Beware the Dijsselbomb!

Why are rich people so squeamish about the truth?

Some very smart people have taken to the Internet to ridicule Eurogroup president and Netherlands finance minister Jeroen Dijsselbloem for his inappropriate attack of clear speech. He said that “the Cyprus deal will serve as a template for future bank restructurings in the euro zone.” Sounds like something to cheer: Deposit insurance has been affirmed, but implicit taxpayer guarantees for wealthy bank creditors have been repudiated.

But instead we have Matt Yglesias saying “That’s the kind of remark that it would be very sensible for, say, a blogger to make. But Dijsselbloem is president of the Eurogroup of eurozone finance ministers, and a guy in his role is supposed to be reassuring people. Instead he caused them to panic.” And so Meneer Dijsselbloem issued another statement saying that of course the Cyprus bailout isn’t a template for anything, because every financial crisis is a unique special flower and no other European tax haven is an island and you can’t step into the same river twice…

One hears this sort of thing a lot. Why are wealthy investors supposed to be so skittish that patently true statements by economic officials can send them into a panic, but they are like trusting children when soothing words are directed at them? I understand that we don’t want central bankers and finance ministers running off at the mouth. I see two major classes of inappropriate speech for these people:

  • prematurely revealing sensitive information, so that not all interested parties have an equal opportunity to access and apply the information
  • confusing interested parties about economic policies.

Now, it may be that Dijsselbloem’s statement did not, in fact, reflect a consensus among his colleagues, those who would need to approve such measures in the future. But the presumption among commenters was that the mere fact that rich people with money in Portuguese or Italian or Slovenian or Luxembourgeois banks were worried, and might have decided to move their money elsewhere, was proof that the comments were irresponsible and harmful.

Well, should they keep their money in these banks? We all want a stable banking system (well, not the anarcho-syndicalists, but pretty much everyone else…), but presumably we want a regime where banks are stable because the financial needs of their customers are being met, legally and ethically; not because people are confused about what services are being provided, or because the wealthy get to siphon money out of the pockets of the average taxpayer through the banks. If people are going to put their money in poorly capitalised banks, it should be because they are being adequately compensated for the risk; not because they believe that the European taxpayers are actually going to bail them out if the bank fails. On the other hand, to the extent that we think that poorly capitalised or simply uninsured bank deposits are too destabilising, this should be made explicit. That’s pretty much what Dijsselbloem was saying, I think, and he should be commended for it. Now, we don’t want bank runs destroying the viability of otherwise sound banks, and if the EU is secretly working on a plan to stabilise European banking, it makes sense to try to convey a sense of calm to bank depositors, even if the details cannot yet be revealed. But there’s no evidence that this is the case, so why should European officials not make clear to depositors that investments and deposits should not be priced according to an implicit government guarantee.

I understand that guarantees can be cost-free, if they provide enough reassurance that the feared bank meltdown never transpires. Surely, though, there has been enough experience accumulated by now for even a finance minister to understand that bailouts actually happen, and they are expensive. Confidence is important, but it’s not all a confidence game.

To look at this another way, as I have asked previously, how naive are these wealthy investors anyway? Are there really tycoons with millions of Euros in a single large account in Lisbon, who were about to transfer the money to Berlin or London after the first statement suggested to them that they could not count on an unlimited bailout from national governments or the EU, but after the recantation they concluded that there was no risk after all?

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