The Finance Curse. Nicholas Shaxson
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economic myths of all time.
Veblen understood these fallacies clearly, even if he couldn’t anticipate all the various schemes that financialized capitalism would create. One of these was the world of offshore tax havens, a tool of sabotage that was in its infancy in Veblen’s day. There’s no general agreement as to what a tax haven is, though the concept can usefully be boiled down to “escape” and “elsewhere.” You take your money or your business elsewhere—offshore—to escape the rules and laws at home that you don’t like. These laws may involve taxes, disclosure, financial or labor regulations, shipping requirements, or whatever, so “tax haven” is a misnomer; these places are about so much more than tax.
Let’s take tax and a classic tax haven trick that had already begun to emerge in Veblen’s day called “transfer pricing.” Imagine it costs a Spanish multinational $1,000 to produce a container of bananas in Ecuador, and a supermarket in Santa Barbara, California, will buy that container for $3,000. Somewhere in this system lies $2,000 in profit. Now who gets to tax that profit? Well, the multinational sets up three subsidiaries: EcuadorCo in Ecuador, which produces the bananas; USACo in the United States, which sells the bananas to the supermarket; and PanamaCo, a shell company with no employees and based in a tax haven. These companies inside the same multinational sell the container to each other: first, EcuadorCo sells it to PanamaCo for $1,000, then PanamaCo sells it to USACo for $3,000. Where does the $2,000 profit end up? Well, it cost EcuadorCo $1,000 to produce the container, but it sold the container for $1,000 to PanamaCo, so there’s zero profit—hence no tax—in Ecuador. Similarly, USACo bought the bananas from PanamaCo for $3,000 but sold them to the supermarket for $3,000, so there’s no profit or tax in the United States either. PanamaCo is where the action is. It bought the container for $1,000 and sold it for $3,000, making $2,000 profit. But because it’s in a tax haven, the tax is zero. Presto! No tax anywhere!
In the real world it’s obviously much more complicated than this, but this is the basic concept, and indeed Panama was one of the pioneers in this game in Veblen’s lifetime. It’s clear that nobody anywhere in this financial game has produced a better, more efficient way to grow, transport, or sell bananas. This is simply wealth extraction: a shift of wealth away from taxpayers in both rich and poor countries toward the businesses and some lawyers’ and accountants’ fees. But it’s also sabotage, because it rigs markets in favor of the large multinationals who can afford to set up these expensive international schemes, at the expense of their smaller domestic competitors who can’t.
Two brothers who became pioneers of this kind of multinational tax strategy were Edmund and William Vestey, who founded the Union Cold Storage Company in Liverpool, England, in 1897. Meat monopolists extraordinaire, the Vesteys ran cattle operations in South America at one end, where they crushed the unions on their extensive holdings. At the other end, in Britain, they crushed rival meat traders—including one of my great-great-uncles18—and monopolized the retail trade. In between, they dominated certain shipping lines, not least through their Panama Shipping Company Inc., and rigged the international tax system in their favor. “If I kill a beast in the Argentine and sell the product of that beast in Spain,” William Vestey taunted a British royal commission in 1920, “this country can get no tax on that business. You may do what you like, but you cannot have it.”19
From those early beginnings in the 1920s, tax havens would grow to offer a wider ecosystem of market-cornering possibilities. And with the growth of mobile global finance, particularly after the 1970s, the possibilities for sabotage would multiply, in the United States and around the globe.
As the twentieth century progressed, Veblen’s views that sabotage and wealth extraction were central organizing principles of capitalism would be vindicated again and again. Take, for instance, the great American streetcar scandal, when a consortium of oil, bus, car, and tire companies came together in a loose arrangement to buy up streetcars and electric mass-transit rail systems in forty-five major US cities, then kill them off. (The scandal inspired the Hollywood film Who Framed Roger Rabbit.) Antitrust lawyers argued that the ensuing destruction of rail-based urban transport was part of a “deliberate concerted action” to push America into dependency on cars, buses, tires, and oil. To the extent that they were right, this helped pave the way for, among other things, massive climate change.
Financial players also sabotage markets where we buy and sell stuff all the time. The less regulated these markets are, and the less attention regulators pay, the more rigging. That helps explain why, when regulators’ attention was elsewhere engaged during the financial crisis, crude oil prices rose from $65 a barrel in June 2007 to nearly $150 in July 2008. Yet this happened amid falling demand and a world oil glut, exactly the opposite of what the textbooks tell us ought to happen. On September 22 alone, the price rose over $18 a barrel, then dropped nearly $15 the next day. By December, it was down to $30, then back up over $70 by the following June. An internal Goldman Sachs memo in 2011 suggested that speculation accounted for about a third of the price of oil—equivalent to $10 extra on every American driver’s fill-up. The speculators weren’t buying up actual barrels of oil to sell them later at a profit, not least because there are physical limits on just how much oil there is available to buy. Instead they were employing financial instruments, which can be used to bet without limit: one bet piled upon another, upon another. Each bet tends to push the oil price either up or down. This created unreasonably large price swings, which were then worsened by herd behavior: if Goldman Sachs was buying, people reasoned, then they ought to as well. As hedge fund officials and other market watchers noted, the mayhem—which ricocheted to oil consumers around the world—greatly benefited large financial players, who had the best information to buy and sell ahead of everyone else: they made out like bank robbers.
Meanwhile, in the aluminum market, Goldman Sachs indulged in some bizarre market sabotage when in 2010 it bought up Metro, a metals storage company regulated by the London Metal Exchange, the standard-setter for the aluminum industry. Before the purchase, customers who bought aluminum from Metro had to wait some forty days for it to be delivered from the warehouse, but within a couple of years they were having to wait ten to fifteen times as long—674 days at one point, according to investigations by the US Senate and the New York Times. Metro’s customers would also have to pay to store the aluminum for two years before they could get their hands on it. What is more, prices went haywire. MillerCoors, a big user of aluminum for drinks cans, reckoned the dysfunctional market had imposed an extra $3 billion cost on users; some industry experts estimated American shoppers had paid $5 billion extra from 2010 to 2013 through a thousand tiny price hikes in the cans, automobiles, and other aluminum products. Over this time, Goldman was ramping up its trading of financial products linked to aluminum, and other players—notably Germany’s Deutsche Bank, JP Morgan, a British hedge fund called Red Kite, and the Swiss-based commodity trader Glencore—inserted themselves into and milked this strange market. All of this was overseen and approved from London, a den of rogue regulators that we’ll meet properly in chapter seven and that hosts the London Metal Exchange.20
Britain also provides an even more blatant, brazen example of sabotage. There, a unit of Britain’s giant Royal Bank of Scotland used the crisis to hit thousands of fragile small businesses with crippling, unexpected fees, fines, and interest-rate hikes. It became known as the bank’s “Vampire Unit”: under its Project Dash for Cash, financial terms were engineered to make more struggling businesses fail, so it could get hold of their assets cheaply. “Rope: sometimes you need to let customers hang themselves,” one internal bank memo said. An independent report said the bank wasn’t alone either: it found “profiteering and abhorrent behavior” all across retail banking. “Some of the banks,” it said, “are harming their customers through their decisions and causing their financial downfall.” This sabotage led to family breakdowns, heart attacks, and suicides.21
Veblen made an observation about such behavior that remains relevant today. The fountains of profit that can ensue from this kind of rapacity and market rigging underpin what he sneeringly called “business sagacity.” We hear “business sagacity” every day from the leaders of politics, industry, and finance. We hear it when CNN or Fox brings out know-nothing bankers or financial pundits to applaud the latest merger-driven rise in the stock market, the latest deregulatory or tax-cutting gift to Wall Street,