The world, as Arthur Schopenhauer observed, is a business that doesn’t cover its expenses. This wasn’t idle metaphysics but first-hand experience. The Schopenhauer family had been wealthy stockbrokers in the free trade city of Hamburg. Then the European economy collapsed and they lost everything. Two hundred years later, there is much that Schopenhauer would find familiar in the landscape of bank failures, collapsed companies and growing unemployment.
What lies behind the global recession is a particularly virile form of capitalism, now seemingly in its death throes. Let’s call it “offshore” capitalism — literally so in the way it had locked itself into a network of tax havens and offshore finance centers that formed the shadow side of the world’s banks and mega-corporations. But this was offshore in a metaphorical sense too — it produced financial structures and instruments so absurdly technical and abstract that the net effect was a freakishly remote economic system, detached from society.
It was in the 1970s that this form of capitalism began, from the margins, to make itself known in the wider world. Multinationals and banks began as a matter of course to expand and grow through tax havens. Financial whizzkids — much like those experimenting with micro-computers at the time — developed instruments that “financialized” everyday assets and commodities and turned them into derivatives, to be traded on their own markets.
The new offshore wizardry soon had an impact on the wider world. Up until this time, nation-states had complete control over their economies and finances. That changed. Offshore tax havens put enormous pressure on domestic banking systems to deregulate and liberalize. In turn, onshore banks and monetary authorities tried desperately to control and regulate the new international capital markets that were based offshore. But it was an unequal struggle; governments across the industrialized West eventually repealed their own regulations and let offshore finance wash up and make a home onshore.
Over the next three decades, offshore finance (and corporations that depended on it in order to expand) asserted its dominance over national economies. Once assured of a stream of finance offshore, corporations worked out how to use tax havens to retain profits and so expand even further. As profits grew, the amount of tax paid by corporations into the public exchequer decreased. There is no letup in this aspect of offshore capitalism today.
Financial epochs — not unlike cultural epochs — go through late periods of excess marked by opulence and a love of ornamentation. The late flourishing of offshore capitalism has produced an array of decadent, and deadly, phenomena. From hedge funds to credit derivatives and collateralized debt obligations — each symbolizes an ever widening gap between finance and society, to the point where meaningful contact between the two has been obliterated, the detachment complete.
Over this past decade and a half we have seen the rise and rise of the emblem of offshore capitalism — the hedge fund. These private and exclusive clubs, relatively free from regulation and supervision and incorporated offshore, allowed wealthy investors to pool their money and have it gambled on precise (and, it was believed, predictable) price fluctuations of any security or asset that was traded in the world’s markets — from stocks, bonds and currencies to the complex financial instruments derived from them.
The hedge funds took on everything that moved in the markets and made killings by shorting stocks and humbling public companies in the process. But when they targeted the banks, they were undermining the very thing they most needed to ply their trade — the billions of dollars borrowed from banks to make their bets with.
Offshore capitalism was powered by a seemingly infinite supply of cheap money and finance across the world.
So it was no surprise that when the money dried up, the system ground to a halt. And what caused the money to dry up was the most complete and outlandish separation of the offshore world of finance from the bricks and mortar world of onshore society — people’s homes.
As we now know, mortgages were sold to banks for a panoply of complex credit derivatives that were then transformed into new derivatives, and then sold on again until no one knew where the buck stopped. The mortgage business was by and large structured offshore to get the most tax-efficient and flexible arrangements and to keep the deals off the main books of the banks. Thus the property market was stoked up and the bubble grew bigger and bigger — until, like every bubble, it burst.
Pushed to the limit, offshore capitalism imploded. But the fallout is not kept detached, isolated offshore. It is felt onshore — in the mortgage foreclosures, the redundancies and the companies going to the wall; in the costs of the offshore farrago that have now been passed onshore to society and its taxpayers, who end up paying higher taxes.
Schopenhauer’s experience of the economic collapse of his time led him to the gruesome suggestion that the world was a place where people devour and feast on each other in their daily struggle for survival. He would have recognized this behavior as inherent in the cut-throat, winner-takes-all capitalism of his day — and no less, I believe, in the period of offshore capitalism that we have just endured. It is time, surely, to come back onshore once and for all.
William Brittain-Catlin, the author of Offshore: The Dark Side of the Global Economy, is an investigator with the risk consultancy Kroll.
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