G20 Breakdown

There is an excellent petition going around in advance of the meetings in Toronto calling on the G20 to end the pattern of stolen money and tax evasion from corrupt government officials and corporations who hide ill-gotten gains through tax havens and secret jurisdictions. They state that for every dollar in aid that goes to poorer countries, 10 dollars comes out in the form of these corrupt gains that are not properly tracked.

Watch their clear and informative campaign video here and check out their website (Global Financial Integrity) for excellent in-depth information on the problem of tax evasion and other illicit forms of corruption.

While transparency is not the only answer to making the global economy fairer to the poorer countries that are hurt by this, it is certainly a step in the right direction. At this point, the G20 appears unlikely to properly take the issue up, but public pressure may build on them

From the petition:

Research shows that developing countries are losing $1 trillion every year due to crime, government corruption, and tax evasion. These illicit monetary outflows are roughly ten times the amount of aid money going into developing countries for poverty alleviation and economic development.

The loss of money from poor economies that would otherwise go to provide health services, infrastructure, and other critical needs exacerbates poverty and leads to the deaths of millions of people. The annual loss of hundreds of billions of dollars from the world’s poorest and most vulnerable economies constitutes one of the most pressing human rights issues of the new decade.

The key to tackling this problem is transparency in the global financial system. After these stolen or otherwise ill-gotten gains exit their country of origin they vanish into an opaque financial system comprised of tax havens and secrecy jurisdictions. The most effective deterrent to criminals, corrupt officials, and tax evaders is to create a global financial system where illicit money cannot hide.

When the world’s 20 largest economies – the G20 – meet in Toronto on June 26-27, 2010 they will have an unprecedented opportunity to institute changes to create a transparent global financial system that is open, accountable, fair and beneficial for all.

Just as the Canadian government announced before him, the Deputy Governor of the Bank of Canada has responded negatively to the idea of the global transaction tax. There appears to be some confusion in the article between the transaction tax (Tobin tax), as proposed by Britain and others, and the straight levy as recently submitted by Germany that seems to have a little more chance of succeeding.

Nevertheless, from this article it seems that Canadian authorities are opposing both the tax and the levy, in large part based on the idea that it will simply become a tax to pay down deficits and won’t help regulate the system.

I have trouble understanding how charging banks for their risky investment transactions wouldn’t be useful in forcing them think twice about which transactions are worth going ahead with. I guess its socialist to tax banks (but not to bail them out, apparently!)

The Bank follows the Canadian government and the U.S. Treasury (pdf) in its regulatory remedy: “improving capital and liquidity requirements of banks”.

A quick explanation: By capital requirements they are suggesting that banks would need to increase the level of capital, such as from shareholders, depositors, etc… in relation to assets (such as long term bonds or mortgage bonds) with various levels of risk, as a means to ensure they can deal with toxic assets as they come up. Liquidity requirements are about increasing cash reserves VS medium or longer term investments.

These are both passable reforms, but are not near enough to dissuade banks from taking on these assets. As Bill Greider wrote in the Nation last year, banks found ways around the rules even as capital and liquidity requirements were put in place over the past 20 years, and where they couldn’t, credit just went to unregulated ‘money-pots’ outside the banking system. It is worth noting at length:

The president, for instance, proposes to raise the requirements for capital and liquidity held by commercial banks with strict limits on leverage–their ability to borrow. That is a virtuous proposal, but it begs the question. Why did the legal limits already in place fail to restrain the appetites of bankers? Indeed, several times in the last two decades the Fed and other central banks enacted new and supposedly more effective capital requirements to curb the excesses. The big dogs of banking broke free of the leash again and again while vigilant watchdogs at the Fed and elsewhere looked the other way. Why should we expect different results next time?

One reason why old restraints failed is the so-called “modernization” that shifted the credit functions outside regulated banks and into a variety of unregulated money pots–the so-called shadow banking system of hedge funds and private-equity firms. These all interact intimately with traditional banks and give the banks profitable ways to evade the old rules or conceal the actual condition of their balance sheets from both regulators and innocent investors. This interactions are dazzlingly complex–too complex for even the bankers themselves to fully understand–but this was not an accident of nature. It was the goal of financial deregulation enacted by Bill Clinton, arm-in-arm with the Republican Congress.

Likewise, banks were allowed to play these games by legislative creation of “off-balance sheet entities” where they can park their holdings–debts or assets–beyond the view of casual observers. This is essentially the same accounting trick that empowered Enron and other corporations to hide their true condition (then collapse). The biggest bankers played roughly the same game. In fact, it was the bankers who taught Enron and others these tricks. What public purpose is served by these devices except to conceal reality from public investors? For that matter, what is the public purpose of letting corporations, banks and wealthy individuals park their wealth in the Grand Cayman Islands? Everyone in Wall Street knows the answer. It allows them to evade “legally” US regulations and tax law.

Considering these limitations, some form of bank tax seems the only appropriate starting point.

There is currently a shift away from the Tobin tax on bank transactions, with many calling it dead since the U.S. and Canada won’t back it. The hope for consensus at the G20 now lies with a straight bank levy proposed by Germany and likely to be supported by the International Monetary Fund (IMF) at its meeting next month.

This is a big step backward as the transaction tax, long called for by progressive observers, seemed like a distinct possibility in the wake of the economic crisis. It would have put a 1% tax on the types of speculative transactions, such as derivatives, that became toxic and caused the crash. It would have caused investment banks to think twice about performing these transactions.

Instead, after having transferred their risk onto the government through the bailout money, they are able to carry on as before, while governments move towards insolvency. Where did all that momentum for systemic change go?

Like the Tobin tax would have been, the levy is to be used to create a bailout fund, though a German observer noted that it would be nowhere near enough to pay for future bailouts:

The country’s biggest lender, Deutsche Bank, would have to pay a contribution of 2.2 billion euros, equivalent to a third of its expected pretax profit this year, Merck Finck analyst Konrad Becker calculated in a research note, assuming a charge of 0.15 percent of total assets.

No. 2 lender Commerzbank would pay around 1.2 billion euros, Becker said.

The levy, based on total assets less deposits, would need to run for years to raise the vast sums needed for bank bailouts.

“That’s a joke,” Becker said of the 9 billion euro figure.

The U.S. and China are in a big battle right now over exchange rates – with serious global repercussions. Some are calling for this issue to be resolved through the G-20.

China relies heavily on selling cheap exports to the U.S., while the U.S. relies as much on China buying it’s treasury bonds in order to service the U.S. debt. This relationship has created a kind of an equilibrium where neither side wants to tread too strongly on the other.

However, the U.S. is accusing China of falsely depreciating it’s currency (the renminbi) so that China can increase its exports to the U.S. (and other countries) based on the low cost of buying their products. The U.S. is losing export opportunities due to it high exchange rate relative to the renminbi.

And there are calls for action against China, despite fears of retaliation. Even the U.S. Chamber of Commerce, which has done everything over the years to back China’s entrance into the world economy (at the behest of multinational corporations), is calling for the U.S. to name China as a ‘currency manipulator’ and possibly place tariffs on China.

It is also interesting to see the U.S. crying foul about a market (theirs) being artificially flooded by cheap goods (China’s). The U.S. agricultural industry has been doing this for years with cheap subsidies of corn and other products to Latin America, especially Mexico. This has wiped out much of Mexico’s domestic corn industry, knocked farmers off their land, and been a key factor in Mexican economic migration to the U.S. The U.S. has traditionally been fine with artificial markets, as long as they are not hurt themselves.

This all points to a key problem facing global capitalism in the wake of the financial crisis – lack of demand and overproduction. In the wake of low depressed wages worldwide and high unemployment, there is a scramble to get at whatever consumer demand they can round up. Thus the focus on countries like China that still have global demand for their products, and the concern that they are doing it artificially. The countries with strong trade surpluses like China are seen to be “taking more than their fair share of world demand and are under pressure to boost their domestic markets”.

Many are seeing this as a key issue for the G-20 to take up, especially as it moves to become the prime location for creating global policies for economic growth and financial reform.

It will be very interesting to watch in the weeks leading up to the G-20 meetings, as the game of cat and mouse continues between the U.S. and China.

A divide is developing between Canada and Europe on the issue of bank taxes, which is likely to come to a head at the G8/G20. European countries are wanting to tax financial transactions as a means to build up a fund for any future bailouts, while the Canadian government (and Canadian banks – surprise) says that it is a bad idea.

Canadian Finance Minister Jim Flaherty: “We’re not going to impose capital taxes on our financial institutions. We’re against raising taxes and I hope to be able to convince my colleagues that these are unwise moves.” He also states that the U.S. will be siding with Canada on this issue.

Flaherty used a moment to praise the Canadian banking system and suggest that the best thing that governments could do for their banking systems is to follow the Canadian model of low debt, rather than creating new taxes.

The ‘wonderousness’ of the Canadian banking system is going to be a theme that will be touted ad nauseum by the Canadian government during the summits. But is it all that? There are certainly grumblings out there that the Canadian financial sector has more problems than it will admit (such as a U.S. style housing bubble)

There is clearly a need to put this under a bit more scrutiny, watch here in the weeks ahead!