Cyprus brings a welcome return to capital controls, something we’ve needed for a long time

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As is noted in the FT this morning:

Cypriot lawmakers have passed a bill that paves the way for capital controls. The legislation allows Cyprus’s government to introduce limits on transfers of bank deposits and cash withdrawals. It gives considerable discretionary powers to the state. Neither the European Central Bank nor the European Commission prevented the move. Both deemed it necessary to avoid uncontrolled outflows during the renegotiation of the island’s bailout deal. But the eurozone has now embarked on a process that endangers both the currency area and the single market.

The most important characteristic of a monetary union is the ability to move money — without any restrictions — from one bank to another in the currency area. With capital restrictions, the value of a euro in Cyprus is no longer worth the same as a euro held by any other bank in the eurozone. A euro in Nicosia cannot be used to buy goods in Frankfurt without limits. Effectively, it means that a Cypriot euro is not a euro any more.

That's true. And the circumstances make it seem as if this was a deeply retrograde move. According to the economic mantra it is, of course. That mantra says that capital must move wherever it will to maximise its return. The whole of the EU is built on that idea.

But that idea is wrong: if capital can roam as it will then a state cannot control its currency if it has one. Nor can it be in control of its interest rates. Or its tax revenues. Free roaming capital challenges the right of the state to manage its economy in the interests of those who democratically elected it.

And those who do vote undoubtedly lose out from the impact of free-roaming capital. When capital roams and by and large people don't the rate of return to capital increases and the rate of return to labour falls. If you want a simple explanation as to why the real wage rate has been frozen, near enough, for more than thirty years (the precise era of capital market freedom) whilst that of bankers, free-riding on the back of capital, has sky-rocketed that is it.

Capital controls are then to be welcomed. They are an essential control on the destructive power of capital.

If there had been capital controls there would have been no Cypriot crisis.

There would have been no banking crisis in 2008.

There would be, at most, a very small tax haven problem.

And I argue the world would be better off because much of the supposed growth in the world that capital freedom gave rise to has benefited a few and not the many, and more than that, it's helped destroy our environment on the way as anything and everything that can be traded has been.

The markets will say capital controls are a threat. They are right. Capital controls are a threat to the abuse permitted by unregulated markets, but for everyone else today might be a cautious step towards a fairer, more sustainable world.