Treasure Islands - Nicholas Shaxson [48]
Yet some things seem clear. An unregulated market allowing potentially endless and unusually profitable money creation will expand and displace regulated banking, and lending will expand into places where it wasn’t previously able to and often to where it shouldn’t be. Credit quality is likely to deteriorate, out of sight of regulators. Just as the world was waking up to the ideas of Milton Friedman, who argued that governments should focus on money supply as the lever to use to manage their economies, the new London market was starting to make these levers ineffective.
If the 1960s were thrilling for American bankers in London, U.S. regulators weren’t so happy. The archives from that era show that people were fretting about exactly the kinds of trouble that brought the world economy to its knees in the recent economic crisis from 2007—uncontrollable financial flows across borders, and the financing of long-term lending with very short-term borrowing, risking trouble when short-term markets dry up. “Is the growth of this market a welcome tonic, or a slow poison to the international financial system in general?” The Banker magazine had asked in the earlier years of the Euromarkets’ growth.
In 1960 the Federal Reserve Bank of New York, believing that the Eurodollar markets were already making “the pursuit of an independent monetary policy in any one country far more difficult,”48 sent a team to London to investigate. Bank of England staff charmed the American regulators and doubtless offered them a great number of cups of tea. But they did little to address their concerns, even after the Americans said the Euromarkets posed a danger to stability—and even though some British officials were nervous themselves. “I did get the impression,” one Bank of England official noted in a memo in 1960, “some of them were rather keeping their fingers crossed.”49
James Roberston, vice chair of the Federal Reserve, started to point to another worry: the emerging Euromarket centers in the City’s offshore satellites like Cayman and the Bahamas. “My primary objection is that they aren’t branches in any sense of the word,” he wrote. “They are simply desk drawers in somebody else’s desk. Why make banks go through a sham proceeding to obtain certain privileges?” One enterprising trader at a major U.S. bank, recognizing how artificial this game was, planted a cardboard sign saying “Nassau” on a desk in his trading room in New York and recorded trades at that desk, booking them “offshore” and out of sight of regulators. After someone discovered the ploy the traders continued as before but ensured that a clerk simply copied them into a second set of books in the Bahamas.50 Soon, a shift to computerized trading removed the need for cardboard signs anyway. As the author Jeffrey Robinson noted, “The horse hadn’t merely bolted, it was living in a beach-front condo in the Caribbean.”
The Euromarkets rippled outward, driven from the center in London, first to Britain’s semi-independent Crown Dependencies of Jersey, Guernsey, and the Isle of Man near the UK mainland, then out to the British-held Caribbean jurisdictions, then to Asia, and finally to British-held Pacific atolls. These satellites of the City were simply booking offices: semifictional way stations on secretive pathways through the accountants’ workbooks. The banks might park