Higgenbotham wrote:
That's a very simplistic example of what I mean by, "The definition of solvency should not be arbitrary, but it is what it is."
I am very familiar with the "mark to market rules" and how they changed, before the current ongoing financial crisis started, and how they were selectively enforced, and not enforced during that same ongoing crises. They have also changed during the current ongoing financial crisis and there have been several official announcements of ways they will be changed again, in different ways during the ongoing crisis ( some of which have now been completely dropped ).
None of that changes the point that the definition of insolvency in a bank is nothing more than what the government enforcing those rules elects it to be at the time they make the decision to enforce, or not enforce, the rule.
Here we may have two disagreements.
Many, perhaps most, laws and regulations, are arbitrary. Not sure I believe they all
should not be so. Justice requires everyone be held to the same rules, some rules by their nature are arbitrary, that does not by itself make them unjust or morally wrong.
But I am sure the statement of "but it is what it is" is
not correct. The rules we are talking about are arbitrary, unique to the fractional reserve banking system, subject to change, and frequently changed. All those things make such a rule the exact opposite of: "it is what it is".
The biggest problem is the that a rule is changed at will, to achieve an objective the rule was not created to achieve, and a rule is enforced, or not enforced, at will, and again for the purpose of achieving a goal that the rule was not created to achieve.
The markets are reacting to what the markets predict government(s) will choose to enforce, or not enforce, not the rules that are only selectively enforced.
Bank stocks plummeted at the start of the current, ongoing, financial crisis. Under any reasonable enforcement of then existing rules many of the largest banks were insolvent. When it became clear the government had no intention of enforcing those rules, the bank stocks rebounded.
The risk in the Cyprus banking crisis is that the monied class, the markets if you will, will perceive that the government elite's are willing at any moment, for their own interests, to change banking rules, and selectively enforce banking rules in a way that confiscate a bank's assets, the investments of bank bond holders, the investments of bank stock holders and the deposits of those with more than a 100,000 Euros deposited in all banks in the Euro-Zone.
Add to this the fact the Euro-Zone is wiling to allow, or even coerce, governments to have a bank holiday, followed by capital controls they prevent pulling investments out of a country, while selective asset confiscation is taking place over a period of months, and you have the makings of bank runs across Europe.