Wednesday, November 11, 2009

Lending must support the real economy - so attack tax havens

The title of this blog is partly drawn from the FT a few days ago, noting that:

"The share of lending by US banks to the US financial sector – instead of to the real economy – went from 60 per cent of the outstanding loan stock in 1980 (up from 50 per cent in the 1950s) to more than 80 per cent in 2007."

(Mathematically this could be misleading: given that overall lending rose very sharply, the rise of lending to the financial sector in absolute terms is far, far greater than the 50-to-80 jump suggests on its own.) And he notes the obvious but oft-forgotten point that:

"Profit and capital gains may look much the same to the individual bank – a stream of revenues – but they have different macroeconomic consequences. Lending to the real sector is self-amortising: it creates a debt, but also the value-added to repay principal and interest. Such loans enlarge the economy in proportion to the debts created and are financially sustainable. By contrast, loans to create or buy financial assets and instruments are not, by themselves, self-amortizing."

And the author reaches a conclusion which is, similarly, something of a no-brainer:

"The crisis and recession were not all that difficult to predict once you started to look at the flow of funds – at credit and debt – and at the financial sector as separate from the real economy. Following the same logic, it should now be fairly uncontroversial what our long-term aim in financial reform is. It is to redirect lending away from bloating the financial sector and towards supporting the real economy, rather than loading it down with debt."

Which brings us right back to the question of leadership, unilateralism, and our recent blog on the subject: something essential to remember. And the FT article notes this:

"In the 1980-2007 era of cheap credit and deregulation, banks had every incentive to move from real-economy projects, yielding a profit, towards lending against rising asset prices, yielding a capital gain"

and the incentive towards capital gains, of course, is spurred by lower taxes on capital gains than on other forms of income - a differential which is in turn spurred by the things TJN has always been worried about: tax havens, and tax competitition.

And in the context of the bloating of the financial sector, who ever studied the relationship between the bloating of the financial sector, and what was noted in this other comment in the Financial Times in May:

"in recent separate surveys by the US Government Accountability Office and the Tax Justice Network, the largest user of tax havens in every country surveyed was a bank."

It is time to start joining the dots.

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