Krugman: Russians savings in Cypriot banks exceeded Cyprus' GDP.
The Яussians Are Coming! The Яussians Are Coming!
How big a deal is the Russian factor in Cypruss crisis? Pretty big, it seems. Over at FT Alphaville, Izabella Kaminska reports on
estimates of 19 billion euros in Russian nationals deposits in Cyprus banks, which is more than the countrys GDP. Without being an expert here, I wonder whether this is an understatement; given what we think we know about the nature of much of this Russian money, is all of it really being declared as Russian?
Let me make a broader point: weve now seen three island nations around Europe become huge international banking hubs relative to their GDPs, then get into crisis because their domestic economies dont have the resources to bail out those metastasized banking systems if something goes wrong. This strongly suggests, to me at least, that
we have a fundamental problem with the whole architecture (to use the preferred fancy word) of international finance.
As long as you havent bought into the Barney-Frank-did-it school of thought, you realize that the global crisis of 2008 was in a fundamental sense made possible by the erosion of effective bank regulation. As Gary Gorton (pdf) has documented,
we had a 70-year quiet period after the Great Depression in which advanced countries had very few major financial flare-ups; Gorton argues, and most of us agree, that the key to this quietness was
a constrained, regulated financial system that also limited the opportunities for excessive non-bank leverage.
So what are we going to do about this? Cyprus, as a euro-zone country, should really be part of a euro-wide safety net buttressed by appropriate regulation;
its insane to imagine that the euro can be run indefinitely with merely national deposit insurance. But euro-area deposit insurance doesnt seem to be in the cards and anyway, there are plenty of other potential Cypruses out there.
http://krugman.blogs.nytimes.com/2013/03/18/the-%D1%8Fussians-are-coming-the-%D1%8Fussians-are-coming/
Krugman seems to understand the value of a 'constrained, regulated financial system' but I get the sense that most in the financial world still do not understand it or choose not to since they profit so much from the failures of the current system.