Cyprus starts a bank run

March 18, 2013

During the 1930s, bank runs killed off thousands of US banks. Even banks that might have been solvent were driven out of business when they couldn’t liquidate their assets fast enough to pay off anxious depositors. That’s why Milton Friedman and Anna Schwartz called deposit insurance “the most important structural change” of the 1930s. We’re still dealing with other risks to the financial system, some of them unintended consequences of deposit insurance, but deposit insurance pretty much eliminated bank runs.

With that in mind, consider Cyprus’s announcement to tax small depositors, who thought they were covered by deposit insurance. Said depositors, of course, immediately lined up to take their money out, precipitating a crisis. We could call it experimental economics, but it’s an experiment that we’ve run enough times already that the outcome was easy to predict. The government is now scrambling to find plan B.

Lots more elsewhere, including here, here, here, and here.

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