SWISS BANKS AND FINANCIAL PRIVACY

Pierre Bessard of the Liberales Institut in Switzerland, makes the case in NY Times (link) why financial privacy shouldn't be infringed and why Dept. of Justice and the European Union should not exert pressures on Swiss banks regarding financial privacy and client information disclosure to foreign governments:

"Switzerland, which is home to an impressive number of global corporations, has also come under fire from the European Union for offering too-favorable tax rules, including exemptions for income earned abroad. But what critics forget is that these practices also benefit other countries. Swiss firms alone employ hundreds of thousands of people in the United States and Germany, for example. Subsidiaries of multinational corporations usually pay income taxes where they operate, so having their headquarters in Switzerland can help companies avoid multiple taxation in high-tax countries, thereby safeguarding productive capital for investment."

FED INTERVENTION

Allan H. Meltzer explains why Fed should be taken away from investment banks (link):

"So what can taxpayers expect from an increase in the Fed's discretionary authority over investment banks? The likely answer is rescues, delays and lax supervision – followed by taxpayer-financed bailouts. Throughout its postwar history, the Fed has responded to the interests of large banks and Congress, not the public. Investment banks don't need the Fed to regulate them. Some clear rules on capitalization would suffice."

AUSTRIA: ALPINE TAX HAVEN DEFENDS FINANCIAL PRIVACY LAW

Austria firmly rejected the initiative from the European Union to ease and possibly remove the legislation that aims at client data privacy and banking quality (link). The EU tries to impose sanctions on jurisdictions known for sound financial privacy, competitive tax policy and bank secrecy laws (link).

GERMANY'S FISCAL AGGRESSION

In a continuing and overpowering war against low-tax jurisdictions (link), German government hit out a tax attack on the Principality of Liechtenstein (link) by sending intelligence spies into Liechtenstein and bribing former bank employee to alledgly obtation bank client data. Angela Merkel, Germany's chancellor, has endorsed threats to isolate Liechtenstein if the latter does not ease bank secrecy rules (link).

Liechtenstein's GDP per capita equals 84,300 € ($125,000) per capita, which is about three times higher than Germany's GDP per capita. Principality's banking legislation is based on financial privacy. German government has continually forced Liechtenstein to sign information-sharing agreements that would enable German tax authorities to tax capital income of German entrepreneurs whose company is headquartered from Liechtenstein. Also, information-sharing agreements might impose sanctions and tax prosecution of German companies situated in Liechtenstein. The aggression on behalf of German government indisputably violates territorial sovereignity and financial privacy. Nevertheless, the latter is one of the most fundemental human rights.

GERMANY'S REGULATION AGENDA

As a response to subprime mortgage crisis, German government suggested further unilateral tightening of bank regulation as a step to prevent future risk volatility caused by external shocks such as recent subprime mortgage crisis (link).

AFTER YEARS OF TREMENDOUS GROWTH, THE ECONOMY OF ICELAND FEELS THE HEAT

Financial Times just recently posted an article about the macroeconomic and financial prospects of Iceland regarding recent turmoil in financial markets.

Throughout 1990s, Iceland's economy recovered signficantly subject to economic and structural reforms. As a result, fishing, which still remain the dominant source of export revenue decline from 16 percent in 1980 to 6 percent last year, being replaced by finance, insurance and real estate. Moreover, Iceland's three largest banks, Glintir, Landsbanki in Kaupthing have asset capitalization of more than 110 billion EUR, which is more than eight times Iceland's GDP.

So how have the prime movements in credit markets affected risks associated with financial turbulence? A report from F. Mishkin and T. Herbertsson has shown that Iceland's economy is stronger than ever, concluding that fears of rough landing and possible recession were overblown. In a broader sense, Iceland's banking sector was not intensively exposed to credit market turmoil as banks increased their operating capacity by switching to retail deposits as a pattern of funding.

In addition, total assets of Icelandic banks remain solid and there has been almost no sign of a liquidity loss, default loans, exposure to subprime mess and credit blowing. But, loan to deposit ratio is still around 300 percent, reflecting the dependence on gross markets. The question is how the sovereign risk may be managed. Explosive growth of financial sector has certainly benefited Iceland's economy but the problem is the long-term sustainability of risk management due to immediate or sudden fluctuations in business cycle and exchange rate. In fact, krona, Iceland's currency, has been one of the weakest performers recently. Agreeably, the information asymmetry plays an important role in this case. It is important how banks perceive macroeconomic risk and respond to imbalances. As a result, market premium shows how the investors absorbed and perceived the information about Iceland's economy accountably.

U.S. HOUSEHOLD RETAIL SPENDING FALLS AS HOUSING SECTOR SLUMPS

The Financial Times reports about the decline in periodic retail sales in the U.S. presumably to the impacts of the housing market turmoil.

As prices weakened, the lending practice has become far more restrictive, reflecting the experience of sub-prime mortgages. In fact, this particular shock outbursted the sell-off in the capital markets which heated the situation close to panic, leading to price corrections respectively. Despite the recent news about the possible interest rate cuts by the FED, borrowing conditions have become tighter. In turn, immediate market sell-offs sprang out a highlighted price reductions and a downslide of stocks and bonds.

In effective terms, the indicators in the U.S. financial market envisage a high degree of uncertainty in the future, especially due to the aggresive assertions of the interest rate cutting and due to housing and sub-prime mortgage slid. I believe the confidence index will play the major role in regaining the positive outlook of financial markets which crucially determines the dynamics of household spending particularly on retail consumption.

FRANCE'S EXCESSIVE REGULATION PROPOSAL WOULD DISTORT FINANCIAL MARKETS

"Capitalism without failure is like a religion without sin."

Allan Meltzer

France responded to recent turmoils and frictions in credit markets by calling for tougher and tighter regulation of global financial markets. Clearly, recent dynamics of credit markets and ECB's strongest intervention yet, reflect the turbulence and heating of risk over debt securities in avoiding speculation and credit default swamps which notably increase the probability of financial crisis (Mishkin, Herbertsson 2006).

The question is whether regulative pressures to disclose more of particular data and information about traded financial products could ease the credit flows and ensure more transparency. Since information is the most valuable tool in picking-up financial products to invest in particular assets with sufficient return predictions, adding trickier code laws would simply burden the ability of financial markets to catch growth momentum and enforce risk management rules to respond to the volatility of the level markets properly. Risk management is of course an important aspect of decision-making in globally competitive markets. In addition, pressures for more information disclosure would enforce control over credit and broadly financial markets.

Financial markets are faced by risks and shocks every day and failures which occur frequently could hardly be a reasons for imposing more regulation on decision-makers. One of the ways to confront risk-taking and risk-minimization measures is to ensure a broader access to particular funds, thus to provide sound sources of liquidity.

Recently, France's finance minister stressed (link):
"We have been proven right. We need more transparency and better governance in financial markets and we need it on a G-7 basis."

The evaluation of risk which investors and creditors face in the course of financial market, crucially depends on the ability to reduce the risk of biased information regarding decision-making in particular activity, say hedge fund industry or private equity investment. Transferring the liabilites of governance and transparency to a global body would fail already in the short-run because the amount of information needed to be absorbed and the lack of acceptance of risk in terms of responding to the outcome of the excessive regulation, are the prime reasons why globally enforced regulation would punish and penalize financial markets which could face significant distortions and risk aversion leading to lower returns and discounted ability to target particular markets with particular financial products respectively.

Recently published in Wall Street Journal, Allan Meltzer wrote a simple fact which politicians obviously can't understand:
"But whatever the perceived problem, more regulation is not the answer. It is far better to change some incentives for excessive risk-taking."

Because the regulation of credit and financial markets does not achieve stated objectives, information-sharing pressure reversingly forces equity investors, traders and market actors in particular financial industry to disclose the information required and this, in turn, leads to more complexity and government's control over the financial markets to go for an intervention which is perceived as a negative affection of stock market performance. For instance, could the regulation of carried risk in hedge fund industry really ensure more transparency if trading is conducted on the basis of contract deals where the treatment of information is regarded as contract stakers negotiate.

If the assessment of risk is perceived as low and underestimated, than the portfolio and price reassessment boosted by spontaneous market behavior would give bankers, traders and investors a far better incentive to re-evaluate the risk involving repackaged debt securities. A regulation such as proposed by France's policymakers rather induce external risk pressures to hit hedge fund industry, stock market and private equity firms, causing more harm than good.

The cinism of France's minister of finance is well seen:
"It's not a question of forbidding trading or barring market activity, it's making sure that the sophistication of financial products does not get so complicated that even investors dealing in those products are lost as to what they actually are."

So according to this statement, government officials know better how and where to allocate market resources to maximize the return from financial markets by purchasing traded products at agreeable conditions to traders and investors/purchasers. Market fluctuations are a daily reaction to innumerable decisions and contracts in the financial markets. The assessment of product sophistication could hardly be attached to government's responsibility. The proper degree and size of regulation is much better managed trhough contract deals at which both sides agree on terms and conditions involving particular products to take action in financial markets. In sum, transparency of particular financial products is the matter of the contractual enforcement and the reflection of dealing preferences and the overall efficiency of trading and financial markets always gets worse when government decides to intervene the market with excessive regulation whereas the cost adjustment is high; both for the cost of government and the private trading sector's ability to akin compliance burden.