Instead, there was – well, let's call it a shadow liberalisation.
A paradigmatic example of the excessive leverage made possible is that of the Bear Stearns vehicle in the Dublin financial centre. Irish academic Jim Stewart documented after the parent company's collapse that Bear Stearns Ireland Ltd. had $119 of gross assets financing each $1 of equity. Neither the Irish nor US regulator appears to have recognised beforehand a responsibility here, because local regulations were apparently being respected.
The absence of international coordination and information exchange was exploited right across the financial system, as banks and others 'freed' themselves more and more from the burden of state intervention – until the time came when their reliance on it was made plain. Both US Treasury Secretary Tim Geithner and Nobel economist Paul Krugman have placed substantial blame for the crisis on the run on the shadow banking system.
The same lack of financial transparency that made this possible also underpins a problem that persisted all the way through the boom, but is now recognised as much more of an affront to society. We refer, of course, to the tax evasion and avoidance that may cost developing countries $160 billion a year in lost revenues – and greater sums to OECD countries.
The same regulatory arbitrage gave rise to a race to provide the most opaque, least taxed jurisdiction for companies to shift profits made elsewhere. And a location to hide assets and income streams has wider appeal – not least to corrupt state officials, and to companies that rely on bribery to win contracts.
Financial secrecy undermines the Millennium Development Goals, agreed by policymakers around the world to drive human progress to 2015, in numerous ways. Most tangibly, the diversion of revenues means less spending on health and education, less investment in infrastructure, less protection of the poorest. More insidiously, secrecy erodes the social contract that underpins government accountability to deliver for citizens.
When the 'Occupy' protesters call for finance that serves people rather than vice versa, while the World Bank publishes a strident attack on the 'Puppet Masters' of illicit finance, it should be clear that we are seeing a powerful convergence.
For once, we really are all in it together. The G20 has a long way to go to meet its 2009 promise to end secrecy; but if it can find the courage to do so, it will be applauded each step of the way.