Treasure Islands - Nicholas Shaxson [134]
As if all this were not enough, there is yet more.
Trust is a central ingredient in any economy. Where participants in a market don’t trust each other, expensive litigation substitutes for honest behavior. And there is nothing—nothing—like the offshore system to generate opacity and erode trust and the behavioral constraint. When nobody can find out what a company’s true financial position is until after the money has evaporated, trickery and bamboozlement abound. Financial markets seized up in 2007 because nobody knew, or trusted, what the other players in the market were doing, or what they were worth, or what or where their risks were. It is no coincidence that so many of those involved in great financial trickery, like Enron, or the empire of the fraudster Bernie Madoff, or Sir Allen Stanford’s Stanford Bank, or Long Term Capital Management, or Lehman Brothers, or AIG, were so thoroughly entrenched offshore.
The secrecy jurisdictions specialize in bamboozlement. Along with the secrecy, and a curmudgeonly reluctance to co-operate with foreign jurisdictions, the offshore system provides endless incentives for corporations—especially financial ones—to festoon their affairs across jurisdictions, usually a complex mix of onshore and offshore, to fox the regulators. These giant impenetrable offshore trails, sliced, diced, and trailed around the world, increased the distance between the lenders and their borrowers until bankers no longer knew who their ultimate clients were. It is hardly a surprise that the Royal Bank of Scotland in 2003 offered a gold credit card with a ten-thousand-pound spending limit to a Monty Slater in Manchester, England. Monty Slater was a Shih Tzu dog.51
John Maynard Keynes summed up the problem well. “Remoteness between ownership and operation is an evil in the relations among men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation.”
With this observation, Keynes exposed the flaw in the grand bargain at the heart of the globalization project. In giving freedom to finance, people in democratic nation-states lost their freedom to choose and implement the laws and rules that they wanted. But they handed these freedoms to the world’s financiers in exchange for a promise: that the efficiency gains from those free financial flows will be so great as to make that loss of freedom worthwhile.
The tax havens helped bring this calculation to naught.
CONCLUSION
Reclaiming Our Culture
JOHN MAYNARD KEYNES’S OBSERVATION IN THE AFTERMATH of the Wall Street Crash, which I cited in chapter 3, is as apt today as it was when first articulated: “We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.” But the financial system is vastly more dangerous and pervasive now. Changes to domestic banking regulations matter but will never suffice. Reform must be based on a thorough grasp of the new, globalized reality—and anyone who wants to understand the modern financial machine must understand what tax havens are and how they work.
We must tackle the offshore system. I will point to ten major areas for change, in no particular order and as briefly as I can. All overlap with each other—and the last ties them all together.
First, we can pursue transparency. Many and varied changes are needed; here are two.
About 60 percent of world trade happens inside multinational corporations, which cut taxes by shuffling money between jurisdictions to create artificial paper trails that shift their profits into zero-tax havens and their costs into high-tax countries.