What in the world is going through the minds of European officials with their crazy, destructive demands with Cyprus? Seizing a portion of peoples’ bank deposits is the kind of thing one would expect from Argentina or other kleptocratic third-world governments. It sets an awful precedent shredding the rule of law, which is the bedrock of a free and vibrant society. The fact that Cyprus is small is irrelevant. The germane fact is that it was Western Europe, supposedly a strong believer in the rule of law, that engaged in this Hugo Chavez-like move. Now, it’s not inconceivable that President Obama or somebody with a similar ideology could propose seizing and integrating people’s 401K plans into Social Security. And in a panic, Congress would go along.

What the Europeans are doing here guarantees that there will be disastrous runs on banks and money market funds when we have another financial crisis – which we will, since authorities today really don’t know what they are doing on the economic front. Another example of that here: while hitting depositors, Europe leaves bondholders whole. Why?

And don’t think the U.S. would be immune in a crisis. When fears rise, people clutch cash first as trust and faith in authority melts away.

The Cyprus move is portrayed as a way to recapitalize that island’s shaky banks. But stealing deposits guarantees banks’ failures as soon as their doors re-open – if they ever do. After all, the Cypriot government may reject their agreement with the European Commission, European Central Bank and the IMF out of fear of both apoplectic voters and angry Russian depositors. Make no mistake, this deal is about as voluntary as those famous gangster words, “We have an offer you can’t refuse.”

So what in the world were the Germans et al thinking? Berlin is obviously fatigued about being the paymaster for its feckless friends to the south. But anyone with half a brain would know that this is not the time to suddenly change course. In September 2008, Treasury Chief Hank Paulson had a German-like moment. He had already approved the bailout of creditors of Bear Stearns and the bondholders of Fannie Mae and Freddie Mac. Enough is enough, he harrumphed and decided to let Lehman Brothers go down. Instead of being applauded for belated rectitude, Paulson’s move precipitated the first financial panic the U.S. in 75 years. Hardly had the ink dried on Paulson’s decree about Lehman than he was nationalizing AIG, and Uncle Sam was throwing out multi-trillion dollar guarantees to money funds and numerous other entities.

The poor judgment of the political and economical leadership of the West today rivals that of their predecessors of the 1930s and 1970s. Under their misguided policies the wealth-creating private sector is continually squeezed with growth-killing taxes and regulations and the power of Big Government expands. Most countries have made, at best, small reforms when big ones – especially on the tax cutting front – are needed.

Perhaps ways will be found to prevent the mishandled Cyprus situation from triggering a full-blown crisis for now. But only for no

Forbes

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