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DESPITE THE WOES OF UBS, SWISS PRIVATE BANKING REMAINS IN REASONABLE SHAPE
The travails of Swiss banking giant UBS have been well covered, here and elsewhere. When you open fire on your feet with a machine gun it is no surprise that you subsequently have trouble walking. UBS has also been involved in a cage match with the IRS over the release of names and details of their U.S. clients – see, e.g., this issue of the Offshore Digest. So how has all this affected Swiss Banking as a whole?
Not so badly, it turns out. The next four biggest Swiss banks after UBS have gained funds just about equal to UBS’s funds losses, which would indicate that people are on net not fleeing to alternative private banking jurisdictions despite Switzerland’s reduced secrecy protections – actual and threatened. This is at least evidence, as is pointed out, that political risks of other jurisdictions offset their lesser obeisance to the OECD and the like.
Another point is that the whole theory that sticking private banks together with riskier investment banks and hedge funds makes it easier to meet and service rich people has been discredited by the financial crash. In practice, the combination can instead scare them away. The crisis has “vindicated the traditional Swiss model” says a partner at one private Swiss bank.
After visiting his bank in Zurich, Jason Bourne, an amnesic assassin, wonders: “Who has a safety-deposit box full of money and six passports and a gun?” In the popular imagination as well as Hollywood films the answer is clear: Customers of Swiss banks do.
If this reputation for skulduggery is right, Switzerland, home to about 1/4 of the world’s offshore money, is in big trouble. After nearly going bust, UBS, its biggest bank, is now being pistol-whipped by America’s Internal Revenue Service (IRS), which wants it to hand over the names of tens of thousands of alleged tax dodgers. A preliminary settlement between the two was agreed on July 31st, although its details have yet to be made public. In March Switzerland agreed to comply with an OECD tax code that will oblige it to reveal information on clients that other governments say they need to enforce their laws. Where will crooks, despots and war criminals go now? And what will Swiss private banks do when they leave?
Put those questions to Swiss bankers and they will explain – very smoothly, of course – that you are decades out of date. They are calm in part because the concessions on privacy are expected to be limited. Both the OECD code and, they hope, the UBS settlement will endorse the principle of “no fishing expeditions.” Foreign states would have to provide clients’ names and some evidence of wrongdoing before getting information on them. Even if the IRS remains on the warpath and goes beyond the OECD rules, perhaps only 5% of the $2 trillion of offshore assets in Switzerland comes from America.
For the bulk of customers, Swiss bankers claim, tax is in any case not the main draw. They marshal some surprisingly good arguments.
For the bulk of customers, Swiss bankers claim, tax is in any case not the main draw. They marshal some surprisingly good arguments. UBS has been hemorrhaging funds, with an outflow of SFr30 billion ($28 billion) so far this year (see chart). But the country’s next four biggest listed banks, Credit Suisse among them, have had private-bank inflows of SFr31 billion. Clients have fled a bank, not a country. Perhaps 1/3 of offshore funds in Switzerland are from places where the wealthy may not pay much tax anyway, including Russia and the Middle East. They are mainly in Switzerland for its political stability and well-run banks.
More vulnerable are the roughly 40% of assets gathered from the traditional hunting grounds of high-tax European countries, in particular Germany and Italy. Tax relations between Switzerland and the European Union have been fairly cordial – a limited agreement on cooperation in 2004 allows client confidentiality. Things could get more fractious, though. Germany has beaten up tiny Liechtenstein over secrecy. Italy and Britain are proposing tax amnesties to attract money back home. “We are emptying the cave of Ali Baba,” says Guilio Tremonti, Italy’s finance minister. But even if money leaves Switzerland, it may not leave Swiss banks. When Italy last held a tax amnesty in 2003, an astonishing 80% of the funds taken out of Credit Suisse returned to it as clients opened accounts with its Italian operation. Today, many private banks are building up their European operations to help mitigate the impact of any new amnesties.
Hong Kong and Macau are, it is said, less likely to enforce the OECD rules or to kowtow to foreigners. But the flip side for customers may be higher political risk.
Finally, as Swiss bankers point out, “there is nowhere else to go.” All mainstream offshore banking centers have committed themselves to the OECD rules, as have exotic upstarts such as Liberia and Brunei. Some argue that Hong Kong and Macau may become the destinations of choice for tax evaders. They are, it is said, less likely to enforce the OECD rules or to kowtow to foreigners. But the flip side for customers may be higher political risk. The offshore centers of the future will probably be politically stable, with good legal systems and firms and a strategy of non-confrontation with big economies on tax. Stefan Jaecklin of Oliver Wyman, a firm of consultants, reckons that Singapore and Switzerland are most likely to fit the bill. Indeed, emerging-market banks continue to set up in Switzerland. Recent arrivals include firms from Brazil and China.
If a tax-related exodus from Switzerland seems unlikely, business is hardly plain sailing. Fewer people are getting very rich. Margins are under pressure as clients shy away from buying complex bull-market products. In response private banks are expanding into emerging markets and consolidating at home, says Huw van Steenis of Morgan Stanley. Zurich-based Vontobel has bought Commerzbank’s Swiss operation, for example. There are similar pressures in Germany, where Deutsche Bank is mulling taking a minority stake in Sal Oppenheim Jr & Cie.
The crisis has “vindicated the traditional Swiss model.”
That still leaves one outstanding thorny question: whether the modern trend to stick private banks together with riskier investment banks and hedge funds still makes sense. In theory, being a conglomerate makes it easier to meet rich people and create complex products to tempt them with. In practice, it can scare them off. The crisis has “vindicated the traditional Swiss model,” says Nicolas Pictet, a partner at Pictet & Cie. Julius Baer, another medium-sized bank, sold its institutional stockbroking arm in 2003 and is now spinning off GAM, its volatile hedge-fund operation.
Of the two giant conglomerates, Credit Suisse is in rude health and maintains its investment bank is helping to boost its private bank’s margins. By contrast, on August 4th Oswald Grübel, the boss of UBS, reported yet another loss at its investment bank and cautioned that client outflows would continue. Reputation, he said, is crucial to the private-client business. Like other Swiss banks, UBS is not keen on having assassins as customers. Amnesiacs are a different matter.
MOST INVESTORS, ECONOMISTS, AND POLICY MAKERS ARE BLIND TO THE MOUNTAIN OF MALINVESTMENTS
Except for the Austrian School economists, hardly anyone is worried that the extensive restructuring necessary to put the economy back on a healthy, market-sustainable track is not being carried out.
Robert Higgs, writing on Peter Schiff’s website, notes that everyone save the Austrian economists – in particular and especially the mainstream economists – seem oblivious to the theory and fact that the economic troubles are more than a matter of “aggregate output” declining. The U.S. economy needs extensive restructuring to regain its health; a huge amount of misguided investments made during the bubble need to be liquidated and what remains redeployed to more appropriate and productive ends.
Contemporary macroeconomics views rising aggregate real output as “good, no matter what the composition of the newly produced goods and services.” (Microeconomists, even contemporary ones, would not make such a mistake. Microeconomics asks the correct questions regarding when more of a particular output becomes too much.) “A recession ... is bad, and, in their view, it should be combated by” whatever fiscal and monetary policy tools are needed reverse the decline in aggregate demand. “They do not worry about – indeed, they rarely even pay much attention to – the makeup of the aggregate output that is added during business expansions, lost during business recessions, or brought into being by the government’s compensating fiscal and monetary actions. Output is output; spending is spending.”
The result of all this? Counterproductive actions by government to combat the economic decline just make things worse: “In the 70 years since John Maynard Keynes steered macroeconomic policy thinking into the dead-end street of misleading, highly aggregative thinking, tremendous damage has been done, but clearly a great deal of additional damage will have to be suffered before the people who bear the burdens of this kind of policy-making awaken to its operation as a mechanism for robbing the many for the benefit of the politically connected few.”
Reading about the first Quarterly Bloomberg Global Poll of investors, which found that almost 75% of those surveyed give Ben Bernanke favorable marks for his actions as chairman of the Fed during the current financial and economic crisis, my first reaction was to wonder, what are these people thinking? The news article also notes that Martin Feldstein, a leading establishment economist, recently said in an interview with Bloomberg that Bernanke has “done a very good job and I think he should be reappointed.” Feldstein is a fairly reliable barometer of what mainstream economists think about macroeconomic policy.
Bernanke has shown himself to be the greatest inflationist of modern times in the advanced economies.
In contrast, when I think of Bernanke’s actions as chairman of the Fed, I am appalled. During the past year, he has taken the lead in flooding the financial system with an unprecedented amount of newly created central-bank credit – more than a trillion dollars of new Fed credit has been advanced since mid-September 2008, more than doubling the total amount outstanding. Thus, Bernanke has shown himself to be the greatest inflationist of modern times in the advanced economies.
Because the commercial banks have added almost all of the newly created base money to their reserve accounts at the Fed, rather than using it to make new loans and investments, the effect on the money supply and hence on the price level has been muted so far. Bernanke clearly supposes that he has been heroically fending off the greatest threat to the world economy he can imagine – the dreaded deflation of the price level for currently produced goods and services, a phenomenon associated in his mind with the horrors of the Great Contraction of 1929-33.
He also believes that when the price level begins to accelerate as the banks put their vast, (legally) excess reserves to use, he will be able to take counter-measures, such as paying a higher rate of interest on commercial-bank reserves at the Fed or selling securities now held by the Fed in the open market, which will soak up just enough of the potential for the creation of new money that the Fed will be able to disengage gradually and smoothly from its recent, gigantic effusion of new credit, thus avoiding the hyperinflation that it might otherwise produce.
I have serious doubts about whether Bernanke will be able to pull off this Houdini escape from the ravages of the still-dormant monster he has created, but at the moment my concern is not so much with that issue as with the amazing fact that so many investors and economists have applauded his actions so far. The politicians are not so puzzling: In today’s world, they invariably demand resort to inflation of money and credit whenever a recession begins – they are inflationists to their very souls (that is assuming they have souls). Putting aside the politicians, I am willing to conjecture as to why so many investors and economists are making what seems to me a huge mistake in evaluating Bernanke’s actions.
Fallacies of Composition
The root problem, I believe, lies in the aggregative character of contemporary thinking about macroeconomic fluctuations. In this view, rising aggregate real output is good, no matter what the composition of the newly produced goods and services. A recession, which most analysts understand as a sustained decline of aggregate real output, is bad, and, in their view, it should be combated by fiscal “stimulus” and by expansionary monetary policy in order to reverse the decline in aggregate demand. They do not worry about – indeed, they rarely even pay much attention to – the makeup of the aggregate output that is added during business expansions, lost during business recessions, or brought into being by the government’s compensating fiscal and monetary actions. Output is output; spending is spending. In fact, the whole idea of using government spending to offset reduced spending by investors or consumers turns on this assumption that a dollar spent is a dollar spent, regardless of what it is spent for.
In today’s vulgar Keynesian environment, investors and economists do not appreciate how the seeds of macroeconomic busts are sowed by artificially created credit that is employed to finance investments that would not be undertaken if they had to be financed by real savings—investments known in economic theory as malinvestments. When a large volume of malinvestments has been undertaken during a boom (e.g., much of the investment in residential housing and commercial real-estate development between 2002 and 2006), and when for whatever reason the pace of new credit creation slows, causing interest rates to rise, then the unsustainability of these malinvestments becomes increasingly apparent. More and more of them are terminated, often in unfinished condition, and many such projects go bankrupt for want of buyers willing and able to pay for them in the market.
If the government and the central bank use their fiscal and monetary policies to prop up these malinvestments, they do not solve the basic problem; they only paper it over for the time being. The vast assistance given recently to financial institutions embarrassed by investments in bad real-estate-related securities, for example, has allowed these institutions to delay the write-offs and other balance-sheet adjustments that would reflect the errors they have made. The bailouts have created a large number of zombie financial institutions, much like the ones that caused the Japanese economy to stagnate during the 1990s and later. Owners and managers of financial firms laden with rotten securities have been holding out for government rescues of various sorts, rather than carrying out the required restructuring, which in many cases must include bankruptcy proceedings.
A permanent policy of robbing prudent, responsible Peter to pay imprudent, irresponsible Paul.
Just as the malinvestments were made possible in the first place by effusions of artificially created credit and hence artificially depressed interest rates, so now the Treasury and the Fed are keeping the owners of these malinvestments afloat by further effusions of artificially created credit. But so long as these inherently unsustainable projects continue, they constitute a huge legion of the living dead. They may look viable, but their viability hinges entirely on de facto subsidies via the government’s various bailout schemes. Such projects will remain unsustainable unless continually propped up at the expense of the general public, who will suffer because of increased ordinary taxes or a mounting inflation tax on their dollar-denominated assets. If the government goes forward in this fashion, it will be sustaining an economy rife with malinvestments kept in operation only by constant transfusions of other people’s wealth channeled to the zombie projects by the Treasury and the Fed – a permanent policy of robbing prudent, responsible Peter to pay imprudent, irresponsible Paul. No sound, long-run economic development can be based on such productivity-sapping transfers of wealth into projects that are not worth the expense of keeping them going and which misallocate resources to the overall economy’s detriment so long as they continue.
Meanwhile, to return to the Bloomberg poll, “more than three-quarters of investors expect U.S. financial institutions will be in better shape a year from now,” and a majority believe “the world economy is stable or improving.” And why do they expect this progress will occur? Because, “almost three quarters say[,] central banks will hold rates near current levels to support growth.” Indeed, Bernanke promises that this policy is precisely the one he will continue to follow. “Monetary policy remains focused on fostering economic recovery,” he declares. The Fed will maintain a “highly accommodative” stance “for an extended period.” In short, if an immense amount of monetary-base inflation and other artificial credit expansion is good, then a great deal more of the same is even better. Après nous le déluge – oh, but I forget, Bernanke stands ever ready to sponge up that base money the minute the price indexes begin to rise at more than a slight, tolerable annual rate. Trust him.
Except for the Austrian School economists, hardly anyone is worried that the extensive restructuring necessary to put the economy back on a healthy, market-sustainable track is not being carried out – or, certainly not being carried out on the scale that the current situation requires. For the overwhelming majority of today’s investors, economists, and policy makers, output is output, and spending is spending. They are blind to the mountain of malinvestments staring them in the face. In the 70 years since John Maynard Keynes steered macroeconomic policy thinking into the dead-end street of misleading, highly aggregative thinking, tremendous damage has been done, but clearly a great deal of additional damage will have to be suffered before the people who bear the burdens of this kind of policy-making awaken to its operation as a mechanism for robbing the many for the benefit of the politically connected few.
If China’s run of apparently miraculous immunity from normal economic forces is finally about to end, the result will not be pretty for any of us.
Martin Hutchinson takes a look at the economic and banking situation in China, and concludes that China’s “apparently miraculous immunity from normal economic forces” will not go on forever. It walks like a bubble and quacks like a bubble. It is “bound to end in tears.”
Shares are trading at 35 times earnings. Banks in the last six months have lent more than the entire Gross Domestic Product for the period. Interest rates are below the inflation rate, while monetary growth is far above it. The seven largest bond transactions in the world in 2009 were domestic deals in this country.
Looks like a bubble to me, and bound to end in tears. In a Western economy, one would be sure of it. So why should we think China is different, and what would be the effects of a Chinese economic meltdown?
Various very intelligent people have seen their hair turn grey waiting for a Chinese bubble to burst.
Various very intelligent people have seen their hair turn grey waiting for a Chinese bubble to burst. Ever since 1998, it has been clear that the Chinese banking system has contained hundreds of billions of dollars in bad debts. A real estate boom in empty office buildings in 2003-04 pushed the assumed total of bad debts up further, and when Ernst & Young in 2006 estimated its total at $911 billion (and then retracted the figure under pressure) that seemed a reasonable estimate. Yet the Chinese economy has continued to grow almost as fast as the estimates of bad debts in the banking system and no signs of collapse have been seen. Indeed, the major Chinese banks did international Initial Public Offerings in 2006-07, all of which were outstandingly successful.
So why are things different now? It has been clear for a decade that Chinese public figures overstate the country’s growth rate, so that the apparent 16% growth in the second quarter of 2009 is largely fictional. Indeed, income tax receipts data suggest that growth in the first quarter may have even been negative. However, that is hardly surprising; after all, the country’s exports were down around 30% at the peak of the trade recession of last winter. Even if China’s Q2 growth was really at an 8-10% annual rate, after, say, a 5% rate of decline in the first quarter, that is still a better growth rate than any other major economy in the world. So why should we image that China’s relative outperformance cannot continue?
The example of Japan is instructive.
Here the example of Japan is instructive. From the 1950s to the 1980s Japan enjoyed apparently unstoppable growth. The global recession of 1974-75 brought only a brief interruption of that growth. That of 1980-82 (when the Japanese economy had adapted better to high energy prices) brought no interruption at all, although during the 1980s there was a noticeable slowing.
Yet in 1990, after an incredible boom in real estate and stocks that took the theoretical value of the Emperor’s back garden higher than that of the state of California (it was admittedly better tended) it all stopped. The real estate bubble burst, the stock market bubble burst and Japan has now suffered almost two decades of negligible growth and relative economic hardship.
Nobody now considers Japan to be the world’s great growth economy like they did in the 1980s. Yet the Japanese virtues of superb education, dazzling technology and a grinding work ethic are still as evident as ever.
In some ways, the Japanese example should be encouraging to China. While some areas of China have enjoyed astonishing growth, its overall relative wealth is not even that of Japan in 1973, let alone that of 1990. Indeed, the Japanese example suggests China should enjoy several more decades of exceptional growth before its living standards get close to those in the West. At that point we may indeed see a crisis, but on that analogy, the crisis should not occur before 2030, at the earliest.
Yet it is not inevitable that growth economies must almost catch up to western living standards before crisis intervenes. Thailand suffered crisis in 1997, after 30 years of excellent growth but far before it had reached Western living standards. Even South Korea at the time of its 1997 crisis was well behind the relative position Japan had reached in 1990. Thailand and South Korea have enjoyed some growth in this decade, but the intervening transition was painful indeed, involving a sharp drop in output and, in Korea’s case, the passage of the entire banking system through bankruptcy.
On examination, China looks more like Thailand than Japan.
On examination, China looks more like Thailand than Japan. Even 30 years ago, the Japanese economy was known for its transparency, with its own equivalent of the Glass-Steagall Act and a careful division not only between lending and brokerage, but even between different kinds of lending. National statistics were produced meticulously, according to norms laid down during the U.S. occupation. Politically, the same party won every election, but elections were properly contested democratic polls, and there was open competition between different factions in the ruling party as to whose policies would be followed. The state sector was small, and only a small fraction of the banking system was state owned. Much of the private sector dated back for centuries, and followed the stable traditions of family capitalism not dissimilar to Germany of the period.
As its labor costs approached those of the West, inefficiencies in the Japanese system would become more apparent, and it was always likely that a crisis would intervene before Japan was fully modernized. But its education system was so superb, and the openness of it political and economic institutions so great that it was unlikely to reach a crisis before that point. Finally, in 1970 or so there was no great overhang of bad debts in the Japanese banking system, nor was real estate in any obvious excess. (The infrastructure excesses came later, in the 1990s.)
China has none of Japan’s transparency. The government is undemocratic and a poor respecter of human rights; in this respect it is like Japan’s pre-World War II governments – aggressive and chauvinist. Unlike Japan, it maintains a huge military machine, which itself owns a plethora of companies. The state corporate sector is still gigantic and supported by state-owned banks. Savers are not permitted to take money out of China, and their huge savings prop up an overvalued stock market and a bond market that is comparable in size to the freely flowing international bond market. Private sector companies are either youthful fly-by-night operations or dubiously privatized state behemoths. Prices are still largely administered, and investment flows mostly to the politically connected rather than the economically attractive. Education is relatively poor outside the main population centers, and land ownership is still restricted.
China is thus much more like pre-1941 Japan than post-1950 Japan and its economic inefficiencies are correspondingly greater. Because of those economic inefficiencies, the chances remain high of a meltdown far before China has achieved Western living standards. From the excesses in the Chinese economy currently, that meltdown appears now to be impending. Companies currently have more liquid assets than they can usefully invest and have been gambling with them in the stock market, a phenomenon last seen in size in Japan in the late 1980s. Shipments to retailers have increased by 15% in the first half of 2009, an increase reflected in the GDP statistics but not necessarily in sales to final consumers, although households without electricity or running water have reportedly been dragooned into buying washing machines.
The most likely form of meltdown to occur is that of a banking system collapse, as the gigantic volume of recent loans goes bad and liquidity in the economy finally dries up. That would drain the huge Chinese savings pool and cause steep output contraction, particularly in the overleveraged and inefficient state-owned sector.
The excess money in the system, with M2 money supply up 28.5% in the year to June, also suggests that a price explosion cannot be far away. Although official inflation is currently negative, the People’s Bank of China has already warned of a possible inflation resurgence. It must also be remembered that the social structure of China is now quite Latin American in nature, with a Gini (inequality) coefficient rising rapidly, already at 47 by 2007, well above its Asian neighbors and not far below Mexico (48) and Argentina (49). Thus an economic collapse is unlikely to be survived quietly, as was the case in Korea and Thailand.
A Chinese economic collapse, which might well be accompanied by an Indian balance of payments crisis due to that country’s perpetual government overspending, would cause a sharp “second dip” in the global economy.
A Chinese economic collapse, which might well be accompanied by an Indian balance of payments crisis due to that country’s perpetual government overspending, would cause a sharp “second dip” in the global economy. The amount of foreign capital tied up one way or another in the Chinese economy is now so great that a Chinese market collapse would have global repercussions in an already weakened financial system. Furthermore, it is by no means certain that China would quickly resume its role of global growth engine. Japan did not, after all.
China could be different – it always has been. But at some stage, the mysterious Chinese economy and its thoroughly opaque banking system must respond to the same constraints that affect the rest of us. Chinese economic policy has been more stimulative than ever before, its bank lending more reckless. If China’s run of apparently miraculous immunity from normal economic forces is finally about to end, the result will not be pretty for any of us.
SWISS OFFICIAL: PROPOSAL IN SWISS BANKING DISPUTE DOES NOT THREATEN SECRECY
U.S. has agreed to request information under existing agreements between the two countries, he says.
Switzerland’s secretary of state for foreign affairs, Michael Ambuhl, has claimed that a proposed resolution to the U.S. government demand that Swiss bank UBS fork over information about thousands of American clients would leave Swiss bank secrecy intact. How was this sleight of hand accomplished in the fact of seemingly irreconcilable differences? The Swiss propose to only turn over information one account at a time after being presented with specific evidence of fraud. The IRS wants to go on a fishing trip.
According to Mr. Ambuhl the U.S. has agreed to request information under existing agreements between the two countries. Which sounds like no compromise at all. We shall see how the U.S. replies.
Mr. Anti-Offshore, Senator Carl Levin, is already on records as having said: “Too many countries are using our treaties as a shield to deny tax information to us instead of using those treaties as a sword to expose tax cheats as was intended.” To Levin a tax treaty means “We ask for, you give.” There is a wide gulf here.
The proposed resolution to a U.S. government demand for information about thousands of Americans suspected of using Swiss accounts to evade taxes would leave Swiss bank secrecy intact, a top Swiss official has said.
Over intense opposition from Switzerland, the United States has been seeking the names of thousands of Americans who hold secret accounts at UBS, Switzerland’s largest bank. The Justice Department said Friday (July 31) it had reached “an agreement in principle” to end the dispute, but it has not disclosed the terms of the deal.
In a Swiss newspaper interview, Michael Ambuhl, Switzerland’s secretary of state for foreign affairs, said the settlement would not violate Swiss bank secrecy law because the United States has agreed to request information under existing agreements between the two countries.
The United States has “promised ... to ask for legal assistance again,” Ambuhl said in an interview with the NZZ am Sonntag newspaper, which was quoted on the English-language Web site of the Swiss Broadcasting Corp. and confirmed Monday by a spokeswoman for the Swiss embassy in Washington.
It is unclear how such an arrangement would satisfy the U.S. objective.
The Justice Department said earlier this month that any settlement would require UBS to turn over information “on a significant number of individuals.” The U.S. government ratcheted up its civil case against UBS early this year after declaring that it had been frustrated in its attempt to obtain names through a longstanding request for legal assistance.
As of January, the Swiss government had decided to provide records for only 12 of 52,000 undeclared accounts, and it would not even divulge those names until the account holders had been given a chance to contest the disclosure, IRS Deputy Commissioner Barry B. Shott said in a February court filing. “In sum, the Swiss Government has not provided any records sought under the Treaty Request, and it is not clear when, if ever, it will,” Shott said.
Tax treaty with Switzerland has been a failure, says Carl Levin.
The tax treaty with Switzerland has been a failure, Sen. Carl M. Levin (D-Michigan), chairman of a panel that has investigated UBS, said at a March hearing.
“Too many countries are using our treaties as a shield to deny tax information to us instead of using those treaties as a sword to expose tax cheats as was intended,” Levin said at the time. “The result is a cynical charade in which tax havens like Switzerland try to have it both ways, claiming to be a cooperative partner in the international fight against tax abuse while providing a safe haven and promising ironclad secrecy laws for tax evaders.” ...
Publicly, the United States and Switzerland have staked out seemingly irreconcilable positions.
At least publicly, the United States and Switzerland have staked out seemingly irreconcilable positions, putting a heavy strain on otherwise friendly relations. In one corner, the United States has been fighting to collect unpaid taxes and make would-be tax dodgers think twice before hiding money overseas. In the other corner, Switzerland has been fighting to maintain the reputation for bank secrecy that is a cornerstone of its financial industry and economy.
In February, a Swiss regulator ordered UBS to turn over between 200 and 300 client names as part of a deal that allowed the bank to avoid criminal indictment in the United States on charges of aiding tax evaders. The regulator said it issued the order because an indictment could have threatened the survival of the bank and the stability of the Swiss financial system.
Switzerland has already stretched its rules to allow heretofore limited disclosure.
In approving that limited disclosure, a Swiss court appeared to stretch the legal definition of circumstances in which Switzerland permits the breach of client confidentiality, said William M. Sharp Sr., a Florida-based lawyer whose clients include UBS depositors. Sharp said he has spoken to about a dozen Swiss lawyers who share that view.
It is unclear how Switzerland could meet the U.S. demand for thousands of additional names without appearing to bend its secrecy standard further.
“[W]e believe that UBS has now complied with the summons to the fullest extent possible without subjecting its employees to criminal prosecution in Switzerland,” Mark Branson, the chief financial officer of UBS global wealth management, said in March.
Swiss media reports, citing anonymous sources, have said the pending settlement could result in the disclosure of thousands of clients’ names to the United States.
“The big mystery is why UBS found only 285 accounts to meet these criteria last year and now people apparently are throwing the number 5,000 around,” said Washington-based tax lawyer Scott D. Michel.
IRS MAY CAST WIDER NET IN UBS TAX PROBE
Will include bankers, accountants, attorneys, “independent advisers/investment managers” and others who may have advised the account owners.
As Americans “voluntarily” disclose the existence of offshore bank accounts, the IRS is starting to ask questions about accomplice parties such as who made the introductions, who facilitated the account opening, and who prepared tax returns. “There is no question that the IRS is targeting other intermediaries,” said an attorney from a law firm representing Americans with accounts at Swiss bank UBS.
An IRS spokesman said that taxpayers making voluntary disclosures “and others” are providing “new useful information.” We bet.
Eventually details will reveal more. Until then we will keep repeating: If you have offshore financial accounts aggregating more than $10,000 at any point during a year, do not fail to report these on the required IRS/Treasury forms. Most offshore trusts and functionally equivalent structures are not useful vehicles for avoiding the requirements. Secrecy has always provided fragile defense against exposure. Now the war on secrecy has been escalated still further.
The IRS plans to expand its investigation of wealthy Americans suspected of evading taxes through offshore bank accounts to include bankers, accountants, attorneys and others who may have advised the account owners, legal tax experts say.
Summaries of questions that federal investigators ask owners who disclose their offshore holdings at Swiss banking giant UBS and other foreign banks focus directly on the intermediaries. Provided to USA Today by lawyers for UBS clients who have disclosed their assets under an IRS voluntary disclosure program, the queries include:
“Who told the taxpayer about the bank account?”
“Who assisted the taxpayer in opening the bank account?”
“Who prepared the tax returns?”
A form letter the IRS issued last week for use with offshore account owners also seeks names, dates and locations of meetings with “independent advisers/investment managers.”
“There is no question that the IRS is targeting other intermediaries,” said William Sharp of Sharp & Associates, a Tampa law firm representing Americans with UBS accounts.
“They are interested in learning who helped to set up these structures,” said Bryan Skarlatos, a partner at Kostelanetz & Fink in New York that also represents UBS clients from the U.S.
The IRS said the summaries seem to be a compilation of questions to judge eligibility for the disclosure program, which expires September 23.
While saying it would be inappropriate to discuss the investigation, IRS spokesman Frank Keith said that taxpayers making voluntary disclosures and others are providing “new useful information.”
“This includes how undisclosed offshore accounts came to be set up and the identities of those who assisted in these efforts to circumvent U.S. tax laws,” he said.
The IRS often investigates professional advisers “who put clients into transactions of dubious legitimacy,” said Martin Press, a Fort Lauderdale attorney who represents UBS clients.
He cited recent prosecutions of former executives of accounting firm BDO Seidman for allegedly marketing fraudulent tax shelters.
The ongoing IRS investigation centers on an internationally watched battle with UBS over the names and account data for as many as 52,000 wealthy American clients suspected of tax evasion. Justice Department lawyers argue the information must be turned over because the owners have evaded millions of dollars in federal taxes with UBS assistance.
UBS in February agreed to a $780 million settlement that deferred prosecution of charges that it repeatedly sent bankers on secret trips to the U.S. to help American clients place assets in secret offshore accounts.
UBS has contended that disclosing the customer data would violate Swiss banking secrecy laws. The Swiss government has raised the possibility that it would seize the data to prevent any handover.
GERMANY, WIELDING BIGGER WEAPON, STARTS TAX TALKS WITH SWISS
New laws force companies doing business with non-complying jurisdictions to provide more information about their dealings.
Armed with new laws, Germany will start negotiations with Switzerland on tax information exchange standards. Tax “fraud” is draining billions of euros from German government coffers, while German government policies drain vitality from the German economy.
The new law confronts companies doing business with “non-complying jurisdictions” with the choice of providing more information about their dealings – undoubtedly an expensive proposition – or otherwise suffering tax penalties. And if that does not have the desired effect new laws will undoubtedly be passed. Thankfully it is all legal.
Germany will start tax negotiations with Switzerland this month as Chancellor Angela Merkel’s government steps up efforts to combat fraud that is draining billions of euros from German government coffers.
Finance Ministry officials from Germany and Switzerland, which has failed to comply fully with internationally agreed information standards, will start negotiations later this month about improved information exchange, Finance Minister Peer Steinbrueck told reporters in Berlin.
Merkel’s Cabinet today (August 5) backed national rules that force companies doing business with non-complying jurisdictions to provide more information about their dealings. Companies may suffer tax disadvantages if they fail to respect the rules.
“The federal government has made quite a bit of headway in raising the awareness of and fighting tax fraud,” Steinbrueck said. “This is not a minor offense.”
However, the federal government has not made much headway in raising the awareness of and fighting the fraud that is government. Oh ... our mistake. There is no such campaign.
Germans have hidden a “triple-digit billion-euro amount” in accounts in Switzerland and elsewhere without declaring the money to tax authorities, Steinbrueck said. Public borrowing will surge to a record this year as unemployment costs soar and Merkel spends €85 billion ($122.4 billion) to boost growth during the country’s deepest crisis since World War II.
Steinbrueck declined to say which jurisdictions will be put on the government’s list of countries that do not comply with Organization for Economic Cooperation and Development standards and defended the “clear words” he used to get countries such as Switzerland to cooperate.
“Seventh Cavalry”
The threat to put the Alpine country on an OECD list of non-cooperative countries “is like having the Seventh Cavalry in Fort Yuma that can be ordered to ride out but doesn’t have to,” Steinbrueck told reporters on March 14 after a meeting of finance ministers and central bank governors from the Group of 20 nations. “The important thing is that the Indians know it exists.”
Heroic Swiss Defense Minister returned his chauffeur-driven Mercedes S-Class in protest at German pressure.
Swiss Defense Minister Ueli Maurer returned his chauffeur-driven Mercedes S-Class later that month in protest at German pressure over Switzerland’s tax regime, marking an escalation of a spat between the neighboring nations.
Germany’s action comes in addition to broader G-20 efforts to crack down on tax evasion and step up pressure on tax havens as a way to confront the global recession.
The Swiss government may order UBS AG to disclose information on 5,000 to 10,000 accounts to U.S. authorities to settle a dispute over the taxation of the bank’s American clients, Tages-Anzeiger reported today, citing unidentified Swiss officials.
The U.S. sued UBS on February 19, seeking names of 52,000 clients, a day after the largest Swiss bank by assets agreed to pay $780 million to defer prosecution for helping wealthy Americans evade taxes. Zurich-based UBS agreed then to an unprecedented breach of Swiss secrecy laws by giving the U.S. data on more than 250 accounts.
GAMBLING COMPANIES COULD LEAVE COSTA RICA IF TAXED
Operators say they would leave if push comes to shove.
Costa Rica is threatening to follow the self-immolating path of the U.K. by introducing a 2% tax on the online and offline revenues of gambling firms stationed in the country. Gambling operation operators have responded that they could leave if the government’s hand lays too heavily on them, and the U.K. precedent – see article immediately below – indicates that such talk is not empty.
U.K. firms’ destination of choice seems to be Gibraltar, whose 1.5% total tax burden compares rather favorably with Britain’s 15%. The thinking is that Panama would be the logical destination for Costa Rican firms. Panama in the past few years has implemented laws and regulations to attract online gambling operators. So far few have actually moved there due to Costa Rica’s heretofore benign neglect. We will see how benign and neglectful Costa Rica remains.
Following news over the past two weeks that the Government of Costa Rica is considering taxing online gambling firms operating in that country, operators have told Gambling911.com they would leave if push comes to shove.
On Tuesday, July 21, Finance Minister Guillermo Zúñiga announced that the Finance Ministry will introduce a bill in the Legislative Assembly to impose a special 2% tax on gambling revenues – online and offline – earned in Costa Rica, according to the Tico Times. The bill is set to reach the Legislative Assembly on Monday, August 3, and a vote on its approval is expected to be held sometime in mid-August.
The Finance Ministry estimates that the proposed 2% tax will generate $85 million in government income.
“The principal idea of the bill is to regulate activity,” Zúñiga said. “Gambling is something that we are currently not monitoring and, thus, not taking advantage of. If we can regulate it, it could create millions of dollars for the economy.”
Just like that. How nice. Government representatives are victims of “magical thinking” just as those who ask governments to solve problems are.
But those numbers are unrealistic should much of the online gambling sector bolt. Costa Rica’s land-based casinos generate very little revenues in comparison.
“They (The Costa Rican Government) needs to understand our business and the consequences before passing such a law.”
“They (The Costa Rican Government) needs to understand our business and the consequences before passing such a law,” said Mickey Richardson, CEO of BetCRIS.com, the largest and most established sports betting operation in Costa Rica in terms of bet sizes taken. “Hopefully nothing will happen. I think they would ask for our input and then we might be more supportive.”
Richardson estimates that the industry both directly and indirectly employs some 10,000 people, perhaps even more.
“The industry pays above average salaries and contibutes substantially to household incomes,” he said.
Learning From Great Britain’s Mistakes
Costa Rica may want to observe what is currently transpiring in the United Kingdom right now.
The country’s second largest bookmaker, William Hill, this past week unveiled plans to move its Internet operation from England to Gibraltar in order to cut its tax bill.
The Sunday Times said UK-based internet betting companies pay 15% of their gross profits in tax, and that a move offshore by William Hill would put pressure on its rivals to follow suit.
Ladbokes, Great Britain’s largest bookmaker, may do just that. Ladbrokes is keeping its cards close to its chest with a board meeting due the day after William Hill’s results, according to the Daily Mail. But while it is understood to prefer staying in the UK, company sources admitted it would have to respond to any move by William Hill.
The choice between the United Kingdom and offshore locales such as Gibraltar is a practical “no brainer.”
The choice between the United Kingdom and offshore locales such as Gibraltar is a practical “no brainer.” Those businesses operating in England pay a 15% tax while those based in Gibraltar pay 1.5%.
According to the Gibraltar Chronicle, a mass exodus from the UK could spell trouble for the Racecourse Owners Association who would see a drop of £45 million in lost tax as well as a £30 million loss in 10% levy paid to them.((The Department for Culture, Media and Sport has acknowledged that it does want to level the playing field with overseas businesses but crucially predicts little, if no action prior to next year’s General Election.
Panama Might be Best Bet
Those operators we spoke to suggest that Antigua and Panama offer the best options for relocating.
Panama in the past few years has opened its doors to online gambling operators, though few have actually moved there due to Costa Rica’s “hands off” stance until now. “I love Panama,” Richardson admits.
BetCRIS has already opened a Caracas, Venezuela office for its Latin American clientele, though few would argue Caracas is a fair trade with Costa Rica during these times.
Panama City on the other hand resembles Miami in many ways, with modern skyscrapers and some of the best eating establishments rising up over the last 15 years. The Central American nation itself resembles Costa Rica in that it abolished its army over the last decade and is now among the most stable nations in all of Latin America.
“Wait and see” for now.
For now, Richardson admits it is a “wait and see” decision. Nobody seems overly concerned just yet.
In the past, the Costa Rican Government has attempted to increase licensing fees for operators, but few paid them and the requirement was eventually dropped.
U.K. BETTING FIRMS RENEGE ON “GENTLEMAN’S AGREEMENT” WITH TREASURY AND HEAD OFFSHORE
Marquess of Queensberry rules violated.
Costa Rica (see immediately above) is proposing to tax its gambling operations. They should take a look at what happened in Britain before taking any action.
In 2001 the U.K. government handed bookmakers substantial tax breaks in a “gentleman’s agreement” under which the companies moved their nascent offshore internet and telephone betting businesses back to the UK and paid the reduced UK taxes. New times and technology call for new thinking. The UK government has not changed its thinking, but the gambling companies have changed theirs. They are headed back offshore, mostly to Gibraltar.
Pure greed? No. The CEO of William Hill, the first UK gambling firm to officially announce a move offshore, suggested technological advances had in effect left the deal unsustainable. “The people who shook hands on that deal lacked the foresight to see how the internet would develop,” he said. “By being loyal to the UK we have seen our telephone business destroyed ... We are not hanging around to see if the same will happen to online.”
Competition will force other gambling firms to follow William Hill. Even government-owned Tote acknowledged that it would not want to be left as the “last man standing” paying UK betting tax at 15% of gross profits.
The internet has changed the fundamental economics of many businesses, virtually destroyed some traditional industries such as print newspapers. Now it is forcing mobile information-based industries to migrate to more profits-conducive locales. Those who do not will lose customers and be starved of the capital needed to expand and maintain their operations.
Britain’s biggest online bookmakers are drawing up plans for a mass exodus from the country to take advantage of lower tax rates in gambling-friendly tax havens such as Gibraltar, Malta and the Isle of Man.
The rush of departures will be highly embarrassing for the government, which handed bookmakers huge tax breaks eight years ago in a “gentleman’s agreement” under which major chains pledged to repatriate their embryonic offshore internet and telephone betting businesses and pay UK taxes on them.
Industry insiders said the 2001 pact had been killed at a stroke by William Hill’s confirmation today (August 4) that it is relocating its fast-growing internet sports betting operation to Gibraltar. Ladbrokes is expected to follow shortly and will face a barrage of questions on the subject when it reports its half-year figures tomorrow.
Overwhelming competitive pressure to emigrate.
Coral, which has a much smaller online operation, will also face overwhelming competitive pressure to emigrate.
Meanwhile, the government-owned Tote privately acknowledged last night that its position was complicated but said it would not want to be left as the “last man standing,” paying UK betting tax at 15% of gross profits.
The betting exchange group Betfair, Britain’s largest online bookmaker by revenues, is expected to play down likely moves offshore when it reveals yet another year of rising profits on Wednesday. However, the company is known to be unhappy with the tax gap between it and offshore competitors and will not rule out a move.
Technological advances had in effect left the old deal unsustainable. “The people who shook hands on that deal lacked the foresight to see how the internet would develop.”
A Treasury spokesman said: “We recognize that this is a commercial decision for William Hill but we are very disappointed.” Asked why he was reneging on the long-standing pact, William Hill chief executive Ralph Topping suggested technological advances had in effect left the deal unsustainable. “The people who shook hands on that deal lacked the foresight to see how the internet would develop,” he said.
“By being loyal to the UK we have seen our telephone business destroyed ... We are not hanging around to see if the same will happen to online.”
He said William Hill’s telephone betting unit had lost out to offshore rivals and could be forced to close one of two British call centers. “By being loyal to the UK we have seen our telephone business destroyed ... We are not hanging around to see if the same will happen to online.”
Yesterday the firm posted another double-digit rise in gross win from its controversial touch-screen roulette machines in betting shops for the first half of 2008.
Roulette machines were made viable for bookmakers by the 2001 Treasury pact and provided an unexpected 8-year gold rush for William Hill and others. For the first six months of the year machines accounted for 41% of William Hill’s betting shop gross win – £161 million – with their contribution to profits thought to be far greater.
But a Gambling Commission survey two years ago found one in nine people who play the machines are problem gamblers and the regulator has recommended further research in the area. Analysts and industry insiders have suggested the highly profitable and politically unpopular machines are “a sitting duck” for Treasury policymakers focused on repairing shrinking tax coffers. They are already conducting a review of how roulette machines and other types of slots are taxed, though it has indicated any changes are likely to be “revenue neutral.”
MIAMI CON MAN CONVICTED OF STEALING FROM CUSTOMERS OF HIS TAX-DEFERRAL FIRM
In a particularly egregious fraud, Edward Okun’s tax-deferral company was set up to temporarily hold real-estate sale proceeds for a fee under Section 1031 of the IRS code, allowing customers to defer taxes when similar properties are bought within 180 days. Basically we are talking about a glorified escrow agent. People think they are putting money in the bank, and in an honest operation they are when you look through the legal entities.
But instead of holding the money in banks or other no-risk-of-loss accounts, Okun stole the money and used it for expenses that included financing a divorce and buying jewelry for his new wife. Other expenditures were on a 131-foot yacht, a jet and a helicopter, and a $56,252 on dinner with friends in the Bahamas which including $1,008 shots of cognac. Okun makes the government look like a model of propriety. Okun expanded his company by buying competitors and gaining access to their customers’ real-estate sale deposits. He saw an opportunity and grabbed it with both hands.
We cannot help but note that among the links in the chain that resulted in customer losses are government rules designed to boost real estate prices. Capital gains from the sale of real estate can be deferred by buying a similar property within 180 days. We have been previously unaware of the need to keep the property sale proceeds with a “tax-deferral firm,” but that apparent rule was another link. Without taxes on illusory inflation-driven gains and the need to put the funds in some temporary holding operation, Okun would have had to create some other con.
Edward Okun, the Miami businessman convicted of stealing from customers of his tax-deferral firm, 1031 Tax Group LLC, was sentenced to 100 years in prison for running a $126 million fraud scheme.
U.S. District Judge Robert Payne handed down the sentence [on August 4] in Richmond, Virginia, where Okun’s company was based. Prosecutors sought a sentence of 400 years, or a similar term amounting to life in prison. Jurors in March found Okun, 58, guilty of conspiracy, wire fraud, money laundering, smuggling and perjury following a 3-week trial.
“The sentence must deter those who have access to funds of others,” Payne said. “If you ruin lives of others, your life stands to be ruined.”
Perpetrator argues for sentence of 10-15 years based on Madoff metric.
Okun argued that a term of 10 years to 15 years would suffice. He cited Bernard Madoff’s 150-year sentence, the maximum possible, in June for running a $65 billion Ponzi scheme, and lawyer Marc Dreier’s 20-year sentence last month for defrauding hedge funds of more than $400 million. Prosecutors sought 145 years for Dreier.
“If we were just interested in retribution, we could take Mr. Okun outside and tar and feather him,” said Barry Pollack, Okun’s defense lawyer, who works at Miller & Chevalier in Washington. He spoke against the proposal that Okun get 400 years. “But that is not why we are here.” Pollack declined to comment after the hearing.
Personal Piggy Bank
Assistant U.S. Attorney Michael Dry argued Okun’s fraud was worse than others, because his victims thought they were using a risk-free service, as opposed to investing. The tax-deferral industry temporarily holds real-estate sale proceeds for a fee under section 1031 of the U.S. tax code, allowing customers to defer taxes when similar properties are bought within 180 days.
Instead of holding the money in banks, Okun used it as a “personal piggy bank” for expenses that included financing a divorce and buying jewelry for his new wife, prosecutors said.
Okun owned a 131-foot yacht, multimillion-dollar homes, a jet and a helicopter, according to court records. In 2007, Okun spent $56,252 on dinner with friends in the Bahamas, including shots of cognac for $1,008 each, those records show. The money belonged to 1031 Tax Group’s customers, prosecutors said.
Okun expanded the company in 2006 and 2007 by buying competitors and gaining access to their customers’ real-estate sale deposits. The company filed for bankruptcy in May 2007 and is being liquidated in U.S. Bankruptcy Court in Manhattan.
Associates
Lara Coleman, former chief operating officer of Investment Properties of America, a company also owned by Okun, pleaded guilty on January 6 to lying to investigators and conspiring to commit mail and wire fraud. She agreed to a sentence of 10 years in prison.
Robert D. Field II and Richard E. Simring also have pleaded guilty to participating in the conspiracy to defraud 1031 Tax Group’s customers. Field was the chief financial officer and Simring was the chief legal officer of a company set up in part to oversee Okun’s companies.
Before his company went bankrupt, Okun ignored the advice of several lawyers who said he was violating the law by using customer deposits to invest in real estate and buy personal items, prosecutors said.
The case is U.S. v. Okun, 3:08-cr-132, U.S. District Court, Eastern District of Virginia (Richmond).
Western Civilization is ending not with a whimper but a bang.
Butler Shaffer is one of the truly innovative thinkers out there. See, e.g., “Obedience As a Radical Act,” wherein he proposes as the means of resisting government meddling and absurdity, exact obedience ... until the rule being challenged falls under its own weight. For example, instead of resisting laws demanding that certain transactions be reported, report every single transaction and overload the system. A review of his new book Boundaries of Order: Private Property as a Social System, available here, is posted below.
Here he finds himself astonished at how fast Western Civilization is imploding – he had previously expected it would end with T.S. Eliot’s whimper rather than bang. The major factor is that the Booboisee have become accustomed to asking for centralized solutions to problems created by the previous round of centralized “solutions.” It is an unstable dynamic as the problems get worse with each round.
However: “Contrary to the basic tenets of all forms of statism, it is the spontaneous order generated by the individual pursuit of self-interests in a marketplace that accounts for both our liberty and material well-being.” But such decentralized approaches which point to true solutions do not even enter the realm of consideration.
My understanding of history, economics, and the laws of causation, have long led me to expect the present collapse of Western Civilization. I did not, however, anticipate the culture experiencing a free-fall into an awaiting black-hole. Like T.S. Eliot, I suspected Western society would end “not with a bang but a whimper.” I envisioned a more gradual decline, one to which individuals could make the necessary adjustments in their lives that would lessen the impact and help to restore societal order.
Hardly a week goes by without some twit – whether in or out of office – upping the ante in a bull market for runaway imbecility.
The symptoms of our decline-and-fall are becoming increasingly evident even to those who, not so many years ago, regarded the outcome of an American Idol contest as the most pressing concern. A public-opinion-poll mentality substitutes for thinking in our modern world, creating a collective mindset that insists upon instantaneous answers to questions that few people are capable of asking. As the processes of causation play out the inexorable consequences of premises grounded in utter stupidity, a holiday for the expression of socio-economic fantasies has beset us. Hardly a week goes by without some twit – whether in or out of office – upping the ante in a bull market for runaway imbecility. Such efforts continue to produce an upswing in GDP (“Grotesquely Delusional Programs”), with politicians, academicians, and media hacks jostling one another – like San Francisco cable-car passengers – to be first aboard.
Multitudes of men and women consult their Ouija boards for additional “solutions” to the calculated chaos generated by earlier practitioners of political mysticism.
Murray Rothbard said, more than once, that there was nothing wrong about a person not fully understanding economics; but that those ignorant of economic principles ought not to be proposing governmental policies to govern economic activity. I have a hard time imagining Murray remaining calm as multitudes of men and women – with nary an understanding of economics – consult their Ouija boards for additional “solutions” to the calculated chaos generated by earlier practitioners of political mysticism.
Unable to engage in the economic analysis that would both explain and provide a basis for resolving current crises – an approach that would call into question the entire logic of statism – the established order has been forced to seek other rationales for its authority. The New Deal gave us a proliferation of alphabetized federal agencies to do what Plato envisioned could be done, namely to plan for and direct the course of economic systems. But the study of chaos and complexity – along with the failed histories of state planning – have shown the fallacy of such thinking. As but one glaring example, ordinary people are discovering what Ron Paul and others have long observed: The vaunted, “independent” Federal Reserve system is not only incapable of regularizing the marketplace, but has been a principal agency for sowing confusion into our economic life.
Contrary to the basic tenets of all forms of statism, it is the spontaneous order generated by the individual pursuit of self-interests in a marketplace that accounts for both our liberty and material well-being.
The Platonic image of “philosopher kings” sitting atop pyramids of power and directing the lives of hundreds of millions of people to ill-defined ends, is increasingly questioned by those who produce the genuine order in society. Contrary to the basic tenets of all forms of statism, it is the spontaneous order generated by the individual pursuit of self-interests in a marketplace that accounts for both our liberty and material well-being. But in the marbled halls of state, as well as the sycophantic media and academic institutions that are well-paid to propagate a continuing faith in the cult of centralized power, the mantra is still heard, with only the content of the litanies modified to fit new situations. “Save the planet” now substitutes for “save democracy,” but the premise of state power structures remains intact.
Trillions of dollars are given away to the corporate friends of those in power, and the system waits to see what happens.
For a culture fast descending into history’s memory hole, and with the illusion of central planning no longer enjoying the intellectual support it once did, the established order has turned to the most desperate of measures: magical thinking enforced by undiluted, unprincipled coercion. No longer does the pretense of a scientific, rational basis for state planning prevail. Instead, resort is had to a kind of political sorcery – wrapped in the behavior-modification terminology of “stimulus.” Trillions of dollars are given away to the corporate friends of those in power, and the system waits to see what happens. In what even the vice-president has termed a form of “guesswork,” the state has revealed its underlying sophistry.
In a society as thoroughly politicized as ours, the booboisie will always react with demands for the state to “do something,” a mindset that gives the statists a continuing incentive to identify – or concoct, if necessary – fears that can be used to increase state power. When the civilization, itself, is in collapse, Boobus will insist that something – anything – be done, if for no other reason than to keep alive the illusion that the state is still in charge of events in the world, and can act to bring about desired results. An awareness that there is nothing the state can do to reverse the fate it has unleashed is as unavailable to most people as would be a physician’s assurances, to family members, that Uncle Willie’s terminal condition cannot be overcome with Dr. Quack’s Cancer Salve!
What else could be expected from political systems, whose only distinguishing characteristic is an enjoyment of a monopoly on the use of violence? “Reason” in the mouths of government officials, always reduces to no more than rationalizations to justify whatever it is the statists want to do. When the promised results of economic planning are not forthcoming, the troops – with their tanks, armored personnel carriers, attack helicopters, and machine guns – will be sent in to enforce the state’s will. At that point, Boobus may begin to learn what the German and Russian people learned, namely, that the alleged distinction between “law enforcement” and “national defense” has been but another deception employed to protect the establishment from its own people.
And so, we seem to have reached that stage where state violence has become its own raison d’être. Social and economic problems are no longer considered within the sphere of authority of legislative bodies; congress is too slow to act when “we need action, now!,” and so the president or governor takes over and appoints – without anyone else’s approval – “czars” to rule over various realms of human activity. My thesaurus advises me that synonyms for “czar” include “despot,” “tyrant,” “dictator,” “slave driver,” “duce,” “oppressor,” and “Führer.” One news report informs us that some 32 “czars” have been appointed in a number of states.
This is what we have become, a consequence that should reveal to all that scribbling words on parchment and calling them a “constitution” is ineffective to prevent any significant number of people from doing whatever they want to do. The response of some mainstream media’s “talking heads” to America’s embrace of “czars” has been not to question the statist power implications, but only to suggest calling such officials by a different name! As has become the norm in our world, if we use an alternative word to describe something (e.g., “waterboarding” instead of “torture”) it becomes a different act.
With Boobus having learned his catechisms about health-care costs, and the terrible-of-terribles attending “climate change,” might we expect some of these “czars” to get together and plan a solution to both? Perhaps we shall soon be informed that each person produces approximately 2.3 pounds of carbon dioxide per day, an amount that translates into 2.5 billion tons of carbon dioxide per year for all six billion humans. Perhaps people could be euthanized at age 65 – when most have become economically nonproductive, and increasingly costly drains upon Social Security and the health-care system – a result that would greatly reduce their production of carbon dioxide. While such a program would exempt the philosopher-kings from its operation, the next generation of Boobus – unfamiliar with both the philosophically-principled and spiritual nature of what it means to be human – could probably be counted upon to embrace it. After all, what denizen of our brave, new dehumanized world could resist a series of television commercials showing a polar bear on its small patch of ice?
Butler Shaffer’s Boundaries of Order Reviewed
“The treatise on liberty and property for the digital age, one written with a consistently anti-state message but with a unique perspective on how the great struggle between state and society is playing itself out in our times.”
Jeffrey Tucker, writing on the Mises Economics Blog, reviews Butler Shaffer’s latest book, Boundaries of Order: Private Property as a Social System. Tucker calls the book “a completely fresh look at a marvelous intellectual apparatus by a mature intellectual who has been writing on law, economics, and history for four decades. ... Its value added is a vision of the completely free society that is idealistic, practical, and thoroughly optimistic.”
A review of Shaffer’s previous book, Calculated Chaos: Institutional Threats to Peace and Human Survival, may be found here. Another review was posted in the June 30, 2008 Offshore Digest.
The Ludwig von Mises Institute has made the book freely available online in PDF format; download link is here.
Every once in a while, a treatise on libertarian philosophy appears that presages a new way of thinking about politics and economics. Mises’s Liberalism, Rothbard’s Ethics of Liberty, and Hoppe’s Democracy: The God That Failed come to mind.
Boundaries of Order by Butler Shaffer is in that tradition, scholarly yet passionate, and a completely fresh look at a marvelous intellectual apparatus by a mature intellectual who has been writing on law, economics, and history for four decades. It is the treatise on liberty and property for the digital age, one written in the Rothbardian/Hayekian tradition with a consistently anti-state message but with a unique perspective on how the great struggle between state and society is playing itself out in our times.
Its value added is a vision of the completely free society that is idealistic, practical, and thoroughly optimistic. In a through-composed work that builds from foundations all the way through an inspiring conclusion, he presents a vivid portrait of how human cooperation within a framework of liberty and private property yields results that produce human betterment in every conceivable way. Just as powerfully, however, he shows that right now, even amidst an epoch of despotic state control, we owe all that we love in the course of our daily lives to the institution of liberty.
What is striking is how this is not a book that merely bemoans a bygone era. In fact, Shaffer’s view is that the state itself represents a bygone era, ruling with dated ideas over a world that no longer exists. Reality is at once hyper-localized and hyper-internationalized with the two ends of the spectrum connected through digital communication and infinitely complex forms of ownership that never stop yielding unpredictable change.
The nation-state as we know it is constructed to deal with static institutions that are largely mythical, that are not part of our daily lives, and to that extent the state has become an artificial structure governing an artificial reality but with very tangible costs.
Shaffer argues that we are living in a world of glorious upheaval, managed in an orderly way by virtue of individual volition and property ownership. The state is not part of this path of progress and only works to impede it temporarily and at terrible cost.
What Shaffer argues is that we are living in a world of glorious upheaval, managed in an orderly way by virtue of individual volition and property ownership. The state is not part of this path of progress and only works to impede it temporarily and at terrible cost. Meanwhile, the political is ever less relevant for people in the course of their daily lives. It does not help us accomplish the ends we seek to achieve. In this way, he strengthens the case against the state, and intensifies it in our times: the sheer complexity of the social order stands to utterly defy any attempts to control it.
The life of a society is found in its relations of its individuals and their property-based associations. But property always has a social end, he argues. Our lives are bound up with each other within the division of labor, while our individual interests are unavoidably intertwined. If we are to live as free individuals, we must cooperate with others in voluntary association.
He further discusses the albatross of collectivism and its grave consequences, but he understands the collective in a different way. He views it as a pyramidal model that is forced to fit on a diffuse and changing social order; it relies most fundamentally on violence but cannot achieve any socially useful end. The analysis applies not only to socialism but all models of top-down management, even that which relies on the myth of limited government.
The great accomplishment of Shaffer here is to crystallize existing knowledge about how society works in real life and to cut through the propaganda on the state to show how the state everywhere operates as an enemy of society.
The state, in contrast, is always working to strangle this life. If a society is to change and thrive, it cannot and will not tolerate the state. The state has no creative purpose, only a destructive one. The great accomplishment of Shaffer here is to crystallize existing knowledge about how society works in real life and to cut through the propaganda on the state to show how the state everywhere operates as an enemy of society.
The book is at once deeply radical and penetratingly optimistic about the future. He helps us to imagine that the withering away of the state will not bring cataclysm but simply more of what we love and what we find useful and less of what we do not love and what we do not find useful. One comes away from this work with an intense awareness of the great dividing line – too often made invisible by disinformation – that separates power relations from power relations.
Here are some excerpts.
“Men and women are discovering in informal and voluntary forms of association, more effective means of bringing about social changes than those that rely on sluggish, corrupt, and coercive political machinations. While members of the political establishment chastise, as ‘apathetic,’ those who withdraw from state-centered undertakings, the reality is that increasing numbers of men and women are redirecting their energies, with an enhanced enthusiasm, to pursuits over which they have greater personal control. This redistribution of authority is both liberating and empowering, a continuing process that is generating interest--in exponential terms - in less formal systems of social behavior.”
“Many people are increasingly identifying themselves with and organizing their lives around various abstractions that transcend nation-state boundaries. Religion, ethnicity, culture, lifestyles, race – even membership in urban gangs – are some of the categories by which people identify themselves other than by nationality. The Internet is helping to dissolve political boundaries in favor of economic, philosophical, entertainment, political, lifestyle, and other criteria by which individuals create cyber-communities with like-minded persons throughout the world. ‘Societies’ are beginning to be thought of less and less in purely geographical terms, and are increasingly being defined in terms of shared subdivisions of interests that do not necessarily correlate with place. Effective decision-making is becoming more personal, with authority moving outward, away from erstwhile centers of power.”
“As social beings, it is natural for us to freely associate with one another for our mutual benefit. The institutional forms that have contributed so much to the disorder in the world are those that have elevated their organizational purposes above the interests of individuals or informal groups. In so doing, they have become institutions, the most prominent of which is the state, with its coercive bureaucratic agencies, followed by large business corporations that align themselves more with state power than with the unstructured marketplace.”
“The political establishment no longer enjoys the confidence that earlier generations placed in its hands. Its response has been to increase police powers and surveillance; expand penitentiaries and prison sentences; build more weapons of mass destruction; and create new lists of enemies against whom to conduct endless wars. The state has become destructive of the foundations of life, particularly of the social systems and practices that sustain life. Were its attributes found within an individual, it would be aptly described as a psychopathic serial killer! But its destructiveness can no longer be tolerated by a life system intent on survival.”
“The question that has always confronted mankind is whether society will be conducted by peaceful or violent means. Our conditioned thinking, however, has kept us from examining the implications of these alternative forms of behavior. The distinction between such practices rests on whether trespasses will or will not be allowed to occur. It is not that property trespasses can produce violence; they are violence, whatever the degree of force that is used. The property principle – in restricting the range of one’s actions to the boundaries of what one owns – precludes the use of violence. As long as we choose to deny the necessity of this principle, we should cease getting upset over the political and private acts of violence that are the unavoidable consequences of failing to respect the inviolability of the lives of our neighbors.”
SOCIAL NETWORKS SPREAD DEFIANCE ONLINE
“The qualities that make Twitter seem inane and half-baked are what make it so powerful.”
At first blush Twitter seems like yet another vacuous internet social networking service – allowing narcisists to share “what I am doing” reports and thoughts that no one with half a life would care about ... in real time no less. With definite shades of Facebook and MySpace, Twitter users make broadcasts – “tweets” – to their network of buddies – “followers.” The Twitter constraint is that broadcasts are text-only and can be no more than 140 characters long. We can now add Twitter to wit and lingerie as things brevity is the soul of.
As ever, one never knows how a new tool will end up being used. “Men have become the tools of their tools,” said Henry David Thoreau, but this is not necessarily a bad thing. Twitter’s reductive simplicity allows it to be accessed and broadcast from multiple platforms such as a cell or landline phone, a Web browser, or via specialized applications. Web browsing from a cell phone feels like a stopgap measure to most people, but tweets are just text messages so a cell phone is fine for accessing them. A perhaps unforeseen emergent property of this platform proliferation is robustness against attempts to stop Twitter broadcasts by taking out the platform networks.
We have previous heard of instances where a political protestor is arrested, surreptitiously tweets his predicament to his followers on his cell phone, and is met by a crowd at the police station which forces his release. Clearly Twitter is already showing great promise as a tool for defying authority.
This New York Times article, published a little less than two months ago during the disputed Iranian election and accompanying protests, reports on how social networks – especially Twitter – have been used to organize protests and spread news despite crackdowns on communications. While cellphone transmissions, text-messaging services, and access to Facebook were blocked, Twitter users were finding ways to make and end-run around the blocks. How-to links are included in the article.
As the embattled government of President Mahmoud Ahmadinejad appears to be trying to limit Internet access and communications in Iran, new kinds of social media are challenging those traditional levers of state media control and allowing Iranians to find novel ways around the restrictions.
Iranians are blogging, posting to Facebook and, most visibly, coordinating their protests on Twitter, the messaging service. Their activity has increased, not decreased, since the presidential election on Friday (June 12) and ensuing attempts by the government to restrict or censor their online communications.
On Twitter, reports and links to photos from a peaceful mass march through Tehran on Monday (June 15), along with accounts of street fighting and casualties around the country, have become the most popular topic on the service worldwide, according to Twitter’s published statistics.
A couple of Twitter feeds have become virtual media offices for the supporters of the leading opposition candidate, Mir Hussein Moussavi. One feed, mousavi1388 (1388 is the year in the Persian calendar), is filled with news of protests and exhortations to keep up the fight, in Persian and in English. It has more than 7,000 followers.
Mr. Moussavi’s fan group on Facebook has swelled to over 50,000 members, a significant increase since election day.
Labeling such seemingly spontaneous antigovernment demonstrations a “Twitter Revolution” has already become something of a cliché. That title had been given to the protests in Moldova in April.
Twitter is aware of the power of its service.
But Twitter is aware of the power of its service. Acknowledging its role on the global stage, the San Francisco-based company said Monday that it was delaying a planned shutdown for maintenance for a day, citing “the role Twitter is currently playing as an important communication tool in Iran.”
Twitter users are posting messages, known as tweets, with the term #IranElection, which allows users to search for all tweets on the subject. On Monday evening, Twitter was registering about 30 new posts a minute with that tag.
One read, “We have no national press coverage in Iran, everyone should help spread Moussavi’s message. One Person = One Broadcaster. #IranElection.”
The Twitter feed StopAhmadi calls itself the “Dedicated Twitter account for Moussavi supporters” and has more than 6,000 followers. It links to a page on the photo-hosting site Flickr that includes dozens of pictures from the rally on Monday in Tehran.
The feed Persiankiwi, which has more than 15,000 followers, sends users to a page in Persian that is hosted by Google and, in its only English text, says, “Due to widespread filters in Iran, please view this site to receive the latest news, letters and communications from Mir Hussein Moussavi.”
Some Twitter users were also going on the offensive. On Monday morning, an antigovernment activist using the Twitter account “DDOSIran” asked supporters to visit a Web site to participate in an online attack to try to crash government Web sites by overwhelming them with traffic.
By Monday afternoon, many of those sites were not accessible, though it was not clear if the attack was responsible – and the Twitter account behind the attack had been removed. A Twitter spokeswoman said the company had no connection to the deletion of the account.
The crackdown on communications began on election day, when text-messaging services were shut down in what opposition supporters said was an attempt to block one of their most important organizing tools. Over the weekend, cellphone transmissions and access to Facebook and some other Web sites were also blocked.
Using proxies to get around Big Brother.
Iranians continued to report on Monday that they could not send text messages.
But it appears they are finding ways around Big Brother.
Many Twitter users have been sharing ways to evade government snooping, such as programming their Web browsers to contact a proxy – or an Internet server that relays their connection through another country.
Austin Heap, a 25-year-old information technology consultant in San Francisco, is running his own private proxies to help Iranians, and is advertising them on Twitter. He said on Monday that his servers were providing the Internet connections for about 750 Iranians at any one moment.
“I think that cyber activism can be a way to empower people living under less than democratic governments around the world,” he said.
Downloadable software helps evade censorship.
Global Internet Freedom Consortium, an Internet proxy service with ties to the banned Chinese spiritual movement Falun Gong, offers downloadable software to help evade censorship. It said its traffic from Iran had tripled in the last week.
Shiyu Zhou, founder of the organization, has no idea how links to the software spread within Iran. “In China we have sent mass e-mails, but nothing like in Iran,” he said. “The Iranian people actually found out by themselves and have passed this on by word of mouth.”
Twitter particularly resilient to censorship because it has so many ways for its posts to originate. Censors face a game of whack-a-mole.
Jonathan Zittrain, a professor at Harvard Law School who is an expert on the Internet, said that Twitter was particularly resilient to censorship because it had so many ways for its posts to originate – from a phone, a Web browser or specialized applications — and so many outlets for those posts to appear.
As each new home for this material becomes a new target for censorship, he said, a repressive system faces a game of whack-a-mole in blocking Internet address after Internet address carrying the subversive material.
“It is easy for Twitter feeds to be echoed everywhere else in the world,” Mr. Zittrain said. “The qualities that make Twitter seem inane and half-baked are what make it so powerful.”
SHORT TAKES
Missouri Entices Offshore Captive Insurance Operations
Governor Jay Nixon has signed a bill that makes improvements to Missouri’s captive insurance laws by simplifying the process of moving offshore captive operations to Missouri. House Bill 577, an omnibus insurance bill, would remove some financial restrictions and clarify provisions on alien redomestication. It also aims to attract companies based outside Missouri to set up captive operations in the state.
“Because of our central location, Missouri is seen as an ideal spot for companies across the country to locate a captive operation,” said John M. Huff, director of the Missouri Department of Insurance, Financial Institutions and Professional Registration (DIFP).
Among the provisions of the new law are:Huff said the new law is a direct response to the current economic climate, in which captives have had trouble finding credit.
- Specific allowance of alien redomestication, which makes the process as simple as redomestication of a U.S.-based insurer.
- Allowance for reciprocal formations to accommodate the return of offshore not-for-profit groups.
- Removal of the requirement for mandatory investment in Missouri, to accommodate companies with existing banking relationships.
- Additional options for admittance of available credit as assets for Special Purpose Life Reinsurance Captives.
- Reduction of the number of resident incorporators for Special Purpose Life Reinsurance Captives from two to one.
- A portion of all captive premium tax to be allocated for the DIFP’s captive operations, helping to ensure the long-term viability of the DIFP’s program.
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