Economic Crisis + Offshore

Many of the roots of the current global economic crisis trace back to offshore financial centres located in tax havens. These include both those located in the smaller, mostly island states like Cayman and Jersey, and the larger tax havens like the City of London, Switzerland, Dublin, Delaware or Luxembourg.

These tax havens did not "cause" the crisis, but they contributed powerfully to it. This happened in a number of interlinked ways:

They offered what has been called a "get out of regulation free" card to businesses that abuse them.
The offshore system enabled U.S. financial services companies in particular (but also others) to get around domestic regulations and grow fast, achieving political and regulatory "capture" and contributing to the "too big to fail" banking problem. This happened first in the offshore Euromarkets from the 1960s, and then in the wider global offshore system.
Unhealthy competition on tax and regulation between tax havens, and between them and other jurisdictions, eviscerated and degraded regulations that may otherwise have staunched the crisis.
Tax incentives, typically through tax havens, played a major role in accelerating the build-up in debt and leverage across the global financial system.
“Satellite” tax havens like some Caribbean islands or Britain’s Crown Dependencies are conduits for illicit and other financial flows, often from developing countries into financial centres like London, New York, and these contributed to large macroeconomic imbalances. The mainstream economics profession has not measured these vast flows, many of which (such as transfer mispricing) simply do not show up in national statistics.
A key feature of the crisis is that the financial system became frozen as a result of mutual mistrust and impenetrable complexity making it impossible for actors to understand the financial positions of their partners. The secrecy jurisdictions, by giving companies incentives to festoon their financial affairs across multiple jurisdictions, and by covering these affairs in a veil of secrecy, played a major part.
Tax havens provided the cover for all manner of fraudulent business models - such as those offered by Bernie Madoff, Allen Stanford and others.
Offshore centres helped corporations conceal serious losses, which contributed to the build-up.
Offshore bank booking centres have played a powerful role in creating liquidity, which underlay the crisis.
Tax havens, by giving banks with global reach a "competitive" advantage over their more nationally-based rivals (by permitting evasion and avoidance of tax and regulatory obligations, contributed powerfully to the "too big to fail" problem.

Not only that, but by draining reputable jurisdictions of the tax dollars of their wealthiest citizens and corporations, and by fostering massive capital flight out of developing countries, they have made it so much harder for victims of the crisis to pay to clean up the mess.

Other material

The broad analysis above is bolstered by various other documents, and a number of other players have subsequently supported or repeated TJN's analysis. See, for example:

March 21, 2013 - Treasure Island Trauma. Paul Krugman endorses Shaxson's (and TJN's) analysis that havens help feed crisis.
March 12, 2013 - Offshore London and the escape from the U.S. Dodd-Frank bill. Original here.
Dec 4, 2012 - Dexia and the role of Wild West Ireland
Jul 2, 2012 - In Caymans, It’s Simple to Fill a Hedge Fund Board - NY Times. Note Bear Stearns note at bottom.
Jun 20, 2012 - US regulators hit out at ‘risky’ London (originals here, here, here, and here.)
Feb 23, 2012 - Nevada wins race to the bottom on corporate governance. Originals here and here.
Feb 5, 2012 - how inequality contributed to the economic crisis, Stewart Lansley. (More detail here.)
Jan 23, 2012 - How tax havens help private equity companies dump social obligations (originals here and here and here.
2011/2012 - The primacy of hedge funds in the crisis - Photis Lysandrou
Dec 12, 2011 - Deminor open letter on behalf of Madoff investors: Luxembourg's lack of accountability, trust, action was behind the scam
Dec 8, 2011 - MF Global: more evidence of London as a black hole of financial regulation (original here)
Oct 11, 2011 - ActionAid: 98 of FTSE 100 companies in tax havens; banks play huge role. Original here.
July 25, 2011 - How the tax system makes finance more dangerous (original here.)
July 14, 2011 - TJN summary of Jim Stewart paper on the Dublin financial centre. Original here.
June 27, 2011 - IMF full-blown study of the link between inequality and financial crises (IMF report here )
June 10, 2011 - The IMF says tax havens are a menace to society (original here)
May 13, 2011 - NYTimes on the new shadow insurance system - Treasure Islands. Original here.
May 11, 2011 - New French govt report on financial instability, fingering havens. Original here.
May 4, 2011 - Goldman Sachs, the food crisis, and offshore London
May 2, 2011 - Nicholas Shaxson summarises how offshore finance underlay the global financial crisis
Nov 26, 2010 - some forensic detail about offshore Ireland
Nov 26, 2010 - Simon Johnson on Ireland's ghost economy
Nov 26, 2010 - Greece and the tax havens: an interconnected web of contagion
Sept 29, 2010 - Links between inequality and financial crisis
Sept 20, 2010 On tax, shadow banking and the social contract
Sept 2010: Barclays, secrecy jurisdictions, and too big to fail
July 2010 - IMF: Rehypothecation and offshore London
June 2010 - Financial Innovation and the Financial Crisis, paper by Jim Stewart, Trinity College, Dublin
June 2010 - the role of the offshore Euromarkets in helping U.S. banks in particular achieve "political capture" and enjoy the "too big to fail" implicit subsidy.
June 2010 - Lucy Komisar in The American Interest, on how the Cayman Islands is being used to forestall tighter regulation.
June 2010 - more on hedge funds' role.
May 2010 - Review of IMF's concerns about offshore and excess leverage, pp12-13 of Tax Justice Focus.
April 2010 - Goldman deal went through Cayman , pattern is offshore.
May 2010 - How ICE and the Caymans help firms escape derivatives reform (original here)
March 2010 - IMF expresses alarm about offshore role in crisis
Feb 2010 - Onshore and offshore; boom and bust
Feb 2010 - An IMF report on small island havens, with Wealth Bulletin summary on discrepancies
Sept 2009 series of blogs on tax havens and the crisis, including on living wills, the Too Big To Fail problem, the links between tax arbitrage and systemic risk, on evading bankers' pay curbs, and on the widespread links between offshore tax devices and regulatory evasion.
June 2009 Norwegian Commission on Capital Flight from Developing Countries, Section 4.14, contains a brief discussion of the links between tax havens and the crisis.
June 2009 IMF report on tax roots of the global economic crisis
May 2009 FT article "How tax havens helped to create a crisis" by TJN senior adviser Sol Picciotto.
March 2009 at the G20 summit: UK Government official appears to recognise the links.
Joseph Stiglitz' UN Commission of experts on reforming the international monetary and financial system makes several points about the links between tax havens and the financial crisis, many of which TJN has proposed before. See here, and follow the link to the original report.
Nicola Liebert of TJN-Germany and Axel Troost of the German Bundestag examine the links between tax haven and the economic crisis here, March 2009.
March 2009: TJN's Action Program Ending the Offshore Secrecy System.
GFIP report on the economic crisis and offshore, Feb 2009
William Brittain-Catlin examines the links between offshore and the financial crisis.
Christian Aid report on The impact of the financial crisis on the developing world
Jim Stewart's investigation into the role of tax havens and tax and regulatory competition in Dublin's International Financial Services Centre here (and the editorial in the same document gives additional analysis.)
TJN's submission to the UK Treasury Committee on offshore financial centres, here, followed by a series of blogs: Part 1 - Part II - Part III (what to do) - Part IV (nation states and global governance.) This has been followed by a blog looking at fragmented financial architecture, and a look at the role of accounting in all this.
Several political leaders supporting TJN's analysis, here (a top US senator, Carl Levin); here (French Prime Minister); here (French president)
Other commentators, such as here (UK focus, by Willem Buiter); here (Sunday Herald analysis); here (TV debate on tax havens and tax competition); here (the FT); here the IMF and the OECD recognising the problem); here (a former top banker); here (a legendary US crime-fighter).
Prof Sol Picciotto looks at a case study involving Bermuda and a credit derivatives swaps company here.
In addition, note the role that illicit flows have played in macroeconomic imbalances that built up ahead of the market disruptions. Click here, and watch this space for more.
Richard Murphy gives an example of how offshore incentives interact with executive remuneration (May 2008).
TJN's article that appeared in the UK's Guardian newspaper, written by John Christensen and Richard Murphy.
June 2008 - Creating Turmoil - TJN's submission to the UK Treasury Select Committee

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