Ron Paul's Texas Straight Talk 4/1/13: The Great Cyprus Bank Robbery  
The Great Cyprus Bank Robbery
by 
Ron PaulThe dramatic recent  events in Cyprus have highlighted the fundamental weakness in the  European banking system and the extreme fragility of fractional reserve  banking. Cypriot banks invested heavily in Greek sovereign debt, and  last summer's Greek debt restructuring resulted in losses equivalent to  more than 25 percent of Cyprus' GDP. These banks then took their bad  investments to the government, demanding a bailout from an already  beleaguered Cypriot treasury. The government of Cyprus then turned to  the European Union (EU) for a bailout.
The terms insisted upon by  the troika (European Commission, European Central Bank, International  Monetary Fund) before funding the bailout were nothing short of highway  robbery. While bank depositors have traditionally been protected in the  event of bankruptcy or liquidation, the troika insisted that all bank  depositors pay a tax of between 6.75 and 10 percent of their total  deposits to help fund the bailout.
While one can sympathize with  EU taxpayers not wanting to fund yet another bailout of a poorly-managed  banking system, forcing the Cypriot people to pay for the foolish risks  taken by their government and bankers is also criminal. In their desire  to punish a "tax haven" catering supposedly to Russian oligarchs, the  EU elites ensured that ordinary citizens would suffer just as much as  foreign depositors. Imagine the reaction if in September 2008, the US  government had financed its $700 billion bank bailout by directly  looting American taxpayers' bank accounts!
While the Cypriot  parliament rejected that first proposal, they will have no say in the  final proposal delivered by the EU and IMF: deposits over 100,000 euros  are likely to see losses of at least 40 percent and possibly as much as  80 percent. "Temporary" capital controls that were supposed to last for  days will now last at least a month and might remain in effect for  years.
Especially affected have been the elderly, who were unable  to use ATMs or to transfer money electronically. Despite the fact that  ATMs severely limited the size of withdrawals during the two week-long  bank closure, reports indicated that account holders who had access to  Cypriot bank branches in London and Athens were able to withdraw most of  their funds, leading to speculation that there would be no money  available when banks finally opened up again. In other words, the  supposed Russian oligarch money may well be already gone.
Remember  that under a fractional reserve banking system only a small percentage  of deposits is kept on hand for dispersal to depositors. The rest of the  money is loaned out. Not only are many of the loans made by these banks  going bad, but the reserve requirement in Euro-system countries is only  one percent! If just one euro out of every hundred is withdrawn from  banks, the bank reserves would be completely exhausted and the whole  system would collapse. Is it any wonder, then, that the EU fears a major  bank run and has shipped billions of euros to Cyprus?
The elites  in the EU and IMF failed to learn their lesson from the popular  backlash to these tax proposals, and have openly talked about using  Cyprus as a template for future bank bailouts. This raises the prospect  of raids on bank accounts, pension funds, and any investments the  government can get its hands on. In other words, no one's money is safe  in any financial institution in Europe. Bank runs are now a certainty in  future crises, as the people realize that they do not really own the  money in their accounts. How long before bureaucrat and banker try that  here?
Unfortunately, all of this is the predictable result of a  fiat paper money system combined with fractional reserve banking. When  governments and banks collude to monopolize the monetary system so that  they can create money out of thin air, the result is a business cycle  that wreaks havoc on the economy. Pyramiding more and more loans on top  of a tiny base of money will create an economic house of cards just  waiting to collapse. The situation in Cyprus should be both a lesson and  a warning to the United States. We need to end the Federal Reserve,  stay away from propping up the euro, and return to a sound monetary  system.