Not since the fall of the dotcom impresarios has a group seen its stock marked down so fast. A few months ago, the masters of the universe were the masters of the universe. Here in England, the British thanked the financial industry for the island’s remarkably puissant economy and inclined its neck towards the City (Britain’s equivalent of Wall Street) as though to the passing of the True Cross. Never had so many owed so much to so few, as Churchill might have described it, followed by a malicious chuckle. Now, it seems the financial geniuses are blamed for everything… from the losses at AIG to the decline in housing prices to the lack of parking places. What has happened?
It was the “biggest failure of ratings and risk management ever” said analysts at UBS. As the tide of cash and credit subsided, in Warren Buffett’s beautiful metaphor, we got to see “who’s been swimming naked.” Not a pretty sight.
Prevailing opinion is that the financial engineers made ‘mistakes;’ they forgot to put on their bathing suits. Now, everyone is pointing at them and laughing.
As the price of subprime debt plummeted, so did the reputation of an entire profession. All of a sudden, everyone who touches money for a living is suspected of being a rascal. And every one who has a lot of it is thought to be a scoundrel. Week after week, the press targets another victim – bankers… mortgage lenders… German tax evaders… hedge fund managers; first one, then the other, they are singled out for abuse, ridicule and reprisal. The whole moneyed class has been downgraded from a triple A credit to junk debt – especially those rich, privileged few, the ‘non-doms,'(people who live in Britain but are not British citizens) who don’t have to pay rack rate U.K. taxes.
Of course, even when they are making money, the scheming rich have few real friends. And when they lose money they are as unwelcome as smokers. Even the editor of our own MoneyWeek magazine, Merryn Somerset Webb, and one of our leading columnists, Simon Nixon, have argued in favor of squeezing their own London-based publisher… yours truly.
“Why are people who have been based here for 20 years allowed to claim that the U.K. is not their domicile in the first place?” Merryn wants to know. “And having done so, why are they allowed to pay practically no tax and then pretend that this situation is good news for the rest of us?”
There are matters of principle. And matters of practicality. Merryn is arguing the principle of the thing. “It’s not fair,” she might have said.
Simon is concerned with the practical issues. If the non-doms leave, won’t they pack up Britain’s miracle money machine in their luggage and take it with them? Don’t worry, says Simon, they’re not going anywhere:
“The only places in Europe where non-doms can expect better treatment are traditional tax havens, such as Monaco and the Channel Islands, or Ireland, which operates a similar non-dom regime to the United Kingdom. These aren’t serious rivals to London.”
But here on this little page of Markets and Money , at least, we always take the side of the underdog, even a mangy one. We rise to defend this whole class of econopaths and lucred loners – especially the non-doms – neither for reasons of fairness nor practicality, but for the simple reason that we are, statistically and legally, among them. No, it’s not a matter of principle. It’s the money.
There is nothing new… and nothing local… about this phenomenon. Instead, it is cyclical. Labor minister Denis Healey got some mileage out of attacking the rich in the ’60s. He promised to squeeze them “until the pips squeak.” Britain sank into a dreadful slump largely as a result.
And in the United States today, the desire to punish the rich is growing. “I’m not against the hedge fund manager,” said Mike Huckabee; he might have added that some of his best friends were hedgies.
“Unfettered capitalism is not something I support,” added Republican contender John McCain.
As for the democrats, they are ready to attack the rich, excluding campaign donors, of course, as soon as they see the whites of their eyes.
All of which just goes to show that the whole boom was based on false pretenses from the get-go.
In Britain, for example, we are faced with having to pay the British government an additional 30,000 pounds (we already pay tax in Britain on our U.K.-source revenue… and taxes elsewhere, wherever the money is generated). The extra charge might not cause us to leave the country. But we will be getting our bags together, just in case.
Most likely London’s major industry – finance – is in decline. And most likely, the departure of a few non-doms is not going to make much difference. But, at the margin, who knows? If the financial industry is in a slump and, on top of that, a substantial number of non-doms take their credit cards and leave, London could suffer. A logical analyst might conclude that the city has more to lose than to gain by taxing the non-doms now.
But one of the foundation delusions of the whole Reagan/Thatcher boom era was that people always respond directly and logically to financial incentives. “Homo Economicus” was said to always make rational, wealth-maximizing decisions. In fact, he’s an imposter. Real man is often more driven by envy than the desire for absolute wealth. And we can prove it.
Behavioral economists conducted an experiment in which people were offered $100, on the condition that they share it with someone else. If they couldn’t strike a deal as to how to divvy up the money, quickly, they got nothing. Logically, the second person should agree to anything, because it was free money. But researchers found that if they were offered anything less than 30%… they refused; it just wasn’t considered fair. Likewise, Britain is probably better off offering shelter to the footloose exiles, no matter how little of their wealth they choose to share. But envy pushes the politicians and its citizens to insist on a fair deal.
Americans, too, would be better off just putting up with the rich… no matter how loathsome they appear.
Markets and Money