On looking onshore, not offshore for cures to the current financial crisis

March 5, 2009

I was wondering about the outcomes of the last meeting of EU leaders last week-end to discuss international financial regulation in the runup to the G20: Merkel, Brown and Sarokzy came up with ideas on cracking down on tax havens, or regulating hedge funds. EU-wide discussions held on those same dates on improving financial regulation revolved around the following:

“Measures envisaged range from legislation to set regulatory and supervisory standards for hedge funds and private equity to recommendations on directors’ remuneration, and efforts to make sanctions against market abuses more effective. “, so reports the FT.

What is more, some concrete proposals such as the one on an EU-wide financial supervisory body meant to (whatever their worth) actually improve EU-wide financial supervision and stability were bogged down by the President of the Commission himself . No suprise. He is seeking renewal of his mandate which expires this year and must therefore urgently please the big member states, with their national crowd-pleasing obsessions, e.g. tax havens for Germany and hedge funds for France. The onslaught on remuneration packages is approved of by everyone.

Were tax havens and hedge funds cause of the current crisis? No. One can question the incentive structure in remuneration packages for bankers, but bonuses are not a cause of the crisis either.

Are real estate bubbles, nontransparent and incomprehensible structured financial products, monetary policy, current account deficits, among the causes of the current financial crisis? Yes. So? No mention of these topics and how to foster financial stability by addressing these issues? And what about hurrying up to get real on cleaning up the banks so that lending can start again on a sound basis? No-thing.

When one reads newspaper columns these days, it is all about Stimulus Packages, a new Global Financial Architecture and Morality in finance [By the way: Has anybody thought of putting caps on the scandalous salaries of football or tennis players, who could be accused of being ruthless exploiters of average people’s needs for escape and dreams? So why curb banker’s bonuses? – In companies, when times are bad, bonuses and salaries are cut anyway, so it’s the same thing for banks; maybe one shouldn’t bail out banks? That would really force them to slash bonuses…].Yet: almost nothing on the hands-on policy problems, nothing on how to concretely get out of the crisis by tackling the problems that have actually and in reality led to financial crisis.

Gladly, I am not completely alone wondering about all this. On the issue of offshort financial centers, there came today a refreshing column by Avinash Persaud in the FT, entitled: “Look for onshore, not offshore scapegoats”. Here an abstract:

Political leaders in the US, Germany, France, the UK and elsewhere have once more threatened to close down offshore financial centres. These centres have been presented as the drug dealers of modern finance and pushers of instability. Yet the origins of this crisis are in a failure of regulatory philosophy in the US, Europe and elsewhere. It would have occurred were there no offshore financial centres. The attack on offshore centres is a politically seductive distraction from the thorny task of making regulation better in large developed countries and will end up being a discriminatory attack on small developing countries with little voice. (…)

Admitting that the crisis was a failure of domestic regulation implies that those in power were out to lunch as the largest financial crash was brewing. It is easier to blame tax-dodging foreigners. (..)

The current financial crisis suggests that large states have a comparative disadvantage in global finance. They do not need global finance to prosper but global finance distorts their economy and politics. There are more than a few small states that need to improve the quality of their regulation but so, too, do large states. European and US governments should refocus regulation on all financial activities that take place in their jurisdiction, making them less vulnerable to the quality of regulation in Iceland or elsewhere. “

Thanks for the reminder!

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