My letter to the Financial Times re: Wrong logic by Wolfgang Munchau

Dear Sirs:
In his Monday, April 1 column titled “The logic of economics will catch up with the euro” Wolfgang Munchau says that the eurozone banking system needs to share risks and keep debt, both public and private, within sustainable limits.  First of all, risk sharing is a cause of the continuing crises, because it creates moral hazard, whereby banks take increased risks knowing that others will share in any losses.  This is the adverse consequence of any so-called deposit insurance, whether public or private; it encourages the very behavior it wishes to alleviate.  Secondly, debts will be sustainable only in a free market with sound money.  As long as central banks can create money out of thin air, they will funnel it to profligate governments and failing banks.  Under sound money governments are forced to live within their means by the taxpayers and the bond market.  Furthermore, Mr. Munchau’s claim that Cyprus “had no choice but to impose capital controls” is patently false.  I suggest that he read Deep Freeze: Iceland’s Economic Collapse by Drs. Philipp Bagus and David Howden.  Capital controls have discouraged capital investment in Iceland and have created another bubble economy with the capital that is trapped within the country.  Patrick Barron