Despite what the markets are indicating, top economists unanimously agree that Trump is decimating the fundamentals of the US economy, by tearing up important trade deals like the TPP, threatening thousands of undocumented workers with deportation and drafting the most irresponsible tax plan in history. As Trump continues to undo Obama’s economic progress, many think that another financial crisis may be looming over the horizon, and that new measures may be needed to protect our financial institutions in this event.
In 2013, Cyprus was forced to restructure its banking sector, after some extreme financial turbulence caused by speculators. After negotiating the terms for a bailout from the EU and IMF, world leaders agreed that depositors with more than 100,000 Euros should be forced to take a modest ‘haircut’ of 47.5% of their deposits, to be invested in bank shares. The success of this bail-in caught the eye of monetary officials around the world, and many economists now recommend bank deposit levies as a highly effective measure to mitigate financial crises.
After the 2007-08 financial crisis, many bank shares that looked like they were on the verge of bankruptcy, showed double and triple digit returns in subsequent years. If depositors had been forced to invest a portion of their deposits in these bank shares, many of them would have become rich. Studies have also shown that when depositors are forced to underwrite the shares of their bank, the entire financial system is more stable and willing to make loans to small businesses.
Everyone recognizes that fiscal and monetary stimulus is essential for long term economic growth. Now it’s time for us to recognize the similar benefits of bank levies, and start implementing a comprehensive set of policies forcing depositors to take a haircut in the event of a financial crisis. Depositors may not be thrilled about this policy, but the reality is that everyone will benefit as a result. Bank levies are just simple economics.