The Cayman Islands and other offshore money centers could become scapegoats unless regulation is stepped up on Wall Street's biggest banks to avert another potential financial crisis, a former IMF chief economist warned.
"If they can't deal with the underlying real problems, because those banks are too powerful politically, they will look for other people to blame," Simon Johnson, a former chief economist at the International Monetary Fund, said at a weekend business conference in the Cayman Islands.
"Blaming offshore money centers for problems that are really centered on Wall Street's largest banks doesn't make any sense, but it could still happen," he said.
More than a year after the global financial crisis began, there has been far too little regulatory scrutiny of the world's largest banks in the United States and abroad, said Johnson, now a professor at the Massachusetts Institute of Technology.
Without effective regulation, nothing prevents these banks and other financial institutions from carrying on with the high-risk business practices that led to the financial crisis, he said.
Faced with escalating budget deficits, a declining taxpayer base and bank bailouts, more governments will increase taxes, Johnson said.
OECD and G20 countries will then keep up the pressure on offshore centers to make sure their citizens are not evading taxes.
"They have a demographic issue. People are retiring and healthcare costs are going up for the governments. At the same time, these repeated financial crises are very expensive and have seriously damaged their budgets," said Johnson.
President Barack Obama's recent proposal to limit the size and scope of the largest U.S. banks is the right move toward effective regulation, he said.
"It's very important that these scope controls and size controls be meaningful and really reduce the scope and reduce size of our biggest most dangerous banks," Johnson said.
The Cayman Islands came under the spotlight in April of last year when the G20 urged the OECD to crack down on tax havens.
Obama has called the Cayman Islands a tax haven for wealthy American corporations and individuals, which has siphoned off millions in U.S. tax revenues.
The British territory obtained the minimum benchmark of 12 tax information exchange agreements to make the "white list" of countries with internationally recognized tax standards a few months later, as did most major offshore centers.
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