Treasure Islands - Nicholas Shaxson [51]
The Euromarkets just kept snowballing: $500 billion in 1980, then a net $2.6 trillion eight years later64; and by 1997, nearly 90 percent of all international loans were made through this market. It is now so all-enveloping that people hardly notice it anymore.
It is fairly easy to explain why Britain welcomed the new markets, even at the cost of squeezing out British banks. There was the crude question of money, for one thing. “We, at the Bank, have never seen any reason to place any obstacles in the way of London taking its full and increasing share,” one official said. “If we were to stop the business here, it would move to other countries with a consequent loss of earnings for London.”65 Not only that, but Britain was rolling out a new political and economic strategy to make up for its loss of status as the world superpower: It would keep as close as possible to a leadership role in world affairs by hitching itself to the new American superpower through a “special relationship” with Washington, which endures, at least in British minds, until the present day. The economic anchor of this special relationship has been this partnership between Wall Street and the City of London, under a simple offshore formula: give Wall Street banks what they want, and they will come.
Yet if it is obvious that the British would welcome this market, it seems rather odder that the United States would let its banks dive headfirst into this unregulated offshore market, knowing they were undermining American financial controls. Several things help explain why it was tolerated in Washington too.
Wall Street lobbying was obviously a huge part of the story. There is also the classic offshore problem: what goes on overseas, out of sight, gets ignored. Many policy-makers and regulators in the United States simply failed to understand this strange new phenomenon or dismissed it as a weird, slightly unclean, but temporary anomaly66: a funny money best left to Europeans. “Euro-dollars, indeed!” one U.S. banker told Time magazine. “It’s hot money—and I prefer to call it by that name.” And it was hot money.
U.S. banking interests worked hard to keep this offshore playground as quiet as possible too. Bankers deliberately avoided discussing it,67 and when Hendrik Houthakker, a junior member of the U.S. Council of Economic Advisors, wanted to tell the U.S. president about the Euromarket, he was slapped down by his superiors with, “No, we don’t want to draw attention to it.” A U.S. congressional committee report in 1975 expressed amazement at how it had flourished so far beneath the political radar for so long.68 Yet there is a bigger reason why the United States ultimately colluded with Britain in letting Wall Street banks roam offshore.
The U.S. dollar is the world’s main reserve currency. Less privileged nations are periodically constrained from spending by shortages of foreign exchange, but the nation with the dominant currency can borrow in its own currency—and it can print money to acquire real resources and live beyond its means for a long time. This “exorbitant privilege” helped America fight and pay for the Vietnam War; more recently it helped President George W. Bush cut taxes, invade Iraq, and rack up huge deficits while investors around the world continued to buy U.S. debt. Countries choose dollars as the main component in their reserves because dollar markets are large and liquid, and the dollar is trusted to be relatively stable. Everyone trades in dollars. When I was the Reuters correspondent in war-ravaged Angola in the mid-1990s, the raucous street money changers plumped