Tuesday, July 15, 2008

Tax havens and the financial crisis

Equity markets and the dollar have been diving today, as investors took a jaundiced view of U.S. government plans to rescue the struggling mortgage giants Fannie Mae and Freddie Mac. The scale of what is happening is unimaginable - these institutions own or guarantee at least five trillion dollars (yes, trillons.)

How bad is the rescue plan? Let's turn to Willem Buiter of the London School of Economics, a regular commentator in the Financial Times:

The bail-out of Fannie Mae and Freddie Mac by the combined forces of the US Treasury and the Federal Reserve Board is the ugliest exercise of its kind I have ever observed outside early transition economies and mature banana republics.

Strong stuff. Read his article here, it's worth it (and scary stuff.) He also gives a handy history of some of this, laced with acidic comments. Try this section, for example:

There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.

Instead the dishonest, spineless socialist policy makers in successive Democratic and Republican admininstrations have systematically tried to hide both the subsidies and size and distribution of the incremental fiscal burden associated with the provision of these subsidies, behind an endless array of opaque arrangements and institutions.
Off-balance-sheet vehicles and off-budget financing were the bread and butter of the US federal government long before they became popular in Wall Street and the City of London.

The abuse of the Fed as a quasi-fiscal agent of the federal government in the rescue of Bear Stearns is without precedent, and quite possibly without legal justification.

How bad is all this? It's fundamentally bad. Another commentator, for example, said this:

In a few years, we shall look back at this time as one that redefined the landscape of the US financial system and, by association, the workings of global capital markets.

All of these things are tax justice set of issues. For one thing, it is all about taxpayers subsidising some of the wealthiest sections of society. We have written about this kind of thing before.

But there is something else. What roles have tax havens played in this gigantic, unfolding global mess? Some important recent pointers can be found here. But we will also be turning to this in the next edition of Tax Justice Focus, due out in the next few days. Watch this space.

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