WHEN share and house prices collapsed in 2008, Buttonwood’s father-in-law asked what happened to the trillions of dollars of wealth that had disappeared. Uninsured Cypriot bank depositors are asking the same question about the money that is likely to vanish from their accounts. The answer to both questions is remarkably similar.

First, those equity and property prices. In a free market, like an auction, prices are set by the marginal buyer and seller. If there is an imbalance between willing buyers and sellers (as there was in American, Spanish and Irish housing in the middle of the last decade), then prices will rise sharply. The average homeowner feels wealthier as a result.

But only a small proportion of the housing stock (or of equities) trades on any given day. The price set by marginal buyers and sellers is not the price that could be realised if all owners of the asset in question tried to sell their holdings at the same time. In such a moment, there will be more willing sellers than buyers, and prices will plunge.

High house or share prices, relative to personal incomes or profits, represent a bet that the good times will continue, and that incomes and profits (and cashflows in the form of dividends or rents) will rise significantly in future. When that bet proves wrong, the wealth disappears.

Now to the banks. When a customer deposits money, a bank must do something with it: buy assets or lend it to businesses. That is the banking system’s economic function; it transforms short-term liabilities (deposits that can be instantly withdrawn) into longer-term loans. Banks have always been at risk of two things: that the loans will not be repaid, and that customers will want to withdraw their deposits faster than the bank can turn its assets into cash. Until the 1930s bank failures, and the resulting losses to depositors, were a recurring problem.

Depositing money in a bank therefore amounts to a bet that the bank will lend its money wisely, or that the economy will be strong enough for bank loans to be repaid, and that confidence in the banking system will be maintained. In the modern era bank customers have tended to regard this risk as negligible, thanks to a combination of deposit insurance and governments’ willingness to rescue failing banks. But in many countries the banking sector has grown so large, relative to the economy, that few governments could plausibly guarantee all their system’s deposits. In such circumstances bank customers, particularly uninsured depositors, are in effect relying on the governments of other countries to bail them out in times of trouble—a risky proposition.

So what happened to the Cypriot banks? It is understandable that Cypriots are angry, particularly as the initial proposal for a bail-out hit insured depositors as well as uninsured ones. The process was handled badly.

Some Cypriots also see the eventual deal as “theft”; if so, where did the money go? Relative to the initial proposal, insured depositors have benefited at the cost of the uninsured, and most people think that is quite right. Some depositors may have withdrawn their money before the crisis. But by far the biggest loss suffered by the Cypriot banks relates to their investment in defaulted Greek government bonds. Technically, Greek taxpayers gained from this default, but the Greeks are overwhelmed by their debts and have suffered austerity and mass unemployment. They are hardly winners.

Can “the troika”—the European Union, the European Central Bank and the International Monetary Fund—be classed as burglars? They are lending €10 billion ($13 billion) to the Cypriots to recapitalise their banking system, money that comes from the taxpayers of Europe and the rest of the developed world. Many of those taxpayers live in countries that are also suffering from austerity; none of them has been asked to assent to this loan, which (like any other debt) might not be paid back. They too have hardly prospered from this process. Should they have guaranteed all bank deposits, insured and uninsured? Perhaps in future the EU will do so, although it is doubtful that politicians will risk putting this idea to voters.

When a country takes on debt, this is a bet that the economy will grow fast enough for the money to be paid back. If it does not, someone must lose, either through outright default or by having the savings inflated away, resulting in a loss in the purchasing power of their money. Where did all the money go? It went with the growth that never materialised. The Cypriots will not be the last to suffer.

Economist.com/blogs/buttonwood