In comments, James Wimberley asked about the recent agreement on a 15 per cent global minimum rate of tax. Over the fold, a section from my book-in-progress (still a bit rough in places), Economic Consequences of the Pandemic addressing this and other points
In the 1980s and 1990s, the financialisation of the economy was viewed in triumphalist terms. Terms like ‘Masters of the Universe’ and ‘The Thundering Herd’ reflected the view of financial markets as not merely beneficent but irresistible and indestructible
All of that came to a crashing end in September 2008 when the failure of Lehman Brothers brought the entire financial system to the brink of collapse. Hundreds of securities that had been rated as AAA were shown to be worthless
But the general loss of faith in financial markets had little impact on their actual operations. Hardly anyone in the system faced any serious consequences. [Fn: the complete impunity of Wall Street contrasts sharply with the aftermath of the financial collapse in Iceland where a dozen or more senior bankers were sent to prison]
The divide became even wider in the years following the crisis. Having escaped any consequences for nearly destroying the world economy, the financial sector was, if anything emboldened. A steady sequence of scandals showed them engaged in everything from market-rigging to tax evasion to the provision of finance for terrorists and drug dealers [fn A partial list, which readers are invited to explore includes LIBOR, Panama Papers, cum-ex, Forex, UBS tax evasion, Deutsche Bank money laundering, Credit Suisse spying and many more). In every case, the response of regulators was the same. The banks paid a financial penalty representing a small proportion of the profits their manipulations had generated, and were told that next time there would be really consequences. Eventually, one Swiss bank was forced to close for its role in US tax evasion [Wegelin was the oldest bank in Switzerland, but apart from that was of little significance].
All of this undermined the political strength financial sector. In the heyday of financialised capitalism, the financial sector enjoyed bipartisan political support and a fair degee of popular enthusiasm. Financial professionals and firms donated both to Democrats, whose social liberalism they largely shared and to Republicans, whose willingness to hand out big tax cuts they appreciated.
The first step was the Occupy Wall Street movement which erupted in 2011. Although the movement ultimately faded away, it marked a sharp break between the left, including the left wing of the Democratic party and the financial sector. Democrats with close ties to the sector, such as Senator Chuck Schumbers came under increasing pressure to justify their position.
Republicans, most notably Donald Trump, combined rhetorical denunciations of Wall Street with highly favorable policies, including tax cuts and the removal of regulatory constraints. Most notably, while he promised to ‘drain the swamp’ by breaking up the banks with a new version of the Glass-Steagall Act, in reality he did nothing of the kind.
The result was that, by the time the pandemic hit, Wall Street was as profitable and politically influential as it had ever been, but commanded almost no public support. Both Democratic and Republican voters (as well as independents) supported stronger regulation
This is an inherently unstable situation. The power of the financial sector cannot, in the end, co-exist with democracy. While finance is essential, it should be subordinate to the needs of productive economic activity, and not the primary driver.
The pandemic has further exposed the dependence of financial markets on public suppot. As the severity of pandemic became evident in February and March 2020, stockmarkets plunged. It was only when the Federal Reserve stepped with massive purchases of securities and injections of liquidity that markets recovered.
The availability of easy money has led to a surge in speculation. Much of this has occurred on the fringes of official financial markets in such ventures as ‘Initial Coin Offerings’ for cryptocurrencies. However, mainstream financial markets have produced similar speculative
most notably in the form of “special purpose acquisition companies” (SPACs)
Although the name SPACs is new, the concept is not. A speculative boom in Australia in the 1980s saw the emergence of hundreds of ‘cashbox’ companies, which were created solely for the purpose of acquiring other companies Those that survived the sharemarket crash of 1987 were killed off by a financial crisis. Subsequent regulations prohibited the listing of companies with more than half their assets in cash https://smallcaps.com.au/spacs-australian-cash-boxes-were-ahead-of-their-time/
In one form or another, speculative vehicles like the SPAC can be traced back to the first experiment with joint-stock corporations in 18th-Century England, which gave rise to the “South Sea Bubble”. Among many dubious corporations created in this mania was, it is said, “a company for carrying on an undertaking of great advantage, but nobody to know what it is”
Although they have benefitted greatly from government supporrt, financial markets have made little if any contribution to solving the problems created by the pandemic. Programs like mortgage relief have been legislated by Congess.
What can be done to curb the power of financial markets. Both governments and civil society have a role to play.
Much of the profitability of the corporate sector derives from socially undesirable activities such as tax avoidance. Progress against tax avoidance and evasion has been grindingly slow, but real nonetheless.
As a result tax evasion by wealthy individuals using offshore accounts has become more difficult and risky. The famous Swiss bank account, wiht guaranteed anonymity, ceased to exist in 2018 when Switzerland began officially sharing bank account data with tax authorities in othe countries.
The leak of the Panama Papers detailing offshore arrangements amnaged by law firm Mossack Fonseca showed the extent of evasion, but also accelerated the push against it. Overriding a Trump veto in 2021, Congress passed the Corporate Transparency Act, which requires large numbers of businesses to disclose their true ownership
On the corporate front, colorfully named maneuvers like the “Double Irish” and “Dutch Sandwich” were used by US corporations to shift profits from the countries where they were earned, inlcuding the US into low-tax European jurisdictions and then to tax havens in the Caribbean and elsewhere. The OECD has moved against these also, under the more prosaic terminology of Base Erosion and Profit Shifting (BEPS). A long series of negotiations have gradually squeezed out the most egregious practices.
https://www.theguardian.com/politics/2021/sep/06/european-banks-storing-20bn-a-year-in-tax-havens
These measures have had some limited effect. In the years leading up to the Global Financial Crisis, financial corporations accounted for nearly 40 per cent of all corporate profits. After the Crisis, the finance share of profits rapidly recover. However, this recovery has been limited. The finance sector share of profits is now about 25 per cent, still well above the levels of the 20th century, but below those of the bubble economy that ran from the 1990s to the GFC.
It is unclear how much of this is due to tighter regulation. Steady improvements in technology might have been expected to drive a contraction in the financial sector, and a reduction in margins between borrowing and lending rates. However, there is not much evidence of this. Another possibility, discussed below, is that the information monopolies that now lead the growth in corporate profitability have little need for investment and therefoe less reliance on financial markets.
What can be done to return the financial sector to its appropriate and limited role of an intermediary between savers (mostly households) and borrowers (homebuyers and business investors). Both governments and activism by civil society have a role to play.
Activism can seek to push the financial sector towards encouraging more socially desirable forms of investment. Perhaps the biggest successes have been seen in campaigns to force finance sector firms to divest from coal, oil and gas in line with the need to decarbonize the global economy. The campaign began with small-scale successes, persuading universities, churches and charitable organizations to divest, but these symbolic measures did little to reduce the availability of finance for carbon-based fuels.
The broader campaign for divestment faced determined resistance from the finance sector. Proposals for divestment put forward at shareholder meetings were routinely defeated, typically with institutional shareholdes like pension funds lining up with company boards in opposition. But as it became evident that decarbonization would happen sooner or later, banks, insurance companies have adopted divestment policies, focusing on the more sustainable profits that can be gained from investment in carbon-free energy sources such as solar and wind.
While activism has its place, co-ordinated action by national governments is needed to bring global finance under control. The Biden Administration’s proposal for a 15 per cent minimum rate of corporate tax, already backed by more than 100 countries, is a crucial first step.
This will be a continuing struggle, and corporations will doubtless seek new ways to avoid taxes both at home and globally. But the era when companies operated globally while national governments had no capacity to act beyond their own borders has come to an end. With sufficient political determiantion, and international co-operation, it is possible to make both corporations and high-income individuals pay their fair share of the costs of running a modern economy.
John Quiggin 
I love the note of optimism here. I don’t know if this is a pedantic point or an important one, but I don’t like the wording here, “firms donated both to Democrats, whose social liberalism they largely shared and to Republicans, whose willingness to hand out big tax cuts they appreciated.” My reasoning is that firms (and organisations in general), can neither share values nor appreciate things. That’s why political donations from organisations should be banned – they are not part of the demos.
Another cost of the finance sector not mentioned is the opportunity cost of the labour of those who work in finance. I work as a tutor in economics at UQ and find the Bachelor of Advanced Finance and Economics particularly discouraging. It is a prestigious program which attracts some if the brightest students in the state to learn how to chase money around. Surely a flourishing society would be one which employed its brightest minds on its most important questions, not on a sector which is solipsistic at best and venal at worst?
seqaugur – a good point, it’s the people in charge of the firms who are doing this. And agreed on the waste of talent
A good treatment of globailzed hyperfinnce – but since the OECD tax deal excludes the sector (why?) it doesn’t answer my question about it. There will be some knock-on effect on finance as the companies affected (IT, as Google and Facebook, retail, as IKEA and Zara, and manufacturing, as Tesla and Siemens) will hopefully find complex offshoring tax evasion not worth the hassle. Parasitic rents to financial and legal intermediaries will go down, but hardly an earthquake.
A speculation for the future. The battle lines on tax are clear: you will have a small club of rich countries home to multinationals, who are interested in taxing them under Pillar Two, the global minimum tax, and a much larger number of small and middle-sized countries with no or few domiciled multinationals (think Spain or Turkey) who stand to gain much more from Pillar One, taxing more of the profits of multinationals created by domestic sales.Their long-term interest is to widen the move towards unitary taxation, and reduce the exceptions for finance, shipping, resources like oil and gas, and the 10% cut-off that lets off Amazon. Under the future Pillar One treaty, there will presumably be a committee structure and permanent secretariat, that is a forum for pursuing the agenda. in the long run, the shoal of minnows wins.
The deal marks further progress in governments recapturing jurisdiction from over-mighty business barons, as with ISDS. The Statement promises multinationals a narrowly defined dispute resolution mechanism under Pillar One (page 2, Tax Certainty) and a vague promise of consultation of “stakeholders” during the implementation plan (page 8). There is no sign of a seat at at the table in the committee structures, and the companies must have been fighting for this. Geese, meet Monsieur Colbert.
Oh, and since ordinary taxpayers like you and me are also stakeholders in fair taxation of corporations, I suggest writing to the OECD to support a strong deal with fewer exceptions. I’ll suggest a wording later.
“LIBOR, Panama Papers, cum-ex, Forex, UBS tax evasion, Deutsche Bank money laundering, Credit Suisse spying”
Wait, there were two financial scandals Deutsche Bank was not involved in :-).
Copy of he letter I just sent to he OECD, including the email . Please circulate and send your own. Feel free to plagiarise or just endorse, numbers matter.
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Mathias Cormann, Esq.
Secretary-General, OECD
Paris
c/o news.contact@oecd.org 11 October 2021
Dear Secretary-General:
Corporate tax accord
I am writing to congratulate the OECD on this giant step towards global tax equity. And to offer a few comments.
I am emboldened to do this because the final paragraph in the Statement states that “the work will continue to progress in consultation with stakeholders”. Stakeholders, not “MNEs”. As a normal Spanish taxpayer, I have a personal stake in tax fairness as between the many like myself, with few opportunities to evade our civic duty, and a handful of large global tax cheats. For your information, my average and marginal rates of Spanish income tax are 36% and 45%, not counting VAT of up to 21% on my consumption. Adding my pennyworth to the ongoing negotiations is therefore my right, not a privilege.
1. My first suggestion is therefore that you recognize the right of ordinary taxpayers to comment, and set up a specific web channel to facilitate this. You could for example ask readers to take a simple poll:
“Are you in favour of the OECD global tax deal?” (Y/N)
“Do you think it goes too far, is about right, or does not go far enough?” (1/2/3)
As Secretary-General, you should give summary reports on this feedback to the negotiators.
2. The agreement is marred by exceptions with no apparent justification, principally the exclusion of finance and natural resources (Pillar One), and shipping (Pillar Two). Every exception introduces a market distortion and a prima facie injustice to the companies left in, and to other taxpayers.. In addition, two of these sectors are major carbon emitters who should be taxed more, not less, than others. Similarly. Pillar One applies an arbitrary minimum profit rate of 10%. It is well known that Amazon’s retail business has a lower margin, only 6.3% in 2020 – a predatory tactic to discourage competitors (that’s why its smart speakers are such great bargains). The turnover threshold is surely sufficient.
3. These exceptions are deliberate and reflect the current negotiating equilibrium. I recognize that absent major street pressure, they are unlikely to be lifted any time soon. What is important is that the temporary equilibrium not be locked into a treaty, but made subject to review during the life of the process as political life evolves. This has already been done for the Pillar One turnover threshold. Compare the review mechanisms in the Paris climate accord. As Heraclitus said, you don’t bathe twice in the same river.
4. The full Statement is in detail largely incomprehensible to non-experts – which does not disqualify ordinary mortals as stakeholders. I have largely relied for my understanding on the excellent press release to interpret the agreement. It is vital for the democratic integrity of the process that your media colleagues maintain the same high standard as the negotiations continue, in the face of what we can expect to be concerted and expert efforts by business representatives to widen the loopholes and cripple the agreement.
5. Finally the process needs a simple and catchy short name in addition to the mind-numbing alphabet soup of acronyms under which it has hidden so far. “Paris Agreement” is already taken. I suggest “the La Muette tax accords”. If anyone makes a snide crack about hot-air balloons, remind them that they work fine.
I intend to publicise this letter on social media, and to encourage others to write to you with their own takes. If they agree with me, they will be free to reuse any part of this letter, of just to endorse it, on their own responsibility. This is not astroturfing but entirely legitimate democratic activism.
May I wish the OECD a successful completion to this important process, and remain
Yours sincerely
James Wimberley (CoE pensioner)”
PS: my hot air balloon crack refers to the first successful balloon flight in 1783 from the gardens of the Chateau de la Muette. Cormann may not get it but the permanent officials will.
The Lebanese financial market situation seems to be a return to the days of unrestricted shorting of foreign currencies and sovereign bonds. A lack of faith in the IMF may hamper any resolution of such sovereign debt emergencies. Is it then time to replace the IMF with a more effective body?
Shorter JQ:
– “The financial sector after the pandemic” [sees]
– “Wall Street is as profitable and politically influential as it’s ever been” [and makes]
– “This is an inherently unstable situation.”
– “This Is a Battle Between What People Need & What Money Wants.’ How’s That Going to End?” (excerpt below).
-end –
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seqaugur says: “… the brightest students in the state to learn how to chase money around. Surely a flourishing society would be one which employed its brightest minds on its most important questions, not on a sector which is solipsistic at best and venal at worst?”
We need to talk about the brightest minds leaving the commons and public service to manage money. And make war. And venality.
At the global dinner table, we have to work hard to hear about money, sex & religion (& war). Time to start doing so. Thanks for this blog.
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James said in pt 4. ” It is vital for the democratic integrity of the process that your media colleagues maintain the same high standard”
…which the article below “This Is a Battle Between What People Need & What Money Wants.’ How’s That Going to End?”…
disclaims is and will happen to a suitable standard of informed citizenry, providing, as James said is “what we can expect to be concerted and expert efforts by business representatives to widen the loopholes and cripple the agreement.”
James Wimberley says: “but since the OECD tax deal excludes the sector (why?) it doesn’t answer my question about it.” to which “This Is a Battle Between What People Need & What Money Wants.’ How’s That Going to End?” says … “And this fact is also obvious: “Money is written out of the story.”
And James Wimberley’s sugesstion would fix most of this post;
” 1. My first suggestion is therefore that you recognize the right of ordinary taxpayers to comment, and set up a specific web channel to facilitate this. You could for example ask readers to take a simple poll:”
Agree James,100%
Probability of report being released in raw.form: 0.05%.
What if one of the questions is ” how will your superannuation be effected in 40yrs without superprofits?”
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JQ said: “So, a trillion dollar expenditure involves expenditure of $340 per American per year, or a little over $6 a week. That’s not much more than the price of a Starbucks coffee drink or (for the kids) a McDonalds Happy Meal.”
And another way to think about this is, every US person has minus- $6,800 each. Per year.
So minus 104 coffees or 104 crappy meals a year – (packed with single use plastics)… “if the benefits of productivity growth has been shared evenly.”
JQ said: “Yet another way to think about this is to look at the gains made by those in the top 1 per cent of the income distribution as a share of national income. My preliminary estimate is that this group is getting around $2 trillion a year more than they would have if the benefits of productivity growth has been shared evenly.”
https://johnquiggin.com/2021/04/29/how-much-is-a-trillion-dollars/
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Where is the bezzle? 5% fraud + bezzles. The mention of $2trillion not shared evenly, needs to be called something – a bezzle. What other word is appropriate? Neoliberalism? No. Rentier capitalism? No. Government policy? Yes. PR + limited news? Yes. “When corporate reporters explain this story, money and the use of it to corrupt is written entirely out of it.” … from;
“This Is a Battle Between What People Need & What Money Wants.’ How’s That Going to End?
“What happens if the rich don’t stand down and the people don’t stand up?
…
“‘Just Make Sure to Serve the Donor Class’ — How the Rich Control the Government
“The second is this fine catch by David Sirota on the reporting around the $3.5 trillion dollar Reconciliation package now before Congress:
[Sirota GOES OFF on Corporate Media: “Money is Written Out of the Story
https://m.youtube.com/watch?v=qdFytEn0txo&feature=emb_title ]
“Everything he says here is right, but the bottom line comes near the start. When corporate reporters explain this story, money and the use of it to corrupt is written entirely out of it. According to them, for example, the vulture capital industry doesn’t buy Josh Gotheimer. At most, it “influences” him.
“Yet the fact is obvious: “[The reconciliation bill] is a battle between what people need and what money wants.” And this fact is also obvious: “Money is written out of the story.”
“If all you watch is corporate media, the corruption of money will never be part of the tale. Which leads to this more general observation.
‘A Public Relations Firm for the Ruling Class’ — How Corporate Media Controls the People
“I’m taking this point from the great George Carlin, though he’s not the first to make it. I’ve quoted him at the top, but let’s repeat it here:
“The news media are … a sort of bulletin board and public relations firm for the ruling class—the people who run things. Those who decide what news you will or will not hear are paid by, and tolerated purely at the whim of, those who hold economic power. If the parent corporation doesn’t want you to know something, it won’t be on the news. Period. Or, at the very least, it will be slanted to suit them, and then rarely followed up.
“In this media age, the professional and scientific manipulation of mass opinion through advertising and PR is, with a single possible exception, the greatest evil visited on the world in the whole of the Twentieth Century.”
https://neuburger.substack.com/p/this-is-a-battle-between-what-people
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Extreme irony alert. The “manipulation of mass opinion through advertising and PR”‘s “single possible exception”
to ” the greatest evil visited on the world in the whole of the Twentieth Century” is;
From the film Margin Call:
1. What can be done to curb the power of financial markets:
– scrap the private equity carried interest tax loophole
– stop excessive public and private debt and public money printing which devalues the currency thus incentivising financialisation -apart from all the finance industry involvement in spending money we don’t have
– avoid privatising monopolies and introduce price controls
– fewer bailouts and more bankruptcy – freedom to fail
– in return for bailouts – get equity and either clawback exec pay and share buybacks or where present reduce eligibility for bail outs
– raise taxes on post CEO remuneration
– ban or restrict lobbying from companies that pay little tax perhaps especially those that are heavily financialised eg through debt
– stop population growth -which drives a lot of public and private debt.
– live within our means and reconsider our means taking note of various deteriorating circumstances: climate change, decarbonisation, covid, new covid variants, new pandemics, national security, overpopulation, indebtedness, loss of ownership of domestic assets.
– require all lenders and other financiers to show the proportion of domestic and foreign financing on each individual mortgage or other instrument
2. “Hundreds of securities that had been rated as AAA were shown to be worthless
But the general loss of faith in financial markets had little impact on their actual operations. Hardly anyone in the system faced any serious consequences. [Fn: the complete impunity of Wall Street ”
Suggest the GFC bail outs of the finance industry gets a mention here.
The non fictional interviews with wall street people about their career choice tend to be a bit different.
Going to wall street is not a rational choice. I´m rather doubtfull about all that best and brightest thing because there is so much social selection going on in that sector. Either way, people who go to wall-street usually have all the choices in the world, because they got a good elite university degree. Maybe rather in art history than rocket engineering, still, enough to open doors to big tech which pays better and where work conditions are maybe slightly less insane. Or just about anywhere else, where work conditions are much better, increasing their life expectancy by some 4 years. Wall-street staff selection is uterly sick, they essential scan for personality disorders and prefer the people who sound like they have them, since those are easier to manipulate.
If it were the FB version I would push the “sad” emoticon.
Live in hope, die in despair.
Michael Lewis wrote a book called Liar’s Poker based on his own experience working for a Wall Street firm. He describes being asked at interview why he took his degree in art history and as far as I recall his response was something about how it interested him and why that was what mattered. It did not help him to get hired (I forget the part where he explained what did). According to his account, which I feel probably did not capture the whole truth but probably did capture a large part of it, Wall Street firms want to hire people whose interests revolve entirely around money. I guess that’s a kind of personality disorder, perhaps. According to Michael Lewis, Wall Street firms hire lots of economics graduates not because of the value of their technical knowledge but because (he says) people don’t take economics degrees because they’re interested in it: people take economics degrees (he says) because their personalities revolve around money and they know that an economics degree is the best way to get hired by a Wall Street firm. So when Peter Sullivan says, in the clip I linked to, that he came to the firm because of the money, he is (assuming Michael Lewis is more or less correct) confirming that he is the kind of person Wall Street firms want to (and do) hire.
That wall-street prefers people who want to make money seems correct to me. Albeit, i´d say that is far from the only factor. The different part i was mainly thinking off is that wall-street recruits, when they are interviewed with assured anonymity by scientists, which means they are not in self-sell mode, tend to not sound particular eloquent or self assured about their goals and plans in life. Rather the opposit. (ill look for the interview i got in mind later – somwhere in Alexandra Michels work
The personality disorder stuff is not is not limited to wall-street. The entire system of up or out carrer professions leans very strongly in that direction. Should probably add that personality disorders are quite widespread (from memory arround 10% of the population). The people who end up at wall street are also unlikely to be the worst cases, since more severe cases don´t typically allow the level of functioning necessary to get or stay there.
To be clear: It seems unlikely that wall-street firms made a deliberate plan together with some psychologists or that they only recruit such people. Albeit there seems to be quite a bit of awarness about what is de facto hapening and no willingness to change or any shame about it. The mid till long term health results are rather unfortunate, since wall-street ain´t health for anyone in the forst place, least for the type of person wall-street likes particular. (the most explicite describition of the system would be Laura Empson, leading professionals)
I posted the clip from Margin Call in response to comments from sequagur and John Quiggin about the wastefulness of employment of bright and talented people in the finance industry when they could be doing something more useful. I don’t think they meant that the finance industry employs only bright and talented people and I also don’t think that they meant that it employs all the bright and talented people. I’m sure neither of those things is true, and I don’t think the clip from Margin Call was suggesting that either. (I think the clip was partly about how senior executives were suddenly noticing this junior employee for the first time and realising it might be important to take his measure, and partly about them being a little taken aback that they had recruited somebody away from rocket science, and partly about them being a little impressed with themselves that they had managed to do so.) I don’t even think that rocket science (despite its proverbial status) is the single best use of the abilities of bright and talented people, but I do think it’s a better use of their abilities than the finance industry.
I haven’t seen the whole of Margin Call but I have seen multiple clips from it online. The things that people say in those clips suggest three different kinds of answer to the question of why people work in firms like the one depicted. At more than one point characters talk or make speeches to other characters about the social value of what the industry does (they don’t use the exact phrase ‘social value’, but I think it captures the point in common between these scenes). In context, however, the film casts doubt both on the extent to which these characters believe what they’re saying and also the extent to which they expect the people they’re talking to to believe it. Taken together, it seems this may be a story that they feel a need to tell to and be told by each other without anybody ever fully believing it. The second reason, as I already mentioned, is simply the money. The third type of reason, which like the first is never put plainly in these words, is that they simply keep going on a course on which they have started without reflecting on any external reason for selecting and remaining on that course, which is fully consistent with what hix wrote about how Wall Street recruits ‘tend to not sound particular eloquent or self assured about their goals and plans in life. Rather the opposit.’