It’s a wonderful life

Those of you who’ve seen Frank Capra’s classic 1946 movie “It’s a Wonderful Life” (at least once, since it’s been a Christmas Holiday perennial on television for decades) will remember one of its most famous sequences.

George Bailey (played by James Stewart) runs a one-horse Savings and Loan bank in the All-American town of Bedford Falls. And one day he’s confronted by a group of his depositors who’ve come to withdraw their savings money because they’ve become nervous about its safety, the classic run on the bank.

He tries to clue them in on the realities of the banking business, explaining that he doesn’t keep their savings in a safe in his back office. Instead, he’s used most of the money to grant each of them affordable mortgages on their homes.

Sam’s money is in Chuck’s house. And Chuck’s money is in Dick’s house. And Dick’s money is in Sam’s house … So it goes.

With each of them able to own the homes they live in instead of having to pay rent to Old Man Potter, the hard-hearted villain who owns the leading commercial bank and most everything else worth owning in town.

What George was trying to describe to his nervous depositors is how the home mortgage and banking business worked in the “Good Old Days.”

If “It’s a Wonderful Life” were made today, its description of banking would have to be updated to reflect last month’s goings on in Cyprus. To secure a 10 billion euro bailout, Cyprus slapped a tax on deposits that ranged from 9.9 percent on amounts above E100k to 6.75 percent on deposits under E100k which translates into $130,000 (the limit for deposit insurance). It then revised the terms of the proposed haircuts to reduce the levy on smaller depositors and raise them on larger ones. In other words, they would tax the bank accounts of citizens and businesses to recapitalize the banks. Afraid that the government was coming for their cash, Cypriots ran to the bank. Much was made of the government’s attempt to get its pound of flesh from bank accounts; people had to wonder if their own money was safe. We were told Cyprus was an isolated case and it could not happen here.

But how does Cyprus compare to what’s happening to American depositors and savers? The Federal Reserve’s zero interest rate policy (ZIRP) is not a tax, but it reaches into the average American’s pockets.

And it is done for the same reason as the bank bailout in Cyprus: to save the financial system. Average Americans are earning next to nothing on their bank deposits, which are actually losing ground to inflation. Yet they can’t borrow from the bank at these ridiculously low interest rates. Maybe Cyprus doesn’t look so bad after all.

ZIRP sets a dangerous precedent. It suggests that governments are not above taking money from depositors to pay for bailout packages. If deposits are not safe from politicians, why should you trust any bank?

ZIRP has been confiscating the savings of Americans for the past five years.

The average interest on a savings account is less than 0.25 percent, a 10-year government bond yields less than 2 percent and inflation adjusted returns on six-month bank CDs are 0 percent. Average Americans have no safe place to park their money and collect a decent return. Is the difference between these returns and normal interest rates equivalent to a tax? In Cyprus, it was a one- time hit to depositor, in America it happens more slowly.

This blow to traditional savers harms the working class, discourages savings and induces some to speculate in the stock market and reach for higher yields on riskier investments. In America, savers aren’t an endangered species; they’re all but extinct.

originally posted: April 20, 2013