Posts Tagged ‘banking’

US-2

According to the Tax Justice Network, the United States ranks second in the 2018 Financial Secrecy Index. This is based on a secrecy score of 59.8, which is practically unchanged from 2015. The only country ahead of the United States is Switzerland, with a secrecy score of 76. The rise of the United States continues a long-term trend, as the country was one of the few to increase their secrecy score in the 2015 index.

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The continued rise of the United States in the 2018 index comes on the back of a significant change in the U.S. share of the global market for offshore financial services. Between 2015 and 2018, the United States increased its market share by 14 percent. In total, the United States accounts for 22.3 percent of the global market in offshore financial services.

So, actually, we’re #1!

History

The United States has long been a secrecy jurisdiction or tax haven at the federal level. For example, the 1921 Revenue Act exempted interest income on bank deposits owned by non-US residents, and this was explicitly justified at the time as a measure to a attract (tax-evading) foreign capital to the United States.

Another factor influencing policy makers later on was the Vietnam War, which opened up growing external balance of payments deficits—after a long history of surpluses. The United States increasingly needed foreign loans to finance these deficits and it did so, in significant part, by a attracting the proceeds of tax evasion and other illicit foreign money. Foreigners invested in the United States for many reasons, not least the fact of the U.S. dollar being the global reserve currency—but secrecy and tax-free treatment were also key attractions.

Alongside this history of U.S. federal-level secrecy, individual U.S. states have been hosting the formation of secretive shell companies—especially as several states (such as Delaware, Wyoming, and Nevada) have engaged in a race to the bottom to outbid one other in offering ever more egregious secrecy facilities.

Here is how it works. A wealthy Ukrainian, say, sets up a Delaware shell company using a local company forma on agent. That Delaware agent will provide nominee officers and directors (typically lawyers) to serve as fronts for the real owners, and their details and photocopies of their passports can be made public but that gets you no closer to who the genuine Ukrainian owner of that company is: if the nominees are lawyers they are bound by attorney-client privilege not to reveal the information (if they even have it: the owner of that shell company may be another secretive shell company or trust somewhere else). The company can run millions through its bank account but nobody—whether domestic or foreign law enforcement—can crack through that form of secrecy in any efficient or effective way.

 

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Adam Smith’s Wealth of Nations makes for uncomfortable reading these days. That’s because, as my students this semester have learned, the father of modern mainstream economics—who has become so closely (and mistakenly) identified with the invisible hand—held a narrow theory of money and advocated extensive regulation of the banking sector.

This is contrast to the obscene growth of banking in recent decades, which Rana Foroohar observes “isn’t serving us, we’re serving it.”

According to Smith, the “judicious operations of banking” did nothing more than convert dead stock into active and productive stock—”into stock which produces something to the country.”

The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either. The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air, enable the country to convert, as it were, a great part of its highways into good pastures and corn-fields, and thereby to increase very considerably the annual produce of its land and labour.

Moreover, Smith also argued, banks were susceptible to speculative crises. Thus, even in his system of “natural liberty,” the banking sector needed to be regulated, in order to lessen the likelihood of such crises and to minimize the suffering of the poor when they did happen.

To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.

Those warnings and regulations, of course, disappeared from contemporary mainstream economics—even as the financial sector continued to increase in size and significance within the U.S. economy.

finance-profits workers

Today, financial profits (the blue line in the chart above) represent more than a quarter of total corporate profits in the United States, although the financial sector provides only 4.3 percent of American jobs (the red line in the chart).

finance-profits inequality

Moreover, as the profits of the financial sector (the purple line in the chart above) have grown—reaching still another record high of more than $500 billion in 2016—the distribution of wealth has become more and more unequal—such that, in 2016, the share of total wealth owned by the top 1 percent (the green line in the chart) was more than 37 percent.

And it’s not just the financial sector. As Forohoor explains, corporations outside the banking sector are copying the spectacularly successful model:

Nonfinancial firms as a whole now get five times the revenue from purely financial activities as they did in the 1980s. Stock buybacks artificially drive up the price of corporate shares, enriching the C-suite. Airlines can make more hedging oil prices than selling coach seats. Drug companies spend as much time tax optimizing as they do worrying about which new compound to research. The largest Silicon Valley firms now use a good chunk of their spare cash to underwrite bond offerings the same way Goldman Sachs might.

The fact is, financial wheeling and dealing has—after a brief interlude—returned as the tail that wags the economic dog in the United States. It manages to capture an outsized share of profits, even as it creates increased instability and obscene levels of inequality.

It should be clear to all that finance has been fundamentally transformed since Smith’s day, from a highway that was supposed to serve us into a master that we serve.

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Tim Harford offers a short but useful piece on the medieval origins of modern banking—in the Knights Templar, the great fair of Lyon, and so on.*

The Templars dedicated themselves to the defence of Christian pilgrims to Jerusalem. The city had been captured by the first crusade in 1099 and pilgrims began to stream in, travelling thousands of miles across Europe.

Those pilgrims needed to somehow fund months of food and transport and accommodation, yet avoid carrying huge sums of cash around, because that would have made them a target for robbers.

Fortunately, the Templars had that covered. A pilgrim could leave his cash at Temple Church in London, and withdraw it in Jerusalem. Instead of carrying money, he would carry a letter of credit. The Knights Templar were the Western Union of the crusades.

But, with the loss of control over of Jerusalem, the Templars were eventually disbanded in 1312.

So who would step into the banking vacuum?

If you had been at the great fair of Lyon in 1555, you could have seen the answer. Lyon’s fair was the greatest market for international trade in all Europe.

But at this particular fair, gossip was starting to spread about an Italian merchant who was there, and making a fortune.

He bought and sold nothing: all he had was a desk and an inkstand.

Day after day he sat there, receiving other merchants and signing their pieces of paper, and somehow becoming very rich.

The locals were very suspicious.

But to a new international elite of Europe’s great merchant houses, his activities were perfectly legitimate.

He was buying and selling debt, and in doing so he was creating enormous economic value.

And that’s Harford’s mistake: there’s is nothing about the buying and selling of debt (or, for that matter, any other financial service, from changing money to issuing letters of credit) that creates value, enormous or otherwise.

Banking often enables value to be created. Surplus-value, too. But it doesn’t create either value or surplus-value.

What bankers do is capture a portion of the surplus-value that is embodied in the goods and services that are produced, which is then distributed to them by those who actually appropriate the surplus-value. In other words, bankers (like many others, from managers to merchants) share in the booty.

Medieval bankers managed to get a cut of the surplus they did not create. And that’s exactly what bankers do today.

 

*Harford also notes that “by turning personal obligations into internationally tradable debts, these medieval bankers were creating their own private money, outside the control of Europe’s kings.” But he fails to mention the obvious contemporary parallel, Bitcoin, the private digital currency and payments system that was invented to finance criminal activities.

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Special mention

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Only in America

Posted: 8 February 2014 in Uncategorized
Tags: , , , ,

postal-banks

The United States has a postal system that is supposed to be self-financing (even after pre-paying postal workers’ pensions) and a poor population that has been ignored by the official banking industry (and therefore is prey to the growing cash-checking and payday-loan industry).

So, the U.S. Postal Service’s Office of the Inspector General [pdf] has come up with the idea of the USPS stepping into the breach by providing financial services to poor people, thus killing two birds with one stone: improving the postal service’s finances on the basis of financial fees paid by poor people who increasingly live in bank deserts.

Elizabeth Warren supports the idea (because she sees it as providing “access to affordable and fair financial services”) and, not surprisingly, the banking industry condemns it (creeping socialism and all that).

Adam Levitin, appropriately, suggests caution:

It is hard to make low-income consumers—like many of the unbanked and underbanked—into profitable financial services customers. That is one reason why so many are unbanked.

This points to a real tension in any sort of postal banking proposal: to the extent that a postal banking system is designed to provide low-cost services to consumers, it is potentially at odds with the USPS’s need to find new revenue sources. Put another way, is the mission of a postal bank profit or financial inclusion?

mcdonalds-wages

Yesterday, thousands of fast-food and retail workers went on strike across the United States in a signal of the growing demand for action on income equality.

But they’re not the only workers who are being paid povery-level wages. According to a new report released by the Committee for Better Banks [pdf], almost a third of the country’s half-million bank tellers rely on some form of public assistance to get by. At the same time,

The top fifty financial CEOs’ compensation collectively rose by 26% in 2010 and by 20.4% in 2011. According to a report by SNL Financial, the median CEO pay for the securities industry in general jumped overall 22 percent in 2012.

  • Although Bank of America’s stock fell 58% in 2011, Brian Moynihan, the bank’s CEO, earned $8.1 million for the year. In 2012, his pay package rose to $12 million.73
  • While in 2011 Goldman Sach’s stock plunged 45.6 percent, CEO Lloyd Blankfein’s compensation rose to $16.2 million.74 In 2012, he was awarded $21 million, including $13 million in restricted stock.
  • Jamie Dimon, CEO of JPMorgan Chase’s compensation increased in 2011 to $23 million as the bank’s stock fell 20%. Dimon’s salary was only reduced after admitting wrongdoing when in May of 2012 JPMorgan’s stock dropped more than 10 percent in two days.
  • Despite the fact that Citigroup was in the midst of letting go of thousands of workers, it let Vikram Pandit leave his post as CEO with a hefty $6.7 million bonus in 2012.