Could the U.S. Do Like Cyprus and Seize Bank Deposits?

Cyprus financial crisis banks insured deposits
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Just when we all thought it was safe to stop worrying about the eurozone, another country's banking system blew up and stopped the Continent in its economic tracks.

This time, the victim was Cyprus: a tiny Mediterranean island not far from Greece, whose two biggest banks were facing insolvency if Europe didn't come to the rescue. And yes, a last-minute rescue plan was arranged. But rather than simply bailing out the banks with EU taxpayer money, as had been done previously, the European Union initially decided to "bail in" the creditors -- that is, make people with money deposited in the banks take some of the hit for the rescue.

Initially, part of this hit was going to be against insured depositors -- ordinary savers whose accounts were insured by the European Union up to €100,000. Had the plan gone through as proposed, they would have faced a one-time 6.75 percent tax on their accounts.

However, there was such local and international uproar against the notion that ordinary citizens could have their bank accounts raided by the government that a new bailout plan was devised. This one protected insured depositors but still left those with various levels of "unsecured debt" -- i.e., very large deposits -- in the country's two biggest banks on the hook.

The mere fact that Cyprus attempted to raid insured accounts has left a bad taste in people's mouths around the world. And it has led some people to ask: Could that ever happen here in America?

Let's play pretend with the U.S. banking system

Imagine if the U.S. found itself in Cyprus' situation, with a failing banking system and no way to save it except by accepting the terms of whatever rescue plan was handed down by foreign governments or multinational organizations.

Finding that hard to imagine? It's no wonder.
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That's because, unlike EU members, Washington isn't subject to any superseding government. No outside force can dictate terms to it. And if the U.S. banking system does get itself into trouble (as it did in when the housing bubble burst and tanked the markets), we're still not in danger of running out of money to pay off our IOUs.

Unlike eurozone nations, we have our own currency. We can just "print" more of it until our debts are covered. So you can rest assured -- if the government needed money to prop up endangered banks, it surely wouldn't need to reach into your savings account to find it.

True, there are dangers associated with flooding the market with dollars, inflation being one of them. But the fact remains that the U.S. literally can't run out of money. For Cyprus, and other countries that have had to take European Union bailout money because there was no other place to turn, this is one of the major downsides of not having a separate currency.

Our ability to print money isn't the only stop-gap against a Cyprus situation. We also have a long-standing deposit-insuring agency: the Federal Deposit Insurance Corp.

We've Got You Covered

The FDIC was established as part of The Banking Act of 1933, in part as a response to the thousands of bank failures that occurred in the U.S. in the late 1920s and 1930s. (At FDIC-approved financial institutions, single depositors are covered up to $250,000 per owner, joint depositors are covered up to $250,000 per co-owner, and even IRAs are covered up to $250,000 per owner.)

No depositor has ever lost a dollar on insured deposits under the limits since the depositor guarantee was written into law in 1933. Without first changing the law, no American president or other member of the federal government could unilaterally tax the accounts of insured bank depositors to "bail in" failing banks. (Interestingly, the FDIC and the Bank of England have floated the idea of a policy that could, in theory, legalize such bank account haircuts, turning the Cyprus experiment into a U.S. precedent. But at this point, it's only a White Paper, an ivory tower exercise.)

And if you think there was an uproar over Cyprus trying a move like this, imagine the uproar the American press or Rep. Nancy Pelosi would create in response to a similar move.

We've Got a Well-Established Blueprint

The European Union and corresponding eurozone haven't been around for that long. There isn't much history in the eurozone as an entity, and the economic rule of law is still shaky in some of these smaller countries, like Cyprus.

Since the financial crisis, they've been putting out fires left and right on a case-by-case basis with varying levels of consistency and success. And that's what the Cyprus rescue was: a poorly thought out, ad hoc response that panicked markets and citizens everywhere.

Luckily for us in the U.S., we have history and established laws on our side. These two things, along with the flexibility having a separate currency provides, is why what happened in Cyprus can't happen here.

John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich.

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Could the U.S. Do Like Cyprus and Seize Bank Deposits?

Nationally, the average gas price hit a recent high of $3.74 per gallon, nearly $0.50 higher than it was on Jan. 1. According to website, that's about a 14 percent increase since the start of the year.

The start of the new year also marked the end of the temporary 2 percentage point tax break on Social Security contributions. Once that part of President Obama's stimulus package expired, your paychecks went back to being 2 percent smaller. For the average family, that adds up to about $1,000 a year.

That same "average family," by the way, already earns only about $50,000 a year today. And according to CNN, that's about $4,000 less than you were earning in 2000.

A disconcerting report from Sallie Mae last week showed that about one-third of Americans working toward retirement are having to raid their retirement savings to pay for their kids' college educations.

According to a poll commissioned by (RATE) in February, only 55 percent of Americans have enough money tucked away in their savings accounts and "emergency funds" to cover the amounts owed on their credit cards.

That Bankrate poll also revealed that among women in particular, 51 percent actually owe more on their credit cards than they have cash in the bank. Digging deeper into the data, Bankrate reported that while high earners are doing well, and generally flush, most people (59 percent) who earn less than $30,000 annually owe more on their cards than they have in savings. And these are the people least able to afford the high cost of credit card interest.

Speaking of earnings -- and jobs -- the same unemployment report that set Wall Street to cheering Friday can be looked at from a glass half empty perspective as well. The new, lower unemployment level of 7.7 percent is the best number we've seen since the Great Recession ended. However, The Wall Street Journal points out that 7.7 percent is very close to the worst unemployment ever got (7.8 percent) in the 1991 recession. Our best number in years is within a whisker of the worst they faced back then.

The overall workforce participation rate -- the percentage of Americans currently earning wages at all -- currently stands at just 63.5 percent. According to the Bureau of Labor Statistics, that's much worse than what we saw in the 1991 recession. It's the lowest we've seen since the recession that hit during the Carter administration.

Little wonder, then, that according to the Bankrate survey, people are increasingly concerned about "job security." Friday's unemployment report may suggest that the jobs market is on the mend, but most people (59 percent) say they feel no more or less  confident in their employment situation today than they did a year ago. Among those polled whose opinions have changed, 23 percent said they feel "less secure today" than they did a year ago, versus 19 percent who feel more secure.

That doesn't exactly jibe with the story that things are getting better.

It's great news for folks who own stocks, no doubt, and according to the Journal , more than 90 percent of people earning $100,000 or more do. But what about the rest of us? Fewer than 46 percent of Americans earning less than $50,000 are invested in the stock market -- and remember, "$50,000" is the average income in America today.

So yes, It turns out for the average American, things may not be getting better at all.

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