The Blinding Rhetoric of Rageanomics

While the merits of free markets and the corrosive effects of protectionism are globally debated by world leaders, a litany of pejoratives linked to ‘banks’, ‘bankers’, ‘tax havens’, ’tax avoidance’, and ‘tax evasion’ currently dominate the rhetoric of what has become, a political ‘grand tour’.

While the merits of free markets and the corrosive effects of protectionism are globally debated by world leaders, a litany of pejoratives linked to ‘banks’, ‘bankers’, ‘tax havens’, ’tax avoidance’, and ‘tax evasion’ currently dominate the rhetoric of what has become, a political ‘grand tour’.

Gordon Brown is calling for Europe to lead the world out of the financial crisis, but some commentators observe that the key political figures in the G20 have turned the process into a veritable moral beauty parade, where pragmatic solutions are secondary to competition for the intellectual and ethical high ground. And with Brown, Merkel, Steinbruck and Sarkozy all looking at either elections or flagging opinion polls, it is not surprising that populist oratory is the order of the day.

Even more concerning, emotive language is now leading to emotive action, at a time when calm stoic rationalism would be preferable. Recent events include the properties of AIG executives being ‘cruised’ in Connecticut, and the attack on Sir Fred Goodwins home in Scotland. It is understandable that politicians have a desire to reflect the sentiment of voters, but this extreme condemnation of those at the helm of major financial institutions has clearly gone too far.

This populism, manifested in mob rule, is more reminiscent of the declining years of the Roman Empire, desperate to bolster a flagging regime, than of a modern, erudite government. High emotion, mixed with politics has unpredictable outcomes; the Emperor Commodus discovered this when he had to literally throw the head of Cleander, commander of the Praetorian Guard to the baying mob, in order to appease their anger. Which does raise the question, whose metaphoric head will be next in the blame-the-banker game?

Clearly there have been excesses and challenging questions must be asked. But none of the notable figures under attack appear to have acted illegally. All were subject to the corporate governance of a board. And their own employment packages will have been decided by an independent remuneration committee, and they in turn will almost certainly have been advised by experts in market compensation. Designer legislation enacted in the US (and now proposed in the UK as a device to overturn the legal enforceability of contracts and the rule of law), however strong the public outrage, is a dangerous precedent.

The fashion of accusation now seems to be driving either, irrational and exaggerated judgements about where fault lies, or is being seized upon to justify old ideologies, with the triumph of the ‘Dirigiste’ social market over capitalism being hailed in continental capitals.

Thankfully some rational voices are being heard, and there is hope that the fusion of the Turner review and the De Larosiere report will combine to bring order to market assessment, and the new regulation which is needed to cater for the gaps so cruelly exposed by a decade of artificially low interest rates, an east west savings-debt mismatch, and the blistering pace of product innovation which outstripped the ability of boards and regulators to keep up with what was actually happening.

For readers interested in a synopsis of the findings of the Turner review please see Martin Wolf’s excellent article in Friday 20th March issue of the FT by clicking here.

The apparent confusion over tax avoidance and tax evasion (now used interchangeably and inaccurately at best) is also a misleading and unhelpful development. Utilising your ISA allowance, paying into a pension or trading a few shares within your capital gains tax allowance, are activities that many millions of people undertake in the UK. They are tax avoidance; which means to say that  without taking those planning measures , those people would pay more tax. To accuse banks or companies or individuals of illicit, or immoral behaviour because they plan their international affairs in perfectly legal and sensible ways simply raises the spectre of wrongdoing in a misleading and mischievous manner. Moral judgement without a transcending benchmark is simply a matter of opinion and opinion fuelled by anger is rarely rational. I will return to this theme under the title of ‘A Taxing Fundamentalism’ in future commentary.

And what of the continual reference to ‘Tax Havens’? Our view, and that of the nations with whom we have treaties, is that there is a difference between cooperative and non cooperative jurisdictions. It is the difference between transparent and well-regulated centres like Jersey, and the opaque and less well-regulated; a difference as clear as night and day.

IMF reviews of regulatory benchmarks have provided, proof positive, that Jersey, (ranked 5th globally on assessment scores), is one of the highest performing jurisdictions in terms of compliance with international standards, and is deemed by the UK to be equivalent to the Third EU Money Laundering Directive, a feat that 17 of the EU member States have still to achieve.

On tax transparency and information exchange we are a leading player in the OECD programme, and are delighted that others too have finally signalled their intention to join in. So why the continuing focus by Brown and other G20 leaders on ‘Tax Havens’?

Whilst the banking secrecy jurisdictions have indicated a new commitment to modern standards of information exchange, there is still some scepticism as to what this actually means, given that many have also said they will retain banking secrecy. Nagging doubts clearly remain, and until cordiality statements are translated into action; it seems the pressure for reform will continue with ‘Tax Havens’ featuring in the news.

Speculation as to what the G20 will mean for centres such as Jersey is rife with predictions of blacklists, toolkits of ‘defensive measures’, and all sorts of dire consequences. We feel this speculation is misplaced, as discriminatory action must have some legal basis; if the large nations are not to ride roughshod over the principles of ‘liberty, fairness and responsibility’ as espoused by Mr Brown in his Strasbourg speech.

Mr Brown’s desire to see “a globalisation that is open, free–trading and flexible” cannot surely be a reinforcement of an Orwellian world where access to free trade is on the basis that some are more equal than others. To exclude small nations from the global financial markets where they compete for international business in exactly the same way as do many OECD and G20 nations; on a mix of financial expertise, lower costs, attractive tax regimes, political and social stability, and robust, flexible, laws and regulation would be a gross injustice, and contrary to the many statements which have been made regarding the dangers of protectionism.

I have been a banker for 30 years and like many ‘traditional’ bankers I have long held the view that capitalism unfettered is dangerous, and clearly there is universal agreement that change is needed. However, we should not let this conclusion obscure the fact that capitalism through globalisation has provided enormous benefits to the global community over the last 30 years.

I will conclude by quoting from an FT article by University of Chicago professors in economics, Gary Becker, (Nobel prizewinner) and Kevin Murphy, (Clark Medal).

“Capitalism has been wounded by the global recession, which unfortunately will get worse before it gets better. As governments continue to determine how many restrictions to place on markets, especially financial markets, the destruction of wealth from the recession should be placed in the context of the enormous creation of wealth and improved well-being during the past three decades. Financial and other reforms must not risk destroying the source of these gains in pr

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