There Go the Banks...

The ongoing disaster in Venezuela should serve as an object lesson for those who think democracy cures all problems (ahem, George W. Bush). As Hugo Chaves marches his country down the glorious path to 21st Century Socialism, he is systematically jettisoning all the legal constraints on his own power, and driving a wrecking ball through Venezuela's financial system. But since he is doing it "for the people," his voters (he was democratically elected, recall) will love him even more for it - until the inevitable economic consquences crash down on them - which he will cheerfully blame on an American conspiracy, no doubt.

CARACAS, Venezuela — President Hugo Chavez ordered Venezuela's bank deposit protection fund to transfer its assets "to the poor," the latest move threatening to undermine one of the country's autonomous financial institutions.

Venezuela's Fogade insurance fund holds properties and other assets, which guarantee deposits in the banking system, much like the U.S. government's Federal Deposit Insurance Corporation.

"I want all the assets held by Fogade to be passed to the Republic," Chavez said Thursday on his "Hello, President" TV talk show.

"Fogade has many warehouses, it has many properties. All that I am going to give to the people, to the poor," he said. "Fogade must disappear."

Chavez added Fogade has a "long list" of acquired properties that are not being put to use. "This cannot be. Pass me (the list) and I'm going to pass it on to the people," he said.

The "poor" was best protected by having a nation with a government constrained by law, and a stable financial system. By stripping bank depositors of their protection, Chavez is removing the guarantee that keeps depositors from withdrawing their accounts when they get spooked about a bank's health. When enough depositors become concerned and start pulling their money out of a bank, it is called "a run" on the bank. Since banks do not keep enough cash on hand to cover sudden mass withdrawals, a run on a bank usually leads to its collapse. The failure of one bank, usually sparks concerns over other banks, prompting their depositors to withdraw their money, regardless of the banks' health. Bank runs tend to spread regionally and even nationally in bad economic times, causing banks to fail and wiping out people's savings. In the U.S., before deposit insurance, mass runs on banks produced short, but sharp recessions called "Panics." There was a spectacular panic in 1907, brought on by a credit crunch. J.P. Morgan stepped in a single-handedly bailed the U.S. economy out by lending money to banks and institutions that needed it. Shortly thereafter, the U.S. created the Federal Reserve to prevent such occurances. Though the Federal Reserve spectacularly failed to prevent the series of bank runs that began the Depression, the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) have succeeded fairly well over the last several decades in bringing stability to the U.S. banking system, making bank runs almost unheard of in modern America. The system has been copied all over the world with generally good results.

Chavez said the government would compensate the fund "little by little" for any assets that it loses.

He also said banking deposits would remain insured but did not say how.

Chavez did not say how, because he doesn't know. Or doesn't care. Or simply doesn't plan to insure bank deposits anymore. Whatever the case, the insurance that made Venezuelan depositors feel secure about their savings will soon be gone and insecurity and fear will shortly become the hallmark of the Venezuelan banking system. It won't take much to spook Venezuelan depositors, and when oil prices dip, or the economy suffers a shock, people will start trying to withdraw their cash and a wave of bank runs will begin. Perhaps Chavez will cheer it on, calculating that the economic misery that follows will win him more votes. In the end, though, it will collapse the Venezuelan economy.

But Chavez's concern is only for his own power.

Fogade, although affiliated with the Finance Ministry, is an autonomous institution. It played an important role in re-capitalizing Venezuelan banks after a 1994 collapse of the banking system that cost the government some $11 billion in bailouts and damaged the economy for years.

Chavez also diverted billions of dollars (euros) from the central bank's foreign reserves _ which are critical to backing a nation's currency _ toward a state development fund that finances his popular social initiatives.

Since winning re-election in December and vowing to deepen his socialist revolution, Chavez has pledged to do away with central bank autonomy altogether.

No element of Venezuelan government can be permitted automony from Chavez's rule. All knees must bend before him. Chavez is following firmly in the footsteps of the socialists/communists before him, abolishing private property, silencing dissent, discovering "enemies of the people," ruling by decree and concentrating all government power in his person. The story of 21st Century Socialism will be a repeat of 20th Century Socialism. Hopefully, it won't be so bloody.