Wednesday, August 20, 2008

Dr Doom and the offshore dictionary

The New York Times is carrying a fascinating profile of Nouriel Roubini, a Turkish-born economics professor and purveyor of gloomy economic predictions. Some have called him Dr. Doom, and others have described him as a "permabear." The article begins:

"On Sept. 7, 2006, Nouriel Roubini, an economics professor at New Yorks University, stood before an audience of economists at the IMF and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac."

It was boom times in global financial markets and the audience was skeptical, even dismissive, but as we now know, his predictions were, unlike those of most other economic forecasters, close to the mark. The NYT continues:

"When Roubini returned to the I.M.F. last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.”"

Economics forecasting is a perilous business - the article cites a recent study looking at “consensus forecasts” (the predictions of large groups of economists) that were made in advance of 60 different national recessions around the world in the ’90s: in 97 percent of the cases, the study found, the economists failed to predict the coming contraction a year in advance. Nevertheless, this blogger has a bad feeling in his stomach about what may be on its way.

What has brought us here? Many factors, of course, but one of the most important has been what we recently noted was described by former IMF chief economist Kenneth Rogoff as an "excess supply of financial services." And one of the chief drivers of this is what has become a catch-all term: "financial innovation."

The key cheerleaders of "financial innovation" include the hugely well-funded Cato Institute, about which we blogged recently. Cato recently hosted former US Federal Reserve chairman Alan Greenspan who had this to say about financial innovation:

"If we wish to foster financial innovation, we must be careful not to impose rules that inhibit it."

Greenspan, once hailed as a sage, is now seeing his reputation badly tarnished. Bankers were basically allowed to do what they wanted - often using complex offshore structures to evade and avoid regulations they didn't like (watch how some of them did it here) - and now just look at the fine mess they have created for all of us.

Language is crucial, and this term, "financial innovation," needs to be unpicked for what it is. Innovation is, generally, taken to be a good thing, especially in terms of technology, production efficiency, and so on. But financial innovation is very different. Some aspects of it are surely good. But so much of this "innovation" was about escaping national laws and regulations - which as we recently argued - are there for very good reasons. (As regards language, there is an analogy here: the phrase "tax competition" is widely assumed by many people to be good because market competition is taken to be a good thing and people lazily conflate market competition with tax competition; in fact, as we have demonstrated, the process is highly pernicious.)

It is for these reasons that we have created a TJN dictionary of Offshore Obfuscation. It's currently a very short dictionary, but we will be adding to it over time. It's posted at the top of the blog (it's a bit small; if you can't read it, it is tucked away near the bottom of the latest edition of Tax Justice Focus, on page 17.)

P.S. if you want to see Bono using the language of offshore obfuscation, look no further than here.


Anonymous Anonymous said...

Hope to see same more information in futere.

1:15 pm  

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