Wednesday, October 22, 2008

Sovereign Society's toadies, liars, charlatans

(Update: Tax Haven debate with Dan Mitchell on TV.)

We have, predictably, come under attack from certain well-funded quarters, particularly as a result of our analysis showing how tax havens and tax and regulatory competition lie behind the emerging global economic crisis. (See this Guardian article, for example.)

One such attack yesterday came from the so-called Sovereign Society. They don't disclose who is behind them but we believe that at least one offshore bank is involved. The advertisement at the end of the column, saying "I tell you Where To Stash Your Cash" and "If you're interested in Switzerland, Click here for Swiss Money Secrets" - gives us some clue where they might be coming from.

This kind of attack on us is no bad thing, really, for the force of it comes in the form of smears. It revels in words and phrases such as:

"toadies, loonies, liars, seriously insane, blatant lies and phony statistics, "concerted global force of legions of tax collectors, backed by police state might," anti-capitalist, far left, drivel, "leftist journalists regurgitate this, while lazy editors fail to question," screed, load of rubbish, socialist charalatans, grabbing a free publicity ride . . ."

And so on. There's also a nice picture of a tax collector with horns, which we reproduce in this blog. We're quite happy with this kind of attack, because smears are the refuge, and the mark, of people who have lost the argument.

This isn't the only attack, though. Sovereign Society (a strange name for an organisation that seeks to promote people and organisations that undermine the sovereignty of nation states around the world) has also quoted the friendly Dan Mitchell of the Center for Freedom and Prosperity, who has also taken us to task for the same article. Mitchell, to his credit, seeks to engage with our arguments directly -- though he isn't averse to a smear or two.

We'll reproduce Mitchell's contribution here, and supply our answers to his points. First, though, a few words.

Mitchell's approach, in several areas, is to misrepresent our position, and create an Aunt Sally which he can then knock down. Also, he and his friends have, for years, actively and aggressively set out to undermine the frameworks for international co-operation that might have helped mitigate or even avert the current crisis, and which have contributed to the widening inequality that threatens social stability. He also seems to premise his argument on the simple formula regulation = bad, deregulation = good. We would suggest that he reads a few newspapers. Not many people would agree with you these days.

We should also note that "leftist" is a common smear tactic - but what's leftist about TJN? We favour transparency, and we oppose corruption and secrecy, and we want to fix global markets so that they work better, with fewer distortions. What's leftist about that? As Richard Murphy said:

"This is not a left / right issue. This is an issue for all those who want to create effective market economies. And it is one for all those who realise that a pre-condition of effective market economies is a fully functioning government."

We have any number of answers to each of Mitchell's points, and for brevity's sake we'll only include a few here. The bits below, entitled TJN1 in small print are from our original article; we then reproduce his responses in italics, and follow it with our own responses, under TJN2.

1. TJN 1: The global economic crisis means financial re-regulation is, finally, on the agenda. Most agree it is needed on a global level.

Mitchell: Since the financial services industry already is subject to very heavy regulation, it is strange to state that re-regulation is on the agenda, but it certainly is true that politicians will use the turmoil that they created as an excuse to impose more red tape and restrictions. The more troubling phrase is this passage is the assertion that regulation is needed on a "global level." This would be a spectacularly bad idea since it would increase systemic risk. In short, if all nations get dumped into a one-size-fits-all regulatory straitjacket, then the inevitable government mistakes will have a negative impact on the entire world's financial system (in much the same way, for instance, that the global Basel rules encouraged over-securitization).

TJN 2: This is just plain wrong, for several reasons. First, it confuses specific regulations (the stuff that got usinto this mess) with all regulation. Indeed, there is plenty of regulation out there. But the banks that got us into this mess side-stepped specific parts of this – the bits that, say, required them to hold adequate capital. They did this through off-balance sheet manoeuvres (which doesn’t necessarily have to be done offshore, but in practice was always done offshore, where they could escape the regulatory constraints that they didn’t like.) Competition between jurisdictions to outdo each other on laxity pushed the offshore model deeper and deeper into the onshore jurisdictions – the City of London being a case in point.

Second, he says regulation at a global level “would increase systemic risk.” It is easy to swallow this, if you don’t think about it too hard. Take a system, any system. Try to regulate it, to guard against systemic risk. There is no point trying to regulate just a part of it: you have to regulate it all. If there is a part of the system that allows the players to escape the regulation, then . . . well, the regulation against systemic risk will fail. It’s really quite simple. When dodgy loans in Florida blow up Iceland's economy, you clearly need a co-ordinated, systemic approach. Who ever disagrees with this? Here is just the latest of many statements about global regulation, this time from the French Prime Minister: "Today there are financial institutions that escape regulation. Certain banks aren't regulated at all. Today there are tax havens that avoid all rules. Today there are prudential rules that aren't the same from one country to another, from one continent to another. And that creates imbalances and competitive distortions." And if you think this is just a French thing, the same Reuters story quotes the Canadian Prime Minister as saying pretty much the same thing, just as many others have done. Or ask Tom Davis, the senior Republican on the congressional committee now looking into the mess. What allowed the crisis, he said, was "the mish-mash of regulations and regulators, each with too narrow a view of increasingly integrated national and global markets." It is probably a stretch, even for you, to call this leading Republican a leftist. It’s a no-brainer, Dan Mitchell. TJN's advice: when you're in a hole, stop digging.

2. TJN 1: the essence of the problem: tax havens. The offshore world created the conditions that led to this crisis, and unless the offshore world is tackled, it will undermine all efforts to deal with it.

Mitchell: Morgenthau may want to bring a charge of plagiarism against the TJN guys, since they copy his tactic of blaming offshore centers while providing zero evidence.

TJN 2: Evidence? Evidence? Look around you, Dan Mitchell, and take your pick. See here, here and here, just for example. It’s like coming to the scene of a car pile up, on a road covered in black ice, and watch more cars skidding and colliding. Then saying “where’s the evidence that black ice caused this? The problem is that the cars were driving too fast.” Well, yes, and it probably depends on what you mean by "evidence."

3. TJN 1: tax havens set out deliberately to "undermine the impact of legislation passed in other jurisdictions". This is their core business, and this is the threat they pose to the world. The impact of this is now visible in the economic crisis.

Mitchell: So-called tax havens did not set out to "undermine" the laws of other nations. Indeed, most offshore centers have always had low taxation and privacy protections. What's changed is that politicians in "onshore" nations have become progressively more greedy, and this is causing an exodus of jobs and capital.

TJN 2: This is a trick routinely used by CFP – if you say it often enough, many people will believe you. Ok, then let's put it like this. Tax havens deliberately set out to undercut, and hence undermine, legislation passed in other jurisdictions." Happier now? If you don’t believe that tax havens deliberately undermine the laws of other nations, and that is their very reason for existence, then you’re simply blinded by ideology and unwilling to think for yourself. It's what they do for a living! Here’s just one example from Jersey, which amended its laws in 2006 to allow the creation of “sham” trusts – laws which involve “enhanced protection of Jersey trusts from adverse foreign court judgments” and “barring the application of all foreign laws to the determination of any of these issues." Or see here, for another example.

4. TJN 1: The banking system has ceased to function because banks do not trust their peers' finances, structures and accounting disclosure. Opacity has been at the heart of the matter, and it is secrecy jurisdictions that create this opacity.

Mitchell: This is an amazing claim. Onshore financial institutions have bad assets. Everyone knows which assets are bad. The problem is that nobody knows the market price of these assets, in large part because governments are hindering market forces. Yet somehow this is the fault of privacy laws in the offshore world! The Guardian is a leftist newspaper, but certainly they must have some standards for the columns they feature. If they print this drivel, apparently not.

TJN 2: Everyone knows which assets are bad? Check the financial pages over the last few months. Go on, read them. Leftist? Is it leftist to worry about crime and corruption? Is it leftist to seek to fix markets and nation states’ capabilities to deliver the tax and regulatory systems that their voters want? Is it "leftist" to want to make markets function properly and cleanly? Are the IMF and the OECD “leftist” (see here)? Only if you are so far to the extreme right do these institutions seem leftist. Which must be the case: Mitchell has accused the OECD (in particular) of being this way.

5. TJN 1: they create uncertainty about who owns what. Offshore entities were used to isolate ownership of financial vehicles from onshore parents to secure higher credit ratings.

Mitchell: The ultimate owner of a bad mortgage is irrelevant. Indeed, to the extent that foreigners (in the offshore world, China, or anyplace else) own some of the toxic assets, they can be faulted for making bad investments. But that's hardly a sin. Moreover, if onshore regulators do not count the assets and liabilities of foreign subsidiaries, that's hardly the fault of the jurisdictions where those subsidiaries operate.

TJN 2: “The ultimate owner of a bad mortgage is irrelevant” Is it really? Now that half the banks in the rich world have collapsed, can you really make that claim? “if onshore regulators do not count the assets and liabilities of foreign subsidiaries, that's hardly the fault of the jurisdictions where those subsidiaries operate.” Is that so? Indeed, governments should try harder to regulate those subsidiaries. But the fact is, they haven’t. Why not? In large part because of the poisonous deregulatory ideology spilling out of organisations like the Center for Freedom and Prosperity (which should really be called the Center for Freedom and Prosperity, But Only For Our Friends,) and partly because of competition between jurisdictions – meaning that onshore centers quail at applying such measures for fear of scaring away the free-riding hot money. But Mitchell has been cheering on this competition between jurisdictions! If he believes onshore regulators should count the assets and liabilities of foreign subsidiaries, and stop tax haven abuse that way, then he should say so! (And we’d agree with him.) What is the generic answer to a free-rider problem? Co-ordination! Which, in this case, can only mean one thing: a global response, and global co-operation.

6. TJN 1: Companies have spread complex structures across jurisdictions to exploit regulatory gaps. Even if each haven's claim to be properly regulated were true, the regulation of such firms falls between stools, since each jurisdiction only accepts responsibility for what happens in its domain. Regulation cannot function in such a world - a fact the failing banks exploited.

Mitchell: As Sarbanes-Oxley and other initiatives indicate, nations have plenty of ability to impose regulations. And those regulations can be an extensive and as intrusive and as costly as politicians desire. Moreover, there is nothing to stop politicians from imposing regulations that require domestically-based companies to treat foreign-based activities as if they were domestic-based. The only thing that regulators cannot do is impose their policies on foreign entities operating in foreign jurisdictions. This, needless to say, is a good thing. It protects sovereignty and forces governments to compete with each other since they learn that senseless regulatory burdens simply drive economic activity to jurisdictions with better policy.

TJN 2: See our answer in point 1 about confusing specific regulations (the stuff that got usinto this mess) with all regulation, and take if from there. It applies just as well here. And see the last point, too.

7. TJN 1: we must gear up for a global fight against tax havens. In the long term this push must stop regulation being embedded in a context riddled with powerful actors deliberately aiming to undermine it. More immediately, it must help policymakers address the crisis's fallout by giving them back powers to tax wealth and capital properly.

Mitchell: The authors get credit for honesty in the conclusion. They admit their real goal, which is to attack free-market jurisdictions. Moreover, notwithstanding the alleged concern about regulatory gaps, they further admit their real goal is to give politicians more power to increase the tax burden and worsen the tax bias against income that is saved and invested.

TJN 2: Mitchell gets credit for honesty in his response. He admits his real goal, which is to attack democracy by stopping governments from having the freedom to respond to voters’ choices, and to worsen the tax bias against ordinary folk who work hard for a living.

A last word from TJN's Richard Murphy:

"Free markets work on the basis of open access to markets and free availability of information. Remove those conditions and you get ones in which monopoly survives i.e. market abuse. This is exactly what secrecy jurisdictions seek to create: an environment in which there is inequality of access to capital, information and markets by the creation of secrecy and artificial factors of production providing some an unfair advantage to ensure they make super normal profits, so undermining the credibility of the market system as a whole. The actions I promote are intended to create effective, workable, efficient markets. Not the monopoly advantage for a select few that the Sovereign Society promotes."


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