Jun 08 2011

Has Tim Geithner read Treasure Islands?

Posted by: Nick Shaxson in: Thoughts

I doubt it very much – but some of the things that the US Treasury Secretary (another deeply flawed character, it has to be admitted) said in a recent speech about ‘competition’ between countries on regulation would fit very well in Treasure Islands’ pages. He called the UK’s light-touch regulation ‘tragic’:

The United Kingdom’s experiment in a strategy of “light touch” regulation to attract business to London away from New York and Frankfurt ended tragically.

Spot on, though I’m not quite so sure about his subsequent claim that US regulation has been tightened up so brilliantly – even if the shadow banking system has shrunk quite a bit. Still, he makes other important observations, which this author approves of:

But it is important to note that the strength of the United States financial system in the decades that followed the Great Depression was that we had the highest standards for disclosure and investor protection, we had the strongest protections for depositors and against money laundering, and we had the best exchanges.  We did not lower our sights to match the more limited ambitions of others.  We knew we would be more vulnerable if we did.

Broadly, this is a true appraisal – and the US population as a whole did very, very well out of this for many years after the Depression. And I cheer is words (though words are, of course, easy) that the world should co-operate and fight against a ‘race to the bottom’ on regulation.

Nothing spectacularly new here, though well worth repeating. Britain has said much, and done little, about reining in its perilous and harmful ‘light touch regulation.’ And there are some interesting numbers in that speech, such as this one:

The three largest U.S. banks account for 32 percent of total banking assets in the United States, in comparison to 46 percent for the three largest in Japan, 58 percent in Canada, 63 percent in the UK, 65 percent in France, 70 percent in Germany, 71 percent in Italy, and 76 percent in Switzerland. And total banking assets are 461 percent of GDP in the UK, 178 percent in Germany, and 820 percent in Switzerland.

Two giant tax havens – the UK and Switzerland – still massively out on a limb . . .

See also coverage of Geithner’s speech in the Guardian, Financial Times, and the predictable counter-attack (containing a useful pot-kettle critique, mixed with some nonsense) from the City of London, reported in the Telegraph.

Oh, and on the subject of statements by U.S. public officials: try this recent one from Hillary Clinton.

And let’s be very clear – many wealthy people in low-income countries avoid taxes by hiding their money offshore, an outflow that by some estimates comes to more than $1 trillion a year. . . . we also have to acknowledge that wealthy countries share responsibility, so that is why, for instance, the United States is making it easy for other governments to know when their citizens are keeping money in American accounts.

We all have an interest in solving these problems together, to empower governments to collect precious revenues they use to build roads and power lines, to open schools and train teachers, to provide healthcare and invest in all the other drivers in economic activity. Corruption, lack of transparency, and poorly functioning tax systems not only deprive government of revenues; they inflict a quieter and in some ways an even more dangerous cost as well, because they corrode citizens’ trust in each other and in their government. And when those bonds of trust crumble, it becomes much more difficult for communities and countries to make progress.

And finally, corruption in poorly functioning tax systems put a strain on our partnerships with developing countries. All of us here are supporting development. We’re committed to doing so. And the United States will continue to lead the world in providing assistance. But let me say very openly it is difficult to ask American taxpayers to spend money abroad when the elites in the countries themselves turn their backs on their own people, especially at a time of difficult budgetary decisions. It is not hard to imagine that an unemployed worker or a struggling business somewhere in my country would wonder why we would offer our hard-earned tax dollars to help those who will not reach the social consensus to help themselves.

I love these words. Has she been reading Treasure Islands? It looks a bit like it, doesn’t it?. But no, on second thoughts, she can’t have: she would have said US$1.6 trillion instead of just a trillion!

17 comments so far

AlienEdouard 6th June, 2011 7.36 pm

And yet Switzerland has had no recession, has kept low taxes, is running a balanced budget and a massively positive current account despite having the world’s strongest currency.

These qualities have attracted inflow of immigrants keen to enjoy its amazing quality of life, such as….

In short, if being a tax haven leads to all of this, we want MORE rather than less.

Nick Shaxson 6th June, 2011 2.04 pm

AlienEdouard, actually, this is a rather variegated issue. Switzerland is quite a special case, no doubt, and it’s doing well in several areas – but there are some worries. I mean, my last blog highlighted geithner’s speech which noted that

“Total banking assets are 461 percent of GDP in the UK, 178 percent in Germany, and 820 percent in Switzerland.”

So, depending on what happens to all those assets, we may not have seen the end of this. Were things to go really sour, our assessment might have to change dramatically. It is also quite an unequal country, and central banker Hildebrand has been massively criticised here for intervening in the currency markets in a failed attempt to stop the currency’s rise (which is only partly about tax havenry) because of the threat to other parts of the economy. Switzerland is also pushing for far stricter capital requirements than other countries – and again that’s something to do with wealth management, and something to do with the size of assets to GDP. But there’s no doubt that it is something of a special case. There are a few special cases in the Resource Curse literature too – Botswana, for example. Switz. has a rather different background model from some other tax havens – wealth management is different from the investment banking – and in fact it’s the reckless UBS Casino Capitalism venture – all of which is tied up with tax havenry – which created all the problems that Switzerland had. A lot of Switzerland’s stability and particular economic model is down to peculiar historical and political circumstances – Treasure Islands goes into them in great detal in Chapter 2.

I might venture to say that Switzerland is to the offshore curse what Botswana is to the Resource Curse. A special case. Other jurisdictions like the Cayman Islands might make a similar case to having done well out of tax havenry – the main reason being that their populations are so tiny compared to the vast size of the inflows and revenues. Even there, though, things aren’t all that great. Jersey is another example – terrible life for poor people there. Britain, if you consider the welfare of the majority of the population and compare them to its peers – is cursed by it.

Anyway, as I said, the issue of the “offshore curse” is a complex, varied and uncertain picture.

[…] too, these welcome words from Hillary Clinton, in a different but related vein, as I noted in my recent blog: “Let’s be very clear – many wealthy people in low-income countries avoid taxes by hiding […]

AlienEdouard 6th June, 2011 4.34 pm

Switzerland is certainly doing exceptionally well, but it is hardly completely unique. Singapore and Luxembourg (which I seem to understand you and pals at the TJN drop in the same bucket) are also doing quite nicely. The same can be said of Botswana in the context of the resource curse: Chile, Norway, Canada (and soon Israel out of its discoveries of natural gas) are also doing very well.

One special case is bad enough for those interested in developing theories under rigourous academic research standards, but when all these cases cease to be special and begin to be the norm, as is obviously the case here, they rather screw up the entire attempt at theorizing. Is this what you mean when you write that “the issue of the “offshore curse” is a complex, varied and uncertain picture”?

As for UBS, you are absolutely right that it accumulated unimaginable losses through reckless investments. But this had nothing to do with “tax havenry” (all these investments were made by a small group of investment bankers using the bank’s own capital and NOT clients’ money) and everything to do with piss-poor management, which has been the hallmark of UBS since the merger with SBC. Nevertheless, the Swiss did not do too bad out of it; the SNB had a profit of around $7 billion out of UBS’ rescue, about the same as the US government made from Goldman Sachs under TARP.

Finally, I am struggling to see how Switzerland can called unequal?

Nick Shaxson 6th June, 2011 8.20 am

AlienEdouard, thanks.

Reply in brief – time is short today.

1. How unequal is Switzerland? Try this one, for example – that’s wealth, not income. Which matters a lot. http://www.nytimes.com/2006/12/06/business/worldbusiness/06wealth.html Massive inequality.
2. Switzerland – those assets vs GDP stats simply cannot, cannot be ignored. Any conclusions about Switzerland can only be highly tentative, obviously.
3. There’s no evidence that mineral resources actually benefited even those countries that are cited as ‘successes’. Norway’s done well – but so have Denmark, Sweden, Finland and many others. Similarly with Chile, Canada. Mineral-rich countries – even the ‘successes’ simply aren’t materially better off than non-mineral economies. Except when as i said there’s a tiny population per inflow. While there is no consensus in the ‘resource curse’ literature that countries end up much worse off for their minerals, there is also no evidence that all that money makes them better off. And there is absolute consensus in the literature that this money simply doesn’t do the good that one would suppose – very, very far from it. Similarly with finance – all that money flooding in from overseas simply doesn’t make life better, strange though that might sound to the uninformed observer. And if you look at the role of the City in the UK, it is unarguable that it’s played a major role in making the UK more unequal, more captured by bankers, with tragically worse social indicators than its peers. Believe me – so many of the symptoms I saw in Africa over the years are shockingly present in the UK – the leaching of best talent away from other sectors to the service of finance, the dutch disease and decline of manufacturing, the political capture by the bankers/oil industry, the inequality, and on and on. It’s just indisputable.


AlienEdouard 6th June, 2011 9.28 am

Ok, so you write that “here’s no evidence that mineral resources actually benefited even those countries that are cited as ‘successes’. Norway’s done well – but so have Denmark, Sweden, Finland and many others. Similarly with Chile, Canada. Mineral-rich countries – even the ‘successes’ simply aren’t materially better off than non-mineral economies”.

You can turn this around and say that there is no evidence that mineral countries have done worse than non-mineral countries.

And so we can conclude that the whole that resources are at best irrelevant in development economics, and the “resource curse” theory can be “binned” (love using British dialectal words) once and for all.

Ditto for the “offshore curse”. Well done.

Regarding Switzerland, the figures are heavily distorted by the wealthy foreign resident population (maybe even you contribute to that diostortion!). And in any event wealth is less relevant than opportunity: Switzerland has free unversal education all the way to university and even a generous system to fund graduate or doctoral studies for Swiss students in the United States. It has a mixed public-private healthcare delivery system, which is privately insured but with massive subsidies. Large chuncks of infrastructure remain public (transportation, telecoms). Of all the countries I lived in it is (together with Israel) the most equalitarian.

Nick Shaxson 6th June, 2011 11.40 am

Well, the data prove you wrong on inequality – something I definitely don’t contribute to as a foreign resident. And one thing I didn’t add – all this analysis applies to the pre-2007 world! In other words, the finance-dependent countries like the UK were already screwed, BEFORE the financial crisis struck. Now that it has struck, things are far, far worse. And their policies have spilled out to many non-financial countries.

Cesar Esteban 6th June, 2011 5.12 am

I agree that the Swiss economy is a special case. Yes, they are a secrecy jurisdiction etc….but finance is not their only game. Like the Germans, they can produce high quality products that have a strong demand across the world. Like the Germans, the Swiss are very careful about spending their money .No housing bubble there either. So basically, these are guys that have intelligent economic policies (unlike the U.K….) , and would probably survive no matter what happens to the offshore world.

AlienEdouard 6th June, 2011 8.43 pm

Nick, the only data you have shown relates to the distribution of wealth, something which the vast majority of the Swiss, correctly, do not care about. What they are concerned about is, correctly and in no particular order, free education, universal healthcare, law and order, Europe’s best funded retirement system, etc. etc. This is the true metric for equality, the Swiss have no time for politics of envy.

With respect to your comment about the time period during which this was measured, I can only recommend that you stop digging your own hole: in essence, you are saying that Switzerland, despite having the world’s highest inequality (as per the NY Times) had NO recession, NO currency devaluation, NO budget deficit and NO current account imbalances. It basically did great form the crash. Great: can we have more inequality, more banking secrecy, lower taxes… PLEASE….

And the same can be said about Singapore, Luxembourg, New Zealand, Israel, and numerous other secrecy jusrisdictions/tax havens, etc. Sorry Nick, you have no point here.

Nick Shaxson 6th June, 2011 8.24 am

Sorry, AlienEdouard, you just haven’t got it yet. First, you seem unwilling to debate the case of the UK for some reason. Why not? Is it because you know your position is untenable? And in case there were any doubt in your mind, this report should dispel it
On Switzerland, go back to that assets/GDP figure – which throws all the rest of the data up in the air. My case in Treasure Islands was about the UK, and to some extent the US – and that case is impregnable.

AlienEdouard 6th June, 2011 9.27 am

Nick – sorry for not realizing that your book and subsequent comments were so narrowly focused on the UK. The reasons I am not that keen to go into a micro-debate about the UK is that the (i) I am not British so only moderately interested, (ii) although resident in London, I confess to rarely leave zones I or II except to go to the airport, and, most importantly, (iii) because in a global context the UK is somewhat irrelevant on its own (isn’t it 1/20th the size of the US?).

Your argument that the impact of the financial services industry on the UK has been negative may be correct. But even IF that is the case, it will not prove that the impact of the finance industry will necessarily be negative everywhere else, since we have just demonstrated that other countries with similarly sized financial sectors are doing extremely well (Switzerland, Singapore, Luxembourg, etc.). None of these places are any more interesting than the UK in isolation, but together they clearly support my point that the problem does not lie primarily with the financial services industry (although I don’t deny that it has quite a bit to answer for), but with the specific domestic policies of the UK’s last left-wing administration. I do not believe that you have covered this in Treasure Islands, and that is a weakness of the essay.

As for you contribution to the US debate, I see from your bio that have never studied, worked or researched there and so I am not exactly sure what you are supposed to be offering.

Nick Shaxson 6th June, 2011 4.03 pm

Treasure Islands is very, very much about the UK, though not exclusively so of course. And as I said earlier – this is a variegated issue: different pictures in each country. Some populations have been actively harmed by their havenry, as the UK has, while the picture in other havens is different, particularly those where a very high finance: population

And on the US – as it happens, I have done the research there. You’ll find that referenced in Treasure Islands. What I found weird was that for one of the biggest pieces of my research (on Delaware), almost nobody in the U.S. – save one NYTimes journalist in the 1980s – had done any research at all – none whatsoever – on this astonishing, profoundly important episode. It takes an outsider to come in and dig this up. Why?

Nick Shaxson 6th June, 2011 4.06 pm

And also – You say the problems lie ‘with the specific domestic policies of the UK’s last left-wing administration. I do not believe that you have covered this in Treasure Islands.”

I hadn’t realised that you haven’t actually read Treasure Islands! I had been under the clear impression that you had. I spend a huge, huge amount of energy, especially but not only in the London chapter, attacking the Blair / Brown games.

Although to be fair to you – you may have read the US version. The US publisher asked me to cut out a lot of UK detail, and quite a bit of this was cut out. Please do confirm this in your next point

Nick Shaxson 6th June, 2011 5.52 pm

And on your peculiar problem of my not being American enough for your tastes, and more specifically your point of the UK being “1/20th” the size of the US, you aren’t even close. Let’s take a look at size of financial centres, shall we (for that is very substantially what we’re talking about)
You may find rankings that put London at number 2, if you will, but this is the mainstream view. And in terms of size of populations, economies, whatever, you will find the ratio is closer to 5:1

AlienEdouard 6th June, 2011 8.39 pm

Nick – I bought the book in SoFla (Borders was stocking it) and must confess to have only read bits of it (there are a lot of conspiracy theories which I find a little tedious to read). I will have missed a lot of the stuff about local British politics but anyway I would not have understood who does what to whom. British politics to me is probably like Florida politics to you, slightly opaque and murky.

Btw, I am considering ordering “Poisoned Wells” but I am now concerned that there may be several versions. Help needed.

AlienEdouard 6th June, 2011 9.23 pm

Nick, I seem to have hit a nerve when talking about the global relevance of the UK. London is a major financial center, undeniably. But the fact is that all major institutions (investment banks, institutional investors, hedge funds) are owned, managed, and controlled by Americans. It is American firms that really made the City by basing their European and then global non-domestic operations there. The American firms’ dominance of the the London financial services was made obvious by the super-tax on bonuses: over 50% of total proceeds were paid by US institutions (JP Morgan, Goldman Sachs, Morgan Stanley, etc.). London is a major center, but only as a subsidiary of Wall Street.

Nick Shaxson 6th June, 2011 7.20 am

That’s more or less just how I describe it in Treasure Islands. “subsidiary’ of American banks is wrong though – ‘bolt-hole’ would be more accurate. And do read the rest of Treasure Islands – there are no ‘conspiracy theories’ in there and I am surprised you missed the whole chapter on the City of London – it’s got very few British characters in there. I enjoy reading things about other countries, even when I’m not already fully acquainted with all the individuals described. Poisoned Wells, btw, has just one version.

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