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UK Economists Rally Behind Cayman Islands,
by Phillip Morton, Investors Offshore.com
Monday, June 22, 2009
‘Don’t blame the Cayman Islands for the financial crisis’
is the resounding message within a comprehensive analysis of the current economic
crisis by the London based Institute of Economic Affairs, in a letter
signed by leading UK economists.
Placing the blame squarely on the shoulders of world governments and central
bankers, the IEA experts urged that: “No significant changes are needed
to the regulatory environment surrounding hedge funds, short selling, offshore
banks, private equity or tax havens.”
The letter states:
“The prevailing view amongst the commentariat (reflected in the recent
deliberations of the G20) that the financial crash of 2008 was caused by market
failure is both wrong and dangerous. Government failure had a leading role in
creating the conditions that led to the crash.”
The letter instead underlines the economists’ prevailing consensus that
instead the financial crisis was caused by government policy, and urges
an end to the assault on offshore and on hedge funds and private
equity. Within the letter the economists underline what
they believe to be the cause of the crisis:
Central banks created a monetary bubble that fed an asset price boom and
distorted the pricing of risk.
US government policy encouraged high-risk lending through support for Fannie
Mae and Freddie Mac (which had explicit government targets of providing over
50% of mortgage finance to poor households) and through the Community Reinvestment
Act and related regulations.
Regulators and central bankers failed to use their considerable powers to
stop risks building up in the financial system and an extension of regulation
will not make a future crash less likely.
Much existing banking regulation exacerbated the crisis and reduced the effectiveness
of market monitoring of banks. The FSA, in the UK, has failed in its statutory
duty to "maintain market confidence".
The tax and regulatory systems encourage complex and opaque methods of increasing
gearing in the financial system.
Financial institutions that have made mistakes have lost the majority of their
value. On the other hand, regulators are being rewarded for failure by an extension
of their size and powers.
Evidence suggests that serious systemic problems have not arisen amongst unregulated
institutions.
“As such, no significant changes are needed to the regulatory environment
surrounding hedge funds, short-selling, offshore banks, private equity or tax
havens,” underline the economists.
“A revolution in financial regulation is needed. The proposals of the
G20 governments and the EU are wholly misconceived. Specific and targeted laws
and regulations could restore market discipline.” According to the economists,
these should include:
Making bank depositors prior creditors. This will provide better incentives
for prudent behaviour and make a call on deposit insurance funds less likely.
Provisions to ensure an orderly winding up, recapitalisation or sale of systemic
financial institutions in difficulty. Banks must be allowed to fail.
Enhancing market disclosure by ensuring that banks report relevant information
to shareholders.
This should be reinforced, the economists urge, with central bank action to
ensure that:
Proper use is made of lender-of-last-resort facilities to deal with illiquid
banks.
The growth of broad money is monitored together with the build-up of wider
inflationary risks.
Anthony Travers OBE, Chairman of the Cayman Island’s Financial Services
Authority concludes:
“Hopefully the message is getting through that the Cayman Islands has
a full and effective network of tax transparency treaties and is a totally transparent
tax regime which has co-operated fully with the UK, EU and US Governments. We
are astonished at the ill-founded comparisons with the opaque regimes still
made by Prime Minister Gordon Brown, Lord Wallace of Saltaire and Senator Levin.
The truth of the matter is that the real reason for the unwarranted attacks
on the Cayman Islands can have nothing whatsoever to do with tax evasion. The
concern of those politicians and the OECD can only relate to the increasingly
high levels of tax in their respective countries, especially the 50% proposal
in the UK. They know that there will be a stampede of individuals and companies
attempting to escape their punitive taxes.”
He concluded:
“President Obama would be better advised to focus his attention nearer
to home in the Vice-President’s State, Delaware, where an office at 1209
North Orange Street, Wilmington, houses the grand total of 217,000 companies.”
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