Thursday, September 18, 2008

Tax havens and market turmoil, Part 2 - how bad is it?

Yesterday, in reproducing Jim Stewart's excellent article on the role of the Dublin International Financial Services Centre in the market turmoil, we promised a long blog on tax havens and the market turmoil. We've decided to split this into two parts. This first part will simply show how bad it is, using a few quotes from different commentators out there. Another blog, later today, will look at what might be done.

This, it seems, is the big one. We start with the billionaire speculator George Soros:

"We are not through it at all – in some ways we are still heading into the storm, rather than coming out of it, and this minute we are at a very precarious moment."

Next, John Gapper in the FT:
"We are now, unquestionably, in the worst financial crisis since 1929."

His FT colleague Martin Wolf had this to say:

"Is the worst now over? Certainly not. Unwinding of excesses on such a scale involves four giant processes: the fall of inflated asset prices to a sustainable level; de-leveraging of the private sector; recognition of resulting financial sector losses; and recapitalisation of the financial system. Making all this worse will be the collapse in private sector demand, as credit shrinks and wealth falls. None of these processes is even close to completion. Some have barely begun."

Then Ken Rogoff, former chief economist at the IMF, wonders how much it's going to cost the US government, and what the consequences might be:

"It is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already. If the US were an emerging market country, its exchange rate would be plummeting and interest rates on government debt would be soaring. Instead, the dollar has actually strengthened modestly, while interest rates on three- month US Treasury Bills have now reached 54-year lows. It is almost as if the more the US messes up, the more the world loves it."

A comment on yesterday's blog, which seems to have been deleted by the blogger programme, noted that we spend an awful lot of time focusing on the US and UK, and urged us to look at other parts of the world such as Asia. We agree - but we need to remind people that we are an absolutely TINY organisation. We have plans to build up our network in different regions of the world, but this will only happen slowly. Please be patient - we just don't have the staff or resources yet.

But here's a short Asian angle on today's story. From a New York Times blog:

"a wariness toward the United States is setting in that is unprecedented in recent memory, reaching from central banks to industrial corporations."

This has obvious implications for the US dollar. But, it continues, America's broken economy may be in a position before too long when others will see it as "bargain time."

"If cash is king during the current global financial crisis, then Asian governments and financial institutions are emperors. China’s central bank alone has $1.8 trillion in foreign reserves. Those reserves grew $280.6 billion in the first half of this year — a pace of $64 million an hour."

Interesting times. Another blog will build on this one, hopefully later today.

(Photo hat tip:Naked Capitalism)

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