Monthly Archives: March 2008

At the Institute of International Finance 2008 Spring Membership Meeting in Rio de Janeiro, Brazil, which took place from March 5 till March 7, I participated in a panel discussion on “Key Issues Facing the Global Economy”. My task was to discuss the outlook for Europe (a small subcontinent on the western extremity of the Eurasian landmass). The Powerpoint presentation that served as the background for my discussion can be found here.

To a significant degree I attribute the North Atlantic financial crisis that erupted in August 2007, to the triumph of transactions-based financial capitalism over relationships-based financial capitalism. I expect the economic damage different parts of the world, including Europe, will suffer as a result of the crisis to be strongly positively correlated to their degree of overexposure to the transactions-based model.

The presentation also briefly discusses regulatory changes that are likely to come down the pike in Europe as a result of the crisis and the near-certainty of an imminent crackdown on tax havens led by a coalition of the willing in Europe and the USA.

The Fed as Market Maker of Last Resort

The Fed is acting as market maker of last resort (MMLR) – a good thing if the latest deepening of the financial crunch facing investment banks and other financial institutions is indeed due to illiquidity rather than rational fear of insolvency. As it is likely that at least part of the increased difficulty of finding private buyers for the kinds of asset-backed securities the investment banks want to unload, is due to pure illiquidity (current illiquidity created by fear of future illiquidity of the would-be seller and of the would-be buyer of the securities) the Fed is right to increase, by $140bn, its collateralised loan facilities (through a one-month maturity repo facility targeted mainly at the primary brokers or investment banks) and Term Auction Facility. It may well have to do more of the same. To avoid creating adverse incentives, the collateral offered in the repo facility and the TAF should , when it is illiquid, be valued aggressively and be subject to a serious haircut.

If Jagdish Bhagwati’s purpose in writing his FT column on March 3, Obama’s free-trade credentials top Clinton’s, was to cheer up those who support multilateral free trade and had become dismayed at the avalanche of protectionist drivel from both the Obama and the Clinton camps, he failed.

Professor Bhagwati writes: “… no Democratic candidate during the primaries can be anything but a protectionist. The only question is: of the two, which is likely to be friendlier as president to the cause of multilateral free trade? Careful scrutiny suggests that the odds are in favour of Mr Obama….”

In today’s Financial Times Economists’ Forum, Michael S. Barr and Laura D. Tyson present proposal to deal with the problems of the American residential housing market and the housing finance market: “Foreclosures: How to save America’s family equity”.

Under their achingly preciously acronymed SAFE (Save America’s Family Equity) loan plan, the US Treasury and the Federal Reserve would run auctions, in which Fannie Mae, Freddie Mac and Federal Housing Administration originators would purchase mortgages from current investors at discounts determined by the auction process. The FHA, Fannie Mae, and Freddie Mac would work with “responsible originators” to restructure the loans they acquire to stem defaults, foreclosures, and liquidations.

This is a terrible proposal: distortionary, unfair and except in the shortest of short runs so beloved by political opportunists, a threat to macroeconomic and financial stability because of the moral hazard and other perverse incentives it creates for reckless borrowing and reckless lending in the residential home finance markets. The FHA, Fannie Mae and Freddie Mac are, of course, the vehicles through which the US has since the Great Depression pursued its unique brand of socialism for the middle class. This proposal widens and deepens that role and extends it to include socialism for the upper-middle class.

A quick reality check for those who argue that as a result of the non-dom legislation, London is about to lose its competitive edge as the location of choice for the exceedingly well-heeled to New York.

The top marginal income tax rate in the UK is 40%

The top marginal rate of Federal income tax in the US is 35%

The top marginal state income tax rate in New York State is 7.7%

The top marginal rate of New York City’s income tax is 3.64%

So, if a seriously well-paid person were to move from the UK to New York City, his/her marginal income tax rate would go up from 40% to 46.34%.

You could chose to live in some leafy Connecticut suburb instead. The highest marginal tax rate of the Connecticut state income tax is 5%.There is no local income tax. You move from London to Greenwich, CT, and you just break even on income taxes.

Or you could move to salubrious New Jersey. The highest marginal tax rate of the state income tax is 8.97 percent. There is no local income tax. You move from London to Newark, your marginal income tax goes up from 40% to 43.97%.

In addition, the US does not have anything resembling non-dom status. The US taxes residents on their world-wide income, regardless of whether they bring the money into the country or not. In addition, the US Federal authorities impose quite intrusive reporting obligations as regards beneficial interests in accounts held abroad.

It may be that other dimensions of life in and around New York City would more than compensate for what would be a continuing income tax advantage of the UK over the US, even after the full implementation of the Chancellor’s original proposals. If so, can someone tell me what they are?

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website