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18 January 2009
Break Out The Champagne! Bring On The Dancing Girls!
Aaaaaaaaarrrrggggghhhhhh, here they come, the Directors with a
capital D of The International Monetary Fund for their quinquennial inspection
of our economy.
Polish everything, lads, paint the trees on the road to the airport,
buy some new sofas for the VIP lounge (but make sure they go down as terrorist
detection scanners). And isn't it time that rather overweight hostess was moved
to the back office? There's a very pretty one who works for the Police Chief.
The IMF has 184 members at a recent count; it's something you
have to belong to, like the UN and FIFA, if you want to be taken seriously as
a country. And one of the ways in which the IMF spends all that taxpayers' money
and occupies the time of those thousands of expensive economists it thinks it
needs is to carry out its 'Article IV consultations', as these inspections are
known.
As exercises in futility, they are hard to beat. There are dozens,
no, hundreds of meetings, lunches, dinners and general schmoozing, and an immense
report with reams of Appendices, pie-charts, graphs and tables, accounting for
several acres of rain forest. And all to present conclusions in high-flown pompous
language which could have been reached in ten minutes by any half-competent
economics graduate. And which will be completely ignored once the team of Directors
has settled into its business class seats on the way to torment some miserable
island in the Pacific which is about to disappear in any event.
At least now they've gone we can get back to doing something useful,
and the Police Chief can have his floozie back.
The IMF is a Bretton Woods Institutiomn, and it's very disrespectful
to talk of it in this way, of course. It is the standard-bearer of economic
orthodoxy. But it is arguable that the IMF, whose primary stated purpose was
exchange rate management, lost its way after the system of fixed exchange rates
broke down under the weight of economic forces in the 1970s. Its high-water
mark may have been Denis Healey's famous return to London in 1976 when the British
Government had to accept humiliating conditions for IMF support of the pound.
Of course, next year it may get to do a repeat performance, when Alistair Darling
and Gordon Brown have spent all their money nationalizing the banking industry.
The IMF's own (modernized) 'mission statement' is: 'The IMF is an organization
of 184 countries, working to foster global monetary cooperation, secure financial
stability, facilitate international trade, promote high employment and sustainable
economic growth, and reduce poverty.' OK, that's nice (yawn).
Actually the useful work of the IMF, which no normal person knows anything
about, is standard-setting, an activity shared by all of the 'multilaterals',
including also the World Bank and the Basle Committee on Banking Supervision
on a fiduciary level and the OECD in fiscal affairs, to mention just the most
prominent of global economic standard-setting bodies.
The IMF has also given its name to a Code of Conduct that emerged from persistent
sovereign debt crises: The Principles for Stable Capital Flows and Fair Debt
Restructuring in Emerging Markets. This was formulated in 2004 between the representatives
of emerging market countries and private sector creditors.
Says Ngaire Woods: 'The challenge for the IMF and the World Bank . . . . is
economic policy made in a more transparent, openly contested, publicly debated,
and democratic way. That process is likely to be messy, complex and time-consuming;
it will often thwart rapid reform, and it will certainly marginalize the role
of the IMF and the World Bank' (Woods, N, 2006, The Globalizers - The IMF, the
World Bank and Their Borrowers, Cornell University Press).
Nowadays, even small countries feel able to defy the IMF's prescriptions, which
can loosely be labelled Keynesian rather than Friedmanite; that's to say, dirigiste
rather than liberal. Thus the tide of economic fashion has turned against the
IMF, which as a proud (some would say, arrogant) international arbiter probably
finds it hard to encompass fiscal relaxation.
The future of the IMF is problematic, and it may not survive the first half
of the 21st century as an independent institution. Says Timothy D Adams, Undersecretary
for International Affairs, US Treasury: 'The perception that the IMF is asleep
at the wheel on its most fundamental responsibility - exchange rate surveillance
- is very unhealthy for the institution and the international monetary system.'
Perhaps that's unfair: the truth is that the market has taken over exchange
rate management. The IMF has played a useful part in helping the development
of sound fiscal regimes in many 1st, 2nd and 3rd world countries, but its task
is nearly done.
You have been
reading an entry on the following blog:
It's very confusing to read the newspapers at the moment, with
every economic pundit peddling his or her own nostrum for how to right the wrongs
of the banking sector. And over Davos the air has been positively blue with
a cloud of conflicting agendas for our economic future.
Well, I'm a financial journalist as well. If they can do it, why
can't I? So here goes! You have been warned; now is the time to stop reading.
To begin with a history lesson: Bang!
Big Bang, that is. The process by which partner-based investment
banking firms were absorbed (at mind-blowing cost) into commercial banking firms
who wanted to be 'universal' banks. Mostly this happened in the early 1980s,
and the process largely demolished the centuries-old model in which people with
capital formed private partnerships in which they could make or lose money without
any embarrassing onlookers such as shareholders.
It's fact that investment banking (m&a, ipos, what is now
called private equity, and all the trading that is associated with these activities)
can make silly amounts of money, and occasionally lose it as well. How can there
be any objection to that if it is done in private? There never was any; the
problem has come with the fact that the clever wheeler-dealers who make these
enormous sums of money now do it in the full public view, and that makes them
vulnerable.
The marriage of private and public banking, with a substantial
injection of 'popular capitalism', led to securitization, itself nothing new
(every public company has been 'securitized'), but a dangerous weapon in the
hands of deal-obsessed investment banking magicians. This was the moment at
which, with hindsight, the regulators should have set up a structure to measure
and control the risks being generated by new instruments such as CDOs. But the
regulatory structure is compartmentalized in every country as well as internationally:
retail banking, insurance, futures and so forth.
Understanding the reasons for the collapse that ensued is not
to withhold blame: there was a Faustian pact between the politicians who need
growth to show off to their electorates (and certainly don't understand 'rocket
science'), the inexperienced young bankers who dined out on toxic mortage debt,
and perhaps most culpable of all, the ratings agencies, themselves totally unregulated
and unsupervised, who allowed and encouraged the ball to continue long after
midnight. But it's very difficult to blame the investment bankers; they were
just doing their job.
There's no going back, however. Any sort of forcible separation
between commercial and investment banking a la Glass-Steagall will simply set
back international economic growth by a decade. The ignorance of politicians
about investment banking and the popular anger that results can be cured by
education - you can see this process taking place already as more and more hacks
like myself come to understand that investment bankers are a necessity. 'The
unacceptable face of capitalism' was Edward Heath's comment, and the Germans
simply call them 'locusts'. But we have to accept them, like root canals and
traffic wardens, as a part of our complex society.
As to preventing the next 'crash'? Well, we can't. While human
nature stays as it is, booms and busts are as inevitable as love and infidelity.
What can be done is to fine tune the regulatory systems, try to bring them up
to date and to stop them lagging behind innovation quite so badly in future.
And most of all, say no to any 'solution' put forward by politicians, because
they are the very last people capable of understanding the problem.
The British government is now face to face with the consequences of the mistakes
it has made over the last ten years in regulating and taxing its gaming sector.
It is scarcely the only country to have trodden the same error-strewn path,
but in the case of the UK the damage is greater because of the highly profitable
industry which the government's policies have now almost destroyed.
'For many reasons, increasingly few companies active in the British market
are now regulated by the Commission,' bleats Minister for Sport Gerry Sutcliffe.
So what has happened?
In 2001 the Government replaced its age-old system of taxing punters with a
15% tax on gaming gross profits (and operators also have to pay VAT plus corporation
tax plus a super contribution on any horse-racing turnover to a superannuated,
cosy old industry nag called the Betting Levy Board). This step wouldn't necessarily
have been fatal on its own, but when Internet betting started to supersede the
betting-shop kind, and UK-based operators began to desert in droves to Malta,
Gibraltar, Costa Rica and the Channel Islands, the government imposed a 15%
tax on Internet gaming profits for all those firms which it licensed, and created
a tough licensing regime under the Gaming Commission. But it could only license
firms on its own territory and was forced to allow in all EU-based firms, without
being able to tax them.
Now, with gaming tax revenues disappearing down a black hole, it is having
a King Canute tantrum and wants to impose licensing (and hence taxation) on
all the firms that operate in the UK (ie advertise there for punters). But why
should the EU permit this? There are perfectly adequate regulatory, licensing
and taxation regimes in Ireland, Malta and Gibraltar, all EU Member States,
and where the ex-UK betting firms now prosper. Under what circumstances are
they going to allow the UK to steal their revenues, or to replace their rules
with a new set? And under what law can the UK forbid another properly-licensed
EU operator from advertising freely throughout the EU?
The ECJ's Gambelli ruling in 2003 was unequivocal: gambling is a service and
is subject to EU freedom of establishment rules. There is no way in which one
EU Member State is going to be able to impose its own legislative practices
on another one. The EU Commission has already attacked France on this issue.
It is a mystery how Minister Sutcliffe could be so badly advised as even to
try.
What the government should have done was to accept the inevitable and offer
a light-touch, low-tax regime to compete with Malta et al, instead of hiding
benhind a hypocritical ('protect our children') smokescreen. All it really cares
about is the tax, and now it has lost that along with the gaming industry. The
existing law is a dead letter, as the government is implicity acknowledging:
you can ban a foreign firm from advertising on the Internet, but Berkshire is
not Beijing, and if a 16-year old wants to place bets with a Costa Rica poker
site using his father's Swiss credit card and bank account, who is going to
stop him?
Even now it is not too late for the government to come to its senses, but under
Pastor Gordon Brown's presbyterian theocracy, and faced with the Treasury's
emptying treasure-chest, what chance is there of that? The few remaining British
gaming firms will now pack their bags and leave. 'Mene, mene, tekel upharsin'.
Penelope Wise
Penny Wise but not Pound Foolish! But remember: I am not offering investment advice. My comments are just for your general information; I do not recommend investments, and you should take professional advice before entering any investment contract.
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