The banking crisis in Cyprus has caused alarm bells to ring in the US—mostly from the Fox News channels, Tea Party spiritual leader Rick Santelli on CNBC and conservative bloggers, who have proclaimed this is a warning sign for us as well.
It follows a familiar meme, best articulated by Rep. Paul Ryan, that the US could go down the path of European destruction if we don’t change our free-spending ways.
There’s some truth in that—which I’ll get to later—but I believe the larger point is false. The US is not Cyprus, there’s virtually no chance of a repetition of that crisis here, and what’s happening in much of Europe likely won’t be our fate, either.
First, Cyprus. This tiny island nation prospered by becoming a banking haven for wealthy foreigners, some with ties to the Russian mafia, who welcomed its no-questions-asked banking policies.
Banking assets ballooned to eight times Cyprus’s GDP. (In the U.S., they’re only one time GDP.) When the big banks sustained losses from their holdings in Greek debt, they were threatened with insolvency.
To resolve this crisis, investors and big depositors in Cyprus’s banks will take a huge hit. Those covered by deposit insurance– €100,000 or under—will be spared.
If I had more than €100,000 in a bank in Greece, Italy, or Spain, I’d be worried, because contrary to what the Eurocrats say, this is a template for future bank rescues.
But here? The FDIC insures deposits up to $250,000 per owner (even in a joint account) in any bank, and it has an excellent, decades-long track record of repaying depositors of failed institutions. (Still, I wouldn’t put more than the limit in any one bank.)
Also, US banks recapitalized with billions of dollars in private money in 2009 and 2010, and many are close to meeting stringent new capital requirements. So, they’re not the banks they were going into the crisis—and we’re not Cyprus.
We’re also not Europe—which, contrary to many Americans’ notions, had many, many different causes besides spending for its problems.
- Ireland got deep into debt when banks that had made reckless loans to developers nearly went under in the real estate crash. The government bailed them out with taxpayer money, which boosted debt to GDP over 100%. But Ireland was never a free spender, and has some of the most pro-business tax policies in Europe.
- Spain also had a modest debt to GDP ratio before its own real estate crash, which decimated its banks and economy. It’s spending more now to combat a 25% unemployment rate, so its debt is growing, but that’s not the cause of its current woes.
- Italy and Greece were big spenders, but they also have a thriving underground economy, and tax collection is a huge challenge. Their crippling bureaucracies and conservative cultures stifle entrepreneurial initiative.
That’s not true in the U.S., a risk-taking culture with a vast ecosystem that supports would-be entrepreneurs. There are more ways than ever to find mentors and funding.
Also, our corporations—both start-ups and established—remain among the most competitive in the world. Our equity markets are among the most liquid and well regulated.
I think Paul Ryan is right that if we don’t address future entitlement spending, we could find ourselves in a European-like debt crisis. And I disagree with Paul Krugman that we should wait a decade before dealing with it.
But let’s get real. Right now, we’re not Europe, certainly not Cyprus, and it will be a long time before we get there, if we ever do.