Thursday, June 10, 2010

Offshore, Euromarkets, political capture, and too-big-to-fail

We have written plenty about the links between offshore and the latest economic and financial crisis. Here is a useful book review from 2003, which explains how important the offshore "Euromarkets," incubated first in the City of London in the 1950s, provided an escape route for U.S. financial institutions in particular from domestic New Deal regulations.

One historical snippet is telling:

"British banks (hitherto rather sleepy organizations) performed well in devising new institutions and vehicles for these funds. But their advantage was short-lived. U.S. banks soon responded by rushing to create their own branches in London and entering this business. This was, as several chapters in the book observe, in part an invasion and in part an escape from the constraints of the U.S. domestic system. The U.S. banks circumvented national controls by moving international lending offshore.
. . .
by the early 1970s, it had become a system of international lending in the hands of U.S. and European bankers that had largely escaped any framework of international control or regulation by central banks or international institutions such as the IMF. As such it was strongly biased towards liquidity and credit creation."


The offshore escape route did several things. Aside from the many other problems it generated (which we've written about here) one of the most important impacts was that the offshore escape route enabled banks to grow much faster than they would otherwise have done, growing into the behemoths we see today strangling our economies. This supersize problem has created one of the greatest threats to our economies today: regulatory and political "capture" of financial regulation, as is widely recognised now (see, for example, this celebrated article), and the too-big-to-fail problem.

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