Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens, by Nicholas Shaxson, Palgrave Macmillan, NYC 2011
Only the Super-Rich Can Save Us! by Ralph Nader, Seven Stories Press, NYC 2009
In Treasure Islands, author Nicholas Shaxson digs deeper than any previous research on the size and shape of global finance and the extent to which it is now beyond the reach of most national governments. Daily headlines form the EU on the travails of the PIIGS and focus on Italy and Spain illustrate the global battle between financial markets and governments' sovereign debt. The latest country "in play" is the U.S. with its stalemated Congress narrowly avoiding an unnecessary default and coping with Standard & Poor's downgrade of U.S. treasuries and GSEs. This is what happens when private toxic debts get shifted from the banks to governments, which are now finding their taxpayers in open revolt.
Thus, Treasure Islands provides essential context for the likely next scenarios as 24-7 high-frequency trading in globalized financial markets outstrips the fixed geographies of nations and their governments. The action has already shifted to currencies and wars between the euro, dollar, Japanese yen, Swiss franc, Brazilian real and Chinese renminbi.
Shaxson shows how many countries deliberately exposed themselves to global finance, including the U.S. policies since the 1980s of luring foreign capital to finance its growing deficits. The Asian meltdowns in 1997 were largely caused by governments in Thailand, Indonesia, the Philippines and South Korea opening their capital markets and being swamped by tides of hot money. These kind of recurring crises are familiarized by Carmen Reinhart and Ken Rogoff in This Time It's Different. Rogoff is now saying it's time for debt forgiveness. Defaults and restructuring of sovereign debt are frequent throughout history and in the recent defaults of Argentina and Iceland are often far preferable to unrealistic, politically unpopular bailouts as in Ireland and Greece. In my scenario "Looking Back from 2020" I posit more financial crises in 2013 leading to a global "jubilee" in 2014. Rob Johnson of INET echoes this possibility of "jubilees."
So where does all today's money flee and why? Shaxson's careful history takes us from Bretton Woods and the end of Britain's empire and how it morphed into an influential "spider web" run out of the City of London. Shaxson sees "the City" as the key tax haven, beyond the reach of British law, with offshore subsidiaries in Jersey, Guernsey, the Cayman Islands, Bermuda, the Bahamas, British Virgin Islands and still active in Hong Kong. He describes the London-Wall Street links in great detail, and how the euro-dollar markets allowed U.S. finance to avoid legislation, particularly President John Kennedy's Interest Equalization Tax in the 1960s. For daily updates on tax havens, see Global Financial Integrity.
Shaxson reports that the chief U.S. tax haven is seen as onshore: the state of Delaware, home to over half of U.S. publically traded companies (nearly two thirds of the Fortune 500). When President Barack Obama criticized the Cayman Islands for having over 12,000 corporations, he was countered by Anthony Travers, chair of the Cayman Islands Financial Authority. Travers retorted that Obama might visit the six-story building at 1209 North Orange Street in Wilmington, DE, the offices of the Corporation Trust, a subsidiary of the Dutch firm Wolters Kluwer, which houses 217,000 companies.
All today's massive tax evasion, revealed by Transparency International, the OECD's Anti-Bribery Convention (1996), and the UN's Convention Against Corruption, exacerbates the budget deficits in many countries. The debate in the U.S. over the deficit and raising the debt ceiling brought the issue to the fore as companies, including GE, Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Cisco (NASDAQ:CSCO), Google (NASDAQ:GOOG) and others amassed profits offshore in Switzerland, Luxemburg, the Caymans and other tax havens. Many of these companies are lobbying for another "tax holiday" before they repatriate their profits back to the U.S. They cite "job creation" as justifying this – against all evidence that few jobs were created after their previous tax holiday. So the public is focused on job creation in the U.S. and an end to off-shoring. Persistent unemployment is the main issue, and how the Fed's QE1 and 2 did not feed through to Main Street lending and job creation, but was mostly off-shored by Wall Street into emerging markets and commodities. Today, both U.S. fiscal policy is hog-tied by the budget agreements and the Fed is out of easy bullets.
Today, as Shaxson makes clear, all national governments are outgunned by $3 trillion plus daily currency markets and global finance. The OECD's blacklist of tax-havens and secrecy jurisdictions is termed a "whitewash." The G20's efforts and those of the BIS and its Financial Stability board are also dismissed by Shaxson as "presiding over the biggest global financial crisis since the Great Depression." The long debate about below 1% financial transaction taxes is now front and center – both to curb high-frequency trading and to fill national budget coffers (see "Financial Transaction Taxes: The Commonsense Approach").
After reading Treasure Islands, what kind of even bigger financial crises are in the cards? How will the mountains of unrepayable debt be re-structured and how will a balance be restored between global finance and the real local economies within countries? How will finance be re-shaped to serve its earlier functions of rational allocation of savings, risks and financing new businesses to meet new need and conditions?
Enter U.S. crusader Ralph Nader and his prescient "practical utopia" scenario in Only the Super-Rich Can Save Us! This enthralling story of how financial markets and global corporations were peacefully re-structured is both practical and richly detailed. The book's Dramatis Personae include arch-capitalist reformers: Warren Buffett, William Gates, Sr., George Soros, Ted Turner, Ross Perot, Barry Diller, Max Palevsky, Peter Lewis and others, who get together and with their billions, corporate expertise, media and political access, turn the nation's declining fortunes into the successes of building a 21st century economy. Their brilliant strategic game plan unfolds in creating a political movement, facing down incumbent industries and their lobbyists, out-maneuvering entrenched opposition in Congress, corporations and media. Nader's deep understanding of Washington and Wall Street make believable all the details of how the reforms succeed. Add to this feast is fun, thrills and humor. This overlooked gem will enrich the mind and perk up anyone's summer reading.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.