The Governance of the Black Holes of the World Economy: Shadow Banking and Offshore Finance

This paper focuses on regulatory challenges posed by the two interconnected structures of the global financial system – the economy of tax havens (or offshore financial centres), and the shadow banking system. The financial crisis of 2007-09 has revealed that tax havens structures and shadow banking entities play a central role in the practise of financial institutions reliant on financial innovation. Thriving on complexity, opaque networks and driven by arbitrage, the two phenomena pose tremendous challenges to national and international regulators aiming to restore the financial cycle in the recessionary environment. In this paper, we analyse "the state of play" and the current plans for the governance of tax havens, offshore finance and the shadow banking industry. We find that although offshore financial centres and shadow banking are outside the scope of academic economics, they have attracted a lot of attention on the part of financial researchers and regulators. Along with other macro-prudential and system risk concerns, the regulation, or governance of these "black holes" of the global economy is increasingly assuming a central place on the agenda of financial regulators. In what follows, we explore the reasons behind this development

Futurity, Pro-cyclicality and Financial Crises

Nearly a century ago, one of the leading forefathers of the school of evolutionary economics, John R. Commons, coined the term ‘futurity’ to describe an epochal change in the late nineteenth-century advanced economies. Futurity refers to the reorientation of economies towards the future, and specifically to the fledgling practice of treating businesses as ‘going concerns’ and measuring its value in terms of their anticipated future profits. Curiously, the implication of such epochal changes on the performance of the financial system had rarely been discussed, let alone addressed. This article presents a theoretical argument that suggests that futurity encourages pro-cyclical dynamics that are pulling the financial systems in ever more violent and disastrous swings

Elsewhere, Ideally Nowhere: Shadow Banking and Offshore Finance

If we were to identify one common thread across the nancial system’s stages of evolution, it is the quest for being located for tax and regulatory purposes elsewhere or, ideally, nowhere. Recognising the limits of mainstream economic models in providing a comprehensive explanation of this phenomenon, we draw on the ideas of orstein Veblen and his theory of business civilisation. A Veblenian analysis suggests that dynamics and behaviour in nance that are commonly associated with human failure (greed, exuberance, fraud, incompetence), and which appear to have become widespread practice, should best be understood as sabotage. Finance is awash with techniques designed to sabotage both clients and the governments who enacted regulations that were supposed to protect clients. ese techniques are legal mechanisms, albeit as Veblen writes, not in the spirit of the law.

Troubling tax havens: tax footprint reduction and jurisdictional arbitrage

Crédit Swiss estimates that global aggregate wealth has reached US$240 trillion in 2013 and is about to rise by 40$ 50 billion dollars - whose main purpose and product is the reduction of individual and corporate tax footprint

The best of both worlds: scale economies and discriminatory policies in London’s global financial centre

From the early 1960s onwards London has managed to vie with New York for the top spot as an international financial centre. Ever since then, London has reigned as a leading global financial hub, despite not having behind it anything like the political or economic backing enjoyed by New York. This paper seeks to explain this phenomenon by building on Kindleberger’s classic analysis of financial centres as international hubs that arise due to economic, geographic and infrastructural advantages, and more recent theories of specialized financial centres which suggest that financial centres deploy discriminatory business practices in order to compete with the scale economy-based centres. Our central claim is that London’s continuing financial supremacy can be traced to the way that the opposing ‘economic’ and ‘political’ sets of criteria necessary for a financial centre are here inextricably fused together in a mutually reinforcing dynamic. Three case studies are used to support this claim: the market for international loans and deposits; the forex (FX) and over the counter (OTC) derivatives markets; and the area of asset and collateral management

Why the UK’s Fiscal Charter is Doomed to Fail: An analysis of Austerity Economics during the First and the Second Cameron Governments

The economic rationale for austerity policies harks back to a highly controversial proposals that originated in the 1990s known as ‘expansionary fiscal contraction.’ This paper explores these ideas relating to austerity and suggests that matters have not worked out as George Osborne expected. Furthermore, since the broad assumptions made by HM Treasury and the OBR remain the same in 2015 as they were in 2010, the paper presents an argument why austerity plans for the period 2016–2020 are also unlikely to succeed. The core arguments in the paper can be summarised by the following bullet points: • Politically motivated suggestions that the economy crashed in 2007–08 because of Labour’s overspending are not supported by the data. Indeed, by the time it left office the Labour government had adopted a more realistic basis for economic forecasting than the following government. • In contrast to the generally perceived view, austerity only hit current spending per head from 2013 onwards, from which time on a significant downward trend in current spending per head of population is noticeable in the available data and forecasts. • Despite the rhetoric of increasing and intolerable debt interest burden, the actual cost per head in 2015–16 is unlikely to be greater than pre-crisis levels on a per capita basis. • The second Cameron government is planning to increase government spending, particularly in discretionary areas at around the time of the next general election in 2020. • There has been a fundamental shift in the way that government spending benefits people in the UK. ‘Feel good items’ spending (health, education, infrastructure) per capita has declined sharply since 2008, while annually managed spending (mainly welfare and debt interest) has increased. These diverging trends clearly have differential effects on groups in society. • Government policy aims to increase income tax and national insurance as a proportion of overall revenue, and at rates in excess of GDP growth, in the next five years, whilst reducing corporation taxes significantly. • The government forecaster – the Office for Budget Responsibility (OBR) – is adopting a low, and in our view, unrealistic multiplier for government spending (range of 0.6 to 1.0). This is much lower than the one adopted by the IMF (0.9 to 1.7) or Standard & Poor (up to 2.5). The low multiplier adopted by the OBR has led to persistent overestimation of the benefit of austerity and constant upwards revision of public borrowing needs. • The Office for Budget Responsibility forecasts for balancing the books by 2020 is premised on very significant, and in our view unrealistic, changes in the pattern of behaviour of the private sector within the UK economy and the external sectors over the next few years. • The Fiscal Charter is neither feasible, nor desirable, for the UK economy. • It is not desirable because it is premised on considerable growing debt burdens shouldered by the private sectors (households and business community) and overseas trade sector. • It is not feasible because it assumes a linear and highly magnified projections of growth trends in the private and external sectors that began an either in the middle or 2014 or the early 2015 into the future but are very unlikely to continue unabated. • If the rate of inaccuracy of OBR forecasts from 2011–12 to 2015–16 was replicated in the years 2015–16 to 2019–20 then, based on the July 2015 OBR forecast, an additional £162 billion would be borrowed over this period, and at the end of the 2015-2020 parliament the budget would not be running a surplus of £10.2 billion but would instead be showing a deficit of £39.3 billio