The right-wing "think" tanks--e.g., the so-called "center for freedom and prosperity" (CFP) (which operates often in conjunction with the corporate-funded Cato Institute and American Enterprise Institute)--continue the push to protect tax evasion and tax competition. See e.g., CFP website with various articles and video links in favor of tax competition and tax havens.
CFP has in its sights the efforts by the OECD and influential governments to create international cooperation on tax policy so that tax cheats can't use the policies of tax haven countries to undermine the tax policies of their home countries. CFP wants multinational corporations and wealthy individuals to be able to hide their assets and avoid tax or to be able to pit one country against another in order to get the most advantageous (lowest) rate of taxation. It builds up phony straw men arguments (worries about an "international tax cartel" ) and false dichotomies (no individual freedom if governments are able to work together to prevent cross-border tax evasion) to persuad Americans to support views about taxation that are both naive and damaging for complex societies, such as its misleading arguments in favor of the "Laffer curve" (see this earlier ataxingmatter posting) and in favor of flat taxes. In both of the latter cases, the CFP makes statements that are factually wrong--such as the claim that the Laffer curve is a "theory" that "proves" that cutting taxes results in broad-based growth, or the claim that a flat tax at a rate of about 20% would be sufficient to raise the same revenues as the current income tax. Those approaches are certainly not good for any country's tax system, including the US. Tax competition is not a good that we should encourage, and the existence of tax havens is something that we shoudlw work against. So read their views and watch their videos with a very skeptical mind. This is a bill of goods for a sale that will jeopardize American society if the American people buy it.
The CFP also has its sights on the reinvigorated government effort to rein in Big Banks and prevent the kinds of problems we saw emerge from the Reagan deregulatory era from happening again. The Center is busy preaching that the problems with the current financial crisis don't stem from the hands-off view that the government adopted since Reagan, but in fact from too much government oversight. See Government Intervention, Regulatory Policy, and the Financial Crisis, a video produced by CFP with the American Enterprise Institute. It preaches a misleading concoction of anti-government rhetoric and selected history to blame the government for the current crisis.
Here's my quick analysis. The video starts with a statement that current politicians are blaming "unchecked capitalism and deregulatory efforts" for the crisis, but that "can't be right, since banks have been the most heavily regulated entities and are at the heart of the trouble" (paraphrase of statements on tape). The real culprit, it claims is the government chartering of Fannie and Freddie, where the market treated the corporations as having an implicit government guarantee.
Let's decipher these statements.
First, banks are regulated under Basel, but those regulations primarily deal with capital reserves. The deregulatory actions that took place starting with Reagan and culminating with Phil Gramm's midnight putsch in the Commodities Futures Modernization Act left 1) the Depression-era walls between commercial banks, insurance companies, and investment banks destroyed, so that all those financial operations could now be down under one enornous roof and the entities were able to shift resources around and have one area do work to support another area while at the same time 2) all the financially engineered "derivatives" inventable by these financial whizzes were placed outside the scope of regulation, permitting banks to gamble without requiring appropriate reserves to back those gambles. That was the real cause of the crisis--the speculative risktaking that put the entire financial system at risk.
Second, Fannie and Freddie did not originate the problematic loans, and did not even get into securitization of those loans in nearly the same quantity that private investment banks did. it was the banks' desire to make big killings off the mortgage loan securitization possibilities that changed the business from a fairly mundane one to a risky business creating a ever-growing appetite for loans of any kind. The banks first encouraged creation of ever larger numbers of loans--the bigger the securitization market, the more loans are needed to feed it, and that push led to riskier loans, since that was the only way to satisfy the volume. Fannie and Freddie's securitizations were not guaranteed by the government--it was the unregulated market that distorted those assets and treated them as though surely the government would back them up rather than let them fail, therefore making the assets, in the market participants' views, less risky than the enterprises actually said they were. Read any offering from Fannie and Freddie, and you will see quite clearly the reminder that there was no government guarantee. But the market participants (particularly banks and insurance companies) speculated in the market on their bet that if they did so, the government would feel obligated to back the companies if the companies' products should default. So again, the cause lies with the risky speculation in the market, not with the two companies' mortgage securitization products.
The CFP/American Enterprise video would have you believe that the existing regulation of the banks caused the problem, so that the cure is to deregulate. This is a twisted version of reality that ignores the facts outlined above. The financial meltdown is due to the speculative risk-taking of banks that had been allowed to consolidate through the removal of the Depression era barriers and whose engineered products were allowed to be developed and sold without regulation.
The CFP/American Enterprise video prescribes 4 "cures" for the "problem" of "government intervention" and "over regulation" that the video claims to have established. What are they?
These prescriptions for success are a genuine prescription for failure. This crisis has hammered in the truth that we should not allow the financial system to regulate itself, because it will fail. It will engage in highly speculative, risky endeavors out of greed rather than deal in the mundane area of investing and lending that will grease the wheels of productive enterprise. We got off base, thinking that all this "financial engineering" could substitute for the real engineering in manufactured goods that this country was losing. It can't. Financial engineering wreaks havoc on the system, especially when it takes place in a Wild West atmosphere in which banks set their own rules and financial engineers are just hired guns striving for the top gun of the west position--"what fancy new derivative can they invent that makes them a lot of money, and damn the system." It will be particularly lamentable if the American people are swayed by these erroneous and propagandistic videos put out by CFP and American Enterprise Institute, whose main purpose is to protect their corporate funders from taxes and to prevent any regulation of the enterprises. Deregulation and the speculation that went with it caused this financial crisis. It's time to go back to much more stringent controls on consolidation within the financial industry and to put in place stringent regulation of financial derivatives.
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