More signals that the days of deregulation are over

Der Spiegel has reported that:

The head of Germany’s leading Deutsche Bank, Josef Ackermann, said the world financial crisis currently unfolding would need strong and organized government intervention to stop further bleeding in financial institutions. Simple market corrections, he said, won’t do the trick. “I no longer believe in the market’s self-healing power,” he told an audience in Frankfurt on Monday. “Making liquidity available isn’t the cure-all.”

Coming on the same day as Martin Wolf has said the same thing I believe it’s safe to say that the neo-liberal model is dead.

But there are those who persist with the other view. This is John Kay in the FT today:

The notion that future banking crises can be averted by better regulation demonstrates unrealistic expectations of what regulation might achieve. ..

Perhaps there was once a golden age when the authority and wisdom of central bankers were so great that such regulation was possible and effective, although the recurrence of bank crises suggests otherwise. Today the financial services industry is the most powerful political lobby in the country and public trust in and respect for regulation are low. All regulators feel buffeted by threats of legal action; there is no easier way to win applause from business audiences than by denouncing red tape.

But in financial services, the demand today is for more regulation. That call should be resisted. The state cannot ensure the stability of the financial system and a serious attempt to do so would involve intervention on an unacceptable scale. But to acknowledge responsibility for financial stability is to assume a costly liability for failure to achieve it. That is what has happened.

The dinosaurs aren’t going to die without a struggle it seems, but the argument Kay presents is absurd. What’s he’s saying is that finance must be allowed to do what it will and the state should pick up the pieces when it goes wrong. That, of course, is exactly why it must be either regulated, and reformed until that can be done. It’s the latter that Kay ignores as a possibility, and he’s wrong to do so. No one is going to give banks licence to carry on in the future as they have to date.

Deregulation has ended: now we begin to rein back in

Martin Wolf said this in the FT today:

Remember Friday March 14 2008: it was the day the dream of global free- market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over. It showed in deeds its agreement with the remark by Joseph Ackermann, chief executive of Deutsche Bank, that “I no longer believe in the market’s self-healing power”. Deregulation has reached its limits.

He’s right. Now we’re reining in. And offshore secrecy has to be very high on the list of abuses that has to stop. That’s for the same reasons that Wolf argues this:

The lobbies of Wall Street will, it is true, resist onerous regulation of capital requirements or liquidity, after this crisis is over. They may succeed. But, intellectually, their position is now untenable. Systemically important institutions must pay for any official protection they receive. Their ability to enjoy the upside on the risks they run, while shifting parts of the downside on to society at large, must be restricted. This is not just a matter of simple justice (although it is that, too). It is also a matter of efficiency. An unregulated, but subsidised, casino will not allocate resources well. Moreover, that subsidisation does not now apply only to shareholders, but to all creditors. Its effect is to make the costs of funds unreasonably cheap. These grossly misaligned incentives must be tackled.

The world is not the same. Some of us are pleased.

Wisconsin leading the way

It’s not something I think I’ve said before, but Wisconsin is leading the way on tax reform right now. According to the Milwaukee Journal Sentinel (not one of my regular reads):

Democratic state senators today said large, multi-state corporations pay little or no corporate income taxes in Wisconsin, so they adopted a budget-repair bill that would end what they call tax-code “loopholes.”

The budget-balancing bill the Democrats pushed through the Senate, on a 18-14 vote, would tax the profits of parent companies, instead of the current system of taxing the profits of their subsidiaries. The change, called “combined reporting,” would cost businesses $130.5 million by mid-2009, according to the Legislative Fiscal Bureau.

Senate Democrats said giant companies like McDonald’s, Wal-Mart, Microsoft and General Electric are big enough to set up subsidiaries that allow them to pay little or no corporate income taxes in Wisconsin. Small and medium-sized Wisconsin companies can’t afford those tax-avoidance deals, so they have no choice but to pay the 7.9% corporate tax, said Democratic Sen. John Lehman of Racine.

Senate Majority Leader Russ Decker (D-Weston) said Wal-Mart made more than $850 million on its Wisconsin businesses from 2000 to 2003, but paid only $3 million in corporate taxes.

“It’s time to pick a side:Wisconsin families and businesses, or Wal-Mart,” Decker said.

Decker asked the right question and gave the right answer. Unitary taxation, here we come. It’s the way to reclaim the local from the global abuse of those assaulting society.

The ACCA should be ashamed to be associated with these comments

The Christian Science Monitor is not my usual read, but I am also well aware that it is noted for good quality reporting. That’s the case in a report published today on the widening probe into tax haven abuse in Europe, which I would recommend to anyone looking for a good summary of the situation.

What really drew the report to my attention though were the comments of Chas Roy-Chowdhury, head of taxation at Britain’s Association of Chartered Certified Accountants, who is reported as saying:

What needs to be made clear is that there is nothing illegal about holding bank accounts in Liechtenstein and wanting secrecy as long as you pay the right amount of tax in your own jurisdiction.

That is, of course technically true. But to offer such a comment is also a way of denying the fact that this is not the way these things almost invariably work. The secrecy is designed to make sure that those with these account do not have to declare them because no-one knows about them. That’s why people place funds in places like Liechtenstein, and not because it offers any real financial advantage. I do not believe Chas Roy-Chowdhury does not know that and as such I think his comment is deliberate obfuscation.

I might have lived with that though if he had not gone on to make further comment:

He says part of the objection is that smaller jurisdictions can afford attractive, low tax rates that result in “capital flight” from bigger countries. “Governments should open themselves up to the wind of global competition and accept that they need to run efficiently to keep tax rates low.”

I am, to be candid, shocked that the ACCA let’s him say such things, for these reasons:

a) This is blatantly political propaganda of a type which no professional body should promote if it is to retain that status;

b) Capital flight, as he should know, is usually illegal and has massive cost on society, especially in the developing countries of the world where the ACCA seeks to recruit much of its membership. By commenting as he does he either endorses the economic instability that tax havens create in the developing world in particular or he shows that he does not understand what capital flight is. Either way the ACCA should be worried that such a man is making comment on their behalf.

c) He should know, but clearly does not, that the ‘low tax rates’ to which he refers cannot be afforded by the smaller jurisdictions to which he refers. For example, a Liechtenstein foundation might be tax free for a non-resident person but is most certainly not for a Liechtenstein resident person. As such he should know that the model he is promoting is not sustainable, or transferable to large jurisdictions unless he is promoting the abolition of taxes on all companies and investment income. If he is then the ACCA has moved onto very dangerous political ground and must justify why it has done so.

d) By discussing tax competition in this way he should realise that he is promoting an assault on democracy itself. It is through the ballot box that tax rates should be set, not through the actions of parasitical principalities. That is the point others in the article make, that the debate is not on tax rates but on secrecy, a point that seems to have escaped him in his desire to promote his political agenda.

e) By diverting attention to this political agenda he seeks to divert attention from the fact that this whole issue is actually a debate about crime, and so long as there is tax there will be tax evasion if there is secrecy that allows it to persist undetected or undetectable. He should have resoundingly condemned tax evasion but did instead seek to apologise for it.

All this says to me that the ACCA has moved far from the mainstream, which might best be represented by this FT editorial comment which Chas Roy-Chowdhury appears to have been unable to endorse:

Helping evasion is distinct from legitimate tax competition. Monaco or Bermuda or Switzerland are fully entitled to set low rates of personal and business tax to attract wealthy individuals and companies to their jurisdiction. What is not acceptable is helping those who live elsewhere to evade the taxes that they owe.

It’s another sad day for the profession.

Disclosure: I am a member of the ACCA’s research committee, in which context I meet Chas Roy-Chowdhury. I am not a member of the ACCA.

Provident Financial: blatantly exploitative

I noted this advert in the Christian Science Monitor today, aimed at the UK market:

I’ve long hated all Provident Financial stands for in terms of exploitation of the poorest in our community. And here they are, continuing to do so, profiting from the credit squeeze and abusing those must vulnerable to its impact.

It’s a sickening indictment of our financial services industry that this company survives, and a failure of a Labour government that has let it do so when options for change have been presented to it, by me amongst others.