What the Cyprus Deal Tells Us About American Politics

The Atlantic

It would have been hard to predict that one of the events that most clearly articulated the line between the Tea Party and other conservatives on economic issues would be the failure of two banks on a Mediterranean island.

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Two things prompted the growth of the Tea Party movement: the presidency of Barack Obama and the federal bank bailout. A lot of things got rolled into the movement, but Obama and the bailouts were the fuel that powered the movement's growth, with the bailouts also acting as the ignition. Providing tax dollars to banks that had failed was the original sin of the "Taxed Enough Already" movement, a sign that the government was embracing socialism and committed to wasting whatever it was provided. (That this largesse occurred under President Bush is usually something of a footnote.)

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The Tea Party's refrain was simple and compelling: Why should we pay with our already-too-high tax dollars for their mistakes? In a capitalist system, businesses should succeed or fail on their own. Their investors should be the ones to pay the cost, not the rest of us. And there was another facet to the criticism, as U.S. News and World Report pointed out: Why them and not us? If anyone has to get a hand-out, why the banks and not the people?

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Which is why conservative — and, particularly, Tea Party — response to the events in Cyprus has been so inconsistent. If you haven't been paying attention, two of the largest banks in the small island nation are essentially broke. Once news of the banks' insolvency became public, the situation quickly got worse, as investors rushed to withdraw whatever money they could from the institutions, a classic run on the bank. (Quartz has a great overview of the banks' structural problems.) The country was forced to limit withdrawals while its politicians worked with the European Union to figure out how to keep the banks from completely collapsing.

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If the banks collapsed, of course, one of two things could happen. The government of Cyprus — which insured any deposit under €100,000, similar to how the FDIC insures American deposits — could pay claims on every failed account. Or everyone with money in the bank could lose all of their money.

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Eventually an agreement was reached. The government would pay for the insurance, but the money to do so would come from those who'd made deposits at the bank. It walks a middle line between the options, to some extent, spreading the pain. At first, the proposal had every depositor taking the "haircut", losing part of what money was in his or her account. The ultimate proposal exempted those with under the insurance level since, after all, those deposits were insured. The amount wealthier investors stand to lose could be as much as 40 percent — which is admittedly better than 100 percent.

The response from some on the right? Breitbart described the "seizure of bank customer cash." A podcast at Red State declared the deal to be "similar to Obama’s GM takeover." One Tea Party news site lamented the losses of the larger deposit-holders. The Tea Party Patriots dubbed it "Cyprus’s suicide pact", writing:

Like in America, the [financial] sector then used government force to escape the effects of their errors. Unlike in America, they didn’t settle for bailouts from taxpayer dollars – they seized customer’s assets to pay for their mistakes.

At least one traditional conservative outlet was very much on board with the plan. Even before the deal was announced, the Wall Street Journal endorsed the final deal. So what makes the Tea Party different? And what would Tea Party conservatives have wanted to see?

The simple answer to the second question is that they — like most Americans, probably — would want "the banks" to pay the cost. There is a lot of sense in this argument, and the point can very much be made that American banks paid very little price for their huge mistakes. But if we remember nothing else from the campaign of Mitt Romney, it's that those corporations are comprised of people. The bankers in Cyprus don't have enough to cover the losses; if they did, any run on the bank would have looked very different. Any money the bank might have comes from equity and deposits. And those deposits are owed to the customers — customers who, in essence, invested in the banks. Both the banks and the people are getting some benefit from the proposed plan.

The simple answer to the second question above is that the Tea Party is a political movement, not an economic one. Suggesting that big government in Europe is on the side of banks allows conservatives to malign both big government and banks — and, by extension, the head of the United States' big government. The Journal's support of the Cyprus plan reflects its institutional interests: business and economic leadership. The Tea Party is not similarly encumbered. Its knees can jerk freely.

What's happening in Cyprus isn't a bailout. It is a complex, difficult attempt to protect a national economy from the collapse of two large, completely broke banks. It is not and could never be a perfect reflection of the American fiscal crisis. But it still offers insight. Had President Bush suggested a similar deal for large American banks — though they were never in as bad a shape as Cyprus' — how would members of the Tea Party have responded?

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