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.

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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Yes it can happen here, and in fact already has! Bernanke and the FED have been slowly taxing bank deposits for years! While inflation has risen at a 4% average clip during the past 7 years, bank interest rates have hovered at 0%. Do the math, and your money has lost 28% of its purchasing power, due to FED policy. In effect, they have transferred $600 billiion to $1 trillion in bank deposit interest from consumer hands to banks and their CEO\'s. Since American bank depositors don\'t seem to be enraged by the

April 04 2013 at 3:56 PM Report abuse +1 rate up rate down Reply

should have never bailed them out . .

April 04 2013 at 3:56 PM Report abuse rate up rate down Reply

Spot on target ! BTW we have been paper money (fiat money) since 1971 and Nixon....we went off the gold standard. Our money is ONLY paper and backed by nothing.

April 04 2013 at 3:30 PM Report abuse +1 rate up rate down Reply

Headlines like this,, and the fact that the United States could actually elect someone like Obama as President, are precisely the reason our forefathers included the Second Amendment into our Constitution!

April 04 2013 at 3:27 PM Report abuse rate up rate down Reply

Let me get this straight...if I have 100k in a bank it is insured and the government can just print pieces of paper and give it to me if the bank I use goes under? ...that is the reasoning? We can just print a trillion dollar coin and pay off the debt? Who in their right mind loans money to someone that pays off their debt with currency that is back by air? Sooner or later people will see it is just paper..and the more they print the less it is worth.

April 04 2013 at 3:16 PM Report abuse +1 rate up rate down Reply

Are you really silly enough to believe we can PRINT our way out of trouble?

Ohhh wait, I remember some of the Soviet Block countries doing that. Pushing around wheel borrows FULL of worthless money that MIGHT buy a cup of coffee.

You have been sniffing way too much glue. Please take an Economics course before you publish another article !

April 04 2013 at 3:10 PM Report abuse rate up rate down Reply

Oh yeah!!! It can't happen here. I worked for the Recreation Department on the Naval Base for 23 1/2 years. It was classified as an Unappropriated Fund Activity employee. Graded like Civil Service. I paid into the Retirement Fund for many years. I retired and started drawing my retirement annuity 18 years ago. This month I received a letter from a Dept. of the Navy Activity the retirement funds are handled under. I was notified that a different process to figure the amount retirees would receive. This new process cut my monthly payment in half. Now I wonder who will be next. I figure it won't be Federal Civil Service because too many high-paid DC government workers would be hit. So I think it will be Military retirements and benefits.

April 04 2013 at 2:32 PM Report abuse rate up rate down Reply

Clinton did this in 1993 didn't he. 401k and IRA plus pensions. All things the low income people do not have. It would not be at all hard to in vision Obama doing this. Even more so since he has SAID he would give 20k of his 400k a year back to the Treasury. My suggestion is collect the back taxes owed by federal workers, straight out of there pay checks. If it were private business they would not hesitate. In fact Obama has said He would not take it off the table. So he has thought about the power play.

April 04 2013 at 2:08 PM Report abuse rate up rate down Reply

When our politicians need money for their special interest programs they look for something to tax. They spend lots of time trying to come up with creative ways to tax us. Yes I do think it can happen here. Maybe no now but give them time to get more creative.

April 04 2013 at 1:13 PM Report abuse rate up rate down Reply

Comparing Cyprus to the U.S? They would be wrong even to compare Cyrus to Mississippi. The market is the highest it has ever been, 300,000 Americans mostly liberals became millionaires just since January. Yes, you heard it correctly. 92% of all millionaires are self-made and self-made millionaires are liberal politically and socially and conservative economically. They know from hard experience that lowering one's taxes doesn't make anyone rich just as getting a good education, living frugally, insisting that their children get an education, taking responsibility of their actions and looking forward to the future made anyone poor.

April 04 2013 at 12:46 PM Report abuse rate up rate down Reply
2 replies to Len's comment

Market are HIGH.......because we are PRINTING money. Continuous money printing brings inflation and higher interest rates that are just around the corner. Then the party stops and reality sets in. We will pay dearly for this very soon.

April 04 2013 at 3:20 PM Report abuse +1 rate up rate down Reply

Poor analogy. If you let people, rich or poor, keep more of their man hour compensation they will in turn invest or spend their increased disposable income. Money invested works in the economy to increase productivity and demand. Money spent increases supply thus increasing employment. Kennedy knew this well. A nation that inflates its money supply to pay off debt is ripe for collapse.

Economically conservative reject your idea of tax, print and spend as if the rich have no problem paying more and more while the poor receive more and more through the government money child credits and earned income credits. When a person making 13k a year gets 8k tax refund there is something seriously wrong. Just because the piece of paper says United States of America does not mean they own it...look at your dollar..."this note is legal tender for all debts, public and private"...government does not own this paper they merely provide it for common use however no longer backed by anything but the productivity of the American people, mine and your is called slavery.

April 04 2013 at 3:47 PM Report abuse rate up rate down Reply