Mon, Feb 09, 2009 - Page 9 News List

How offshore capitalism ate our economies

Offshore capitalism has produced an array of decadent, and deadly, phenomena, from hedge funds to credit derivatives and collateralized debt obligations

By William Brittain-catlin  /  THE GUARDIAN , LONDON

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 But it was an unequal struggle; governments across the industrialized West eventually repealed their own regulations and let offshore finance wash up and make a home onshore.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.

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