treasury bills. They cannot be invested in risky assets, and cannot be used for the payment of salaries or expenses.

Ask the Blogger

First World Financial Problems

Do college or retirement savings come first? How much of my huge cash stockpile should I spend while working on a startup? And other questions, all answered in this week's Ask the Blogger column

Dear Blogger:

We have a four year old and a two year old. How much and how should we save for their education? There is a lot of talk on your blog and elsewhere about a bubble in higher education and how student debt is crushing younger people. For a service that is going to go through a lot of changes how do you know how much to save for something that is well over a decade off?

On a personal finance level – both me and my wife just past our 40th birthday. We own a house valued around $750K and only have about $150K left to pay off. We have been paying down the house about $50K per year so should be debt free in three more years. For the past two years we have also been putting $25K into a 529 for the kids. So at this point we have about $50K in a 529. Almost all our savings are in the house as we only have about $150K in other investments. When is the kids’ college fund topped up? Are we being foolish to save for the kids educations as opposed to our own retirement?

Once the kids are in kindergarten our income should go up (we have been prioritizing family a lot over work while they are this age) and our expenses should drop. Also, our house will be paid off so we can allocate those savings to other investments.

Kids Future Or Ours?

Dear KFOO:

People haven't saved enough for retirement. Should the government make it up to them?

Josh Barro notes an absolutely true fact: most people don't save enough for retirement.

file

Therefore, says Josh, we should raise Social Security benefits to make up the shortfall:

Private saving for retirement is woeful. This typical near-retirement household has just $42,000 in retirement accounts and $18,300 in other financial assets. For most Americans, Social Security isn't augmenting private saving; private saving is (just barely) augmenting Social Security.

Friday Forum

How Are You Saving?

As we head into the fifth year of the financial crisis, people are still cutting back.

As we head into the second week of the sequester, the federal government is thinking about tightening its belt.  But of course, many of you have been cutting back for years.  Eating out less, cancelling cable, running the old car a while longer.  Even people who still have their jobs seem to be looking for ways to save rather than spend, the better to weather any future hurricanes.  

So this week's discussion topic concerns tips for thrift.  What have you done to cut back during the Great Recession?  What were the easiest and most painless ways to economize?  What turned out to be a false economy?

About the Author

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Megan McArdle

Megan McArdle is a special correspondent for Newsweek and The Daily Beast covering business, economics, and public policy. A former senior editor at The Atlantic and writer for The Economist, Megan has a diverse work history including three small startups and a disaster recovery firm at Ground Zero.

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