Monday, September 27, 2010

This is Not The End for Tax Havens - You have been warned

William Brittain-Catlin has posted a new article to the Guardian's Comment is Free section. As a long-term observer of the phenomenon of tax havens, William is well placed to judge whether reform efforts by G-20 and others will impact on their activities; his conclusion - and its one we share - is that financial capitalism will continue to innovate in its use of tax havens, and will migrate to new locations such as Mauritius, Singapore and Malta - until such time as concerted actions are taken at the global level.

Our attention was drawn to several issues raised by the article. First, did the 2007/08 financial crisis reveal the extent to which offshore finance has degraded the worldwide financial markets? Brittain-Catlin clearly thinks so:

2008 was the moment the offshore world fully merged with the onshore world, making both worlds practically indistinguishable from each other.

Global finance had turned into one giant tax haven, where risky transactions were concocted and kept hidden away from regulators and counterparties, and where deregulation and complex financial products went dancing hand in hand into a toxic twilight.

Yet all these failures – for many years seen as risks intrinsic only to tax havens – were part and parcel of mainstream banking and finance in 2008, not something that had gone badly but exceptionally wrong in Grand Cayman or the Isle of Man.

Curiously, in the never-ending stream of material published on the financial crisis, the role that tax havens played in mediating the deep fault lines of the global economy is only mentioned, if at all, as a footnote.

Isn't it remarkable that these little countries and islands that have traded financial secrecy for survival also managed to keep themselves hidden from the big economic questions that face us?

The untold story of the financial crisis and its aftermath is how tax havens and their clients will find gaps in the new financial regulatory order, and begin the job of firing up the economy anew.

Second, are tax havens an intrinsic feature of contemporary capitalism, or have they emerged as a response to the specific circumstances of the past half century? Brittain-Catlin opts for the former:

For what we are witnessing now in the tax haven world is a great reconfiguration of these hidden conduits of finance and ownership that appropriate and preserve wealth; passageways of financial power that will, as sure as night follows day, spur global capitalism on to another so-called golden age some 10, 15 years hence.

This is not prophecy, simply a lesson from history.

Modern tax havens were themselves born out of the financial crises of the late 19th century, and took off as depression-struck nations set up barriers to trade and international finance.

Tax havens germinate in the gaps between nations and act as renegade links that reconnect and empower business and finance, often by trailblazing new, riskier forms of finance and business-making that would not be acceptable onshore.

In turn, the financial alchemy worked offshore is turned against onshore regulations until the onshore dam is burst and offshore finance retakes the high ground of mainstream money-making.

And, finally, is there nothing that can be done to protect ordinary people from these engines of chaos and injustice?

The outcome we know already: offshore capitalism will destroy our economies in a repeat performance of all that we have witnessed these last few years.

But this need not happen; the economic gods have not determined our fate. With the removal of tax havens and offshore finance from the world, we can safely and securely build a new onshore polis. The responsibility is ours. We can and must determine our own fate.

And this is where TJN comes in. History has shown that evil prevails unless good people take counter-action. Politicians will not take action until the massed tanks of civil society are parked on their lawns. Get your engines running . . .

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