Underground economy

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The underground economy or black market is a market consisting of all commerce on which applicable taxes and/or regulations of trade are being avoided. The term is also often known as the underdog, shadow economy, black economy or parallel economy.

In modern societies the underground economy covers a vast array of activities. It is generally smallest in countries where economic freedom is greatest, and becomes progressively larger in those areas where corruption, regulation, or legal monopolies restrict legitimate economic activity.

Contents [hide] 1 Pricing 2 Consumer issues 3 Traded goods and services 3.1 Transportation providers 3.2 Illegal drugs 3.3 Prostitution 3.4 Weaponry 3.5 Alcohol and tobacco 3.6 Copyrighted media 4 Appearance and disappearance 5 Modern examples 5.1 Wars 5.2 Prohibition in the United States 5.2.1 Of alcohol 5.2.2 Of smoking 5.3 Clearstream 6 See also 7 References 8 External links

Pricing

Goods acquired illegally can take one of two price levels:

• They may be less expensive than legal market prices, as the supplier does not incur the normal production costs or pay the usual taxes. This is usually the case in the underground market for stolen goods.
• Alternatively, illegally supplied goods may be more expensive than normal prices, as the product in question is difficult to acquire or produce, dangerous to deal with or may hardly be available legally. This is usually the case in the underground market for goods that are illegal to purchase, sell or possess.

Consumer issues

Even when the underground market offers lower prices, consumers are likely to continue the purchase of the legal counterparts, when possible, due to the following reasons:

• The consumer may—justifiably—prefer legal suppliers, as they are both easier to contact and can be held legally accountable in case of product faults
• In some jurisdictions, customers may be charged with a criminal offence if they knowingly participate in the unregulated economy, even as a customer.
• Consumers may feel that they incur a physical risk to their person, whilst dealing with black market goods, depending on the goods and how they are acquired
• Consumers may feel that the black market supplier conducts business immorally, particularly in cases where the black market supplier exploits their own supplier or has a history of exploiting other consumers

However, in some cases consumers may actively prefer the underground market, particularly when government regulations unnecessarily hinder a legitimate service. Examples include:

• Unlicensed taxicabs, in Baltimore, it has been reported that many consumers actively prefer illegal taxis, citing that they are more available, convenient, and priced fairly.^[1]
• Highly marginalized groups, such as illegal immigrants, may effectively be excluded from the legal economy and thus may undertake most of their purchases and employment in the underground economy.

Traded goods and services

In developed countries, some examples of underground economic activities include:

Transportation providers

In areas where taxicabs, buses, and other transportation providers are strictly regulated or monopolised by government, an active black market typically flourishes in providing transportation to underserved communities. In the United States, some cities restrict entry to the taxicab market via a medallion system. This has led to an active market illegal taxicab operation. Customers range from black Americans living in urban neighborhoods to rural old-order Amish.

Illegal drugs

Main article: Illegal drug trade

Beginning in the 19th and 20th centuries, many countries began to ban the possession or use of various recreational drugs, such as the United States‘ famous “war on drugs.” Many people nonetheless continue to use illegal drugs, and a black market exists to supply them. Despite ongoing law enforcement efforts to intercept illegal drug supplies, demand remains high, providing a large profit motive for organized criminal groups to ensure that drugs are available. The United Nations has reported that the retail market value of illegal drugs is worth 321.6 billion dollars.^[2] While law enforcement efforts do capture a small percentage of the distributors of illegal drugs, the high and very inflexible demand for such drugs ensures that black market prices will simply rise in response to the decrease in supply—encouraging new distributors to enter the market in a perpetual cycle. Many drug legalisation activists draw parallels between the United States‘ experience with alcohol Prohibition and the current bans on various psychoactive drugs.

Prostitution

Prostitution is illegal or highly regulated in some nations throughout the world. In such areas it is classic study of the underground economy because of consistent high demand from customers, as well the high pay, labor intensive, and low skill aspects the work attract a continued supply of sex workers. While prostitution is observed in virtually every nation, studies have shown that it tends to especially flourish in poorer countries, and in areas with large numbers of unattached men, such as around military bases.^[3]

Prostitutes in such areas generally operate with some degree of secrecy, sometimes negotiating price and activities through codewords and subtle gesture. Additionally, in areas such as the Netherlands where prostitution is legal but carefully regulated, illegal prostitutes exist whose services are offered without regard for legal requirements or procedures. In Nicaragua legal prostitution is regulated and most upscale hotels require identification of both parties involved to help prevent the growing percentage of child prostitution.

Weaponry

The legislatures of many countries forbid or restrict the ownership of personal arms. These can range from cold steel weapons exceeding certain sizes to firearms, either altogether or by classification (e.g. caliber, automatism, etc), to explosives. The black market can supply such demands, by smuggling the arms from countries where they were either purchased legally or stolen. The purchase of personal arms via these channels can be of use to criminals, those who wish to use them for self defense, and weapons collectors.

Alcohol and tobacco

Black markets can also form near when neighboring jurisdictions with loose or no border controls have substantially different tax rates on similar products. Products that are commonly smuggled to fuel these black markets include alcohol and tobacco.

It has been reported that smuggling one truckload of cigarettes from a low-tax U.S. state to those jurisdictions of the same country with the highest taxes can lead to a profit of up to $2 million.^[4] The low-tax states are generally the major tobacco producers and have come under enormous criticism for their reluctance to increase taxes from their minimal rates. North Carolina eventually agreed to raise its taxes from 5 cents per pack to 35 cents, although this remains far below the national average.^[5] However, South Carolina has thus far refused to follow suit and raise their taxes from seven cents per pack (currently the lowest in the U.S.A.)^[6] Some law enforcement officials have expressed concern that the profits from tobacco smuggling may be directed to terrorist organizations. This has led to calls for the U.S. Congress to intervene by setting mandatory minimum tobacco taxes for all states.

Copyrighted media

Street vendors in many third world countries, particularly in Asia where loose enforcement of copyright law exists, often sell deeply discounted copies of films, music CDs, and computer software such as video games, sometimes long before the official release of a title. Innovations in consumer DVD and CD burners and the widespread availability on the Internet of cracks for most extant forms of copy protection technology allow anyone with a few hundred dollars to produce DVD and CD copies that are digitally identical to an original and suffer no loss in quality.

Such operations have proven very difficult for copyright holders to combat legally, due to their decentralized nature and the cheap widespread availability of the equipment needed to produce illegal copies for sale. Widespread indifference towards the enforcement of copyright law on the part of law enforcement officials, as well as social acceptance, further compounds the issue.

Appearance and disappearance

In the case of the legal prohibition of a product viewed by large segments of the society as harmless, such as alcohol under prohibition in the United States, the black market can prosper, allowing the black marketeers can reinvest profits in a widely diversified array of legal or illegal activities, well beyond the original item.

Underground markets can be reduced or eliminated by removing the relevant legal restrictions, thereby increasing the supply and quality of formerly banned goods, e.g. marijuana-trade debate. Removing legal restrictions will usually reduce the price of the goods in question, possibly resulting in more of them being bought and sold. This can be beneficial to the state, as the state:

• simultaneously decreases the illegal cashflow, thus making the performance of other, potentially more harmful, activities financially harder.
• can perform quality and safety controls on the traded goods, thus reducing the harm to the consumers.
• can tax the trade, thus providing a source of revenue.
• can free up prison space and save taxpayer money

Modern examples

Wars

Black markets flourish in most countries during wartime. Most states engaged in total war or other large-scale, extended wars must necessarily impose restrictions on domestic use of critical resources, which are needed for the war effort, such as food, gasoline, rubber, metal, etc., typically through rationing. In most cases, a black market develops to supply rationed goods at exorbitant prices. The rationing and price controls enforced in many countries during World War II encouraged widespread black market activity.

During the Vietnam war, soldiers would spend Military Payment Certificates on maid service and sexual entertainment^{[citation needed]}, thus supporting their partners and their families. If the local then wanted consumer goods, which were sparse in the civil stores due to governmental import controls, he would purchase them for the double price from one of the soldiers, who owned a monthly ration card and thus had access to the military stores.^{[citation needed]} The transactions ran through the on-base maids to the local populace. Despite the fact that these activities were illegal, only flagrant or large scale black marketers were prosecuted by the military.^{[citation needed]}

Prohibition in the United States

Main article: Prohibition in the United States

Of alcohol

The prohibition period in the 1920s in the United States is a classic example of the creation of a black market, its activity while the affected good has to be acquired on the black market, and its end. Many organized crime syndicates took advantage of the lucrative opportunities in the resulting black market in banned alcohol production and sales. Since much of the populace did not view drinking alcohol as a particularly harmful activity (that is, consumers and its traders should not be treated like conventional criminals), illegal speakeasies prospered, and organizations such as the Mafia grew tremendously more powerful through their black market activities distributing alcohol.

Of smoking

This effect similarly is seen today, when jurisdictions pass bans on smoking in bars and restaurants. In such jurisdictions, smokeasies (businesses, especially barrooms, which allows smoking despite the legal prohibition) frequently arise. This phenomenon is very prevalent in many jurisdictions with smoking bans, including California,^[7][8] Philadelphia,^[9][10] Utah,^[11] Seattle,^[12] Ohio,^[13] Washington, D.C..^[14] and Iowa

Clearstream

The Clearstream scandal is an example of such tax evasion. Based in Luxembourg, Clearstream practices financial clearing, which means it centralises operations of multiple banks, some based in tax havens.

See also

• Agorism
• Counter-economics
• Informal economy
• Grey market
• Business ethics
• Wide boy
• Household electricity approach
• Unreported employment

References

External links

• Shadoweconomy.eu Publications and research on the shadow economy and tax evasion
• Official March 2000 French Parliamentary Report on the obstacles on the control and repression of financial criminal activity and of money-laundering in Europe by French MPs Vincent Peillon and Arnaud Montebourg, third section on “Luxembourg’s political dependency toward the financial sector: the Clearstream affair” (pp.83-111 on PDF version)
• The Underground Economy from National Center for Policy Analysis (1998)
• Going Underground: America’s Shadow Economy by Jim McTague (2005)
• The Underground Economy: Global Evidence of Its Size and Impact (1997)
• The Effects of a Black Market Using Supply and Demand
• Information on Black Market products
• Cold War Black Market Secrets

« The five craziest mortgage deals of all time | All Posts | Mortgage repayments - how much will you save? »

November 04, 2008

Five experts predict how much further house prices will fall

Martin Ellis – chief economist, Halifax

Prediction: Another 8% fall

“We are predicting a 20 per cent fall over 2008 and 2009 – so as we calculate that prices have already fallen by 12.4 per cent, we would expect roughly another 8 per cent fall before prices start to bottom out at the end of 2009.

“There’s a lot of uncertainty surrounding the economy and unemployment figures in particular at the moment, so it’s very hard to say when prices will start to recover. Prices certainly won’t bounce back quickly.”

Jonathan Davis – housepricecrash.co.uk

Prediction:  Another 35% fall

“The market will not bottom out until spring 2011, by which point there will be a 40 to 50 per cent drop from when house prices were at their peak in August last year.

“If you remember the last house price crash in 1988, it took until 1994 for the market to recover, so a good four or five years. There is no reason whatsoever to suppose the market will recover any quicker this time.

“It is far too early to bag a bargain – people should not be buying for at least another two years. We are only one year into the crash, and it has a long way to go yet.”

Yolande Barnes – Savills

Prediction: Another 10% fall

“We are forecasting a 25 per cent drop from when house prices were at their peak last year, so that means we’ve got about another 10 per cent to go. Whilst we expect prices to bottom out during 2010, the prospect of recession means we do not expect prices to start recovering anytime soon. Houses will not regain their 2007 value until about 2014, or possibly 2013 in the south-east.”

Nicholas Leeming – propertyfinder.com

Prediction: Another 10% fall

“There will be a further drop of about 10 per cent throughout 2009, before the market starts to level out at the end of the year. It will take a while for the effects of the Government bail-out to filter through – the capital markets will not be freed up until maybe the third quarter of 2009, when we can expect to see more mortgage transactions and a gradual recovery of the market.”

Nick Bate, UK economist, Merrill Lynch

Prediction: Another 10% fall

“There will be a 25 per cent drop from the market peak last summer – we have already seen about a 15 per cent drop, so we have about another 10 per cent to go.

“However, no one can say with any confidence exactly where prices will be in a year’s time – but it will certainly be a long time before prices recover to the levels we saw last year. With unemployment rising and people becoming less credit worthy, banks may continue to be reluctant to lend for some time, and this will lead to a very muted recovery.”

Paulson: Troubled assets will not be purchased

‘Market … has for all practical purposes ground to a halt,’ he says

WASHINGTON - Treasury Secretary Henry Paulson said Wednesday the $700 billion government rescue program will not be used to purchase troubled assets as originally planned.

Paulson said the administration will continue to use $250 billion of the program to purchase stock in banks as a way to bolster their balance sheets and encourage them to resume more normal lending.

He announced a new goal for the program to support financial markets, which supply consumer credit in such areas as credit card debt, auto loans and student loans.

Paulson said that 40 percent of U.S. consumer credit is provided through selling securities that are backed by pools of auto loans and other such debt. He said these markets need support.

“This market, which is vital for lending and growth, has for all practical purposes ground to a halt,” Paulson said.

The administration decided that using billions of dollars to buy troubled assets of financial institutions at the current time was “not the most effective way” to use the $700 billion bailout package, he said.

The announcement marked a major shift for the administration which had talked only about purchasing troubled assets as it lobbied Congress to pass the massive bailout bill.

Paulson said the administration is exploring other options, including injecting more capital into banks on a matching basis, in which government funds would be supplied to banks that were able to raise capital on their own.

Critics of the bailout plan are complaining that the administration is not being tough enough on the banks who are receiving the assistance, that the original centerpiece of the program — government purchases of troubled assets — has been left to languish and that homeowners struggling with mortgage foreclosures are not getting the help they need to stay in their homes.

And in addition to all of those complaints, the administration is having to contend with a number of industries, led by auto companies, who contend that they deserve a share of the rescue funds.

President-elect Obama, when he met with President Bush at the White House on Monday, urged Bush to support aid for struggling automakers and Democrats in Congress have begun drafting legislation that would give General Motors, Ford and Chrysler access to $25 billion of the rescue funds.

The Bush administration has already committed $250 billion of the money for the purchase of bank stock, giving financial institutions an infusion of cash that the government hopes they will use to resume more normal lending operations and address the most severe credit crisis in decades. On Monday, the administration announced that it was allocating another $40 billion as an investment in troubled insurance giant American International Group.

Those decisions leave only $60 billion left to allocate of the first $350 billion in funds approved by Congress and that is before any money has been spent to buy troubled assets, which originally had been the administration’s chief reason for requesting the bailout program, which Congress approved on Oct. 3.

The government on Tuesday sought to address another of the complaints of critics, that not enough is being done to help Americans deal with record levels of mortgage defaults.

The Federal Housing Finance Agency, which seized control of Fannie Mae and Freddie Mac in September, announced a plan designed to speed up the process for renegotiating hundreds of thousands of delinquent loans held by the two mortgage giants.

Officials hope the new approach, which goes into effect Dec. 15., will become a model for loan servicing companies, which collect mortgage payments and distribute them to investors. These companies have been roundly criticized for being slow to respond to a surge in defaults.

The plan could have tremendous importance because Fannie Mae and Freddie Mac own or guarantee nearly 31 million U.S. mortgages, or nearly six of every 10 outstanding. Government officials, however, did not have an estimate of how many people would qualify for the new program.

To qualify, borrowers would have to be at least three months behind on their home loans, and would need to owe 90 percent or more than the home is currently worth. Investors who do not occupy their homes would be excluded, as would borrowers who have filed for bankruptcy.

Borrowers would get help in several ways: The interest rate would be reduced so that borrowers would not pay more than 38 percent of their income on housing expenses. Another option is for loans to be extended from 30 years to 40 years, and for some of the principal amount to be deferred interest-free.

While lenders have beefed up their efforts to aid borrowers over the past year, their earlier efforts have not kept up with the worst housing recession in decades. The new approach was also attacked by critics for not going far enough.

“Instead of a massive foreclosure-prevention program, we wait for a homeowner to be in a failing position before doing anything, which often is too late,” said John Taylor, president and CEO of the National Community Reinvestment Coalition.

Senate Banking Committee Chairman Christopher Dodd, who has scheduled hearings for Thursday on the overall rescue program, called the loan modification program a “constructive step forward” but he said it should not be a substitute for a program being pushed by Sheila Bair, head of the Federal Deposit Insurance Corp., which would use part of the $700 billion to provide government guarantees for mortgages that are modified to lower payments, thus providing an incentive for banks to rework the loans.

Bair also criticized the effort as falling short and urged adoption of her program for mortgage guarantees.

“As we lend and invest hundreds of billions of dollars to help institutions suffering leveraged losses from defaulting mortgages, we must also devote some of that money to fixing the front-end problem — too many unaffordable home loans,” she said in a statement.

More than 4 million American homeowners, or 9 percent of borrowers with a mortgage, were either behind on their payments or in foreclosure at the end of June, according to the most recent data from the Mortgage Bankers Association.

The new initiative announced Tuesday followed announcements from several major banks that they plan to do more.

Citigroup said late Monday it is halting foreclosures for borrowers who live in their own homes, have decent incomes and stand a good chance of making lowered mortgage payments.

Also in msnbc.com business Ads of the Weird: In the woods with HSBC Your Career: Getting a job from Obama Answer Desk: Big oil’s big tax breaks ConsumerMan: Stretch your holiday budget Video: Bracing for the financial week ahead

Bloomberg Sues Fed to Force Disclosure of Collateral (Update1)

By Mark Pittman

Nov. 7 (Bloomberg) — Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.

The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint. The suit, filed in New York, doesn’t seek money damages.

“The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry,” said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP, in an e-mail.

The Fed has lent $1.5 trillion to banks, including Citigroup Inc. and Goldman Sachs Group Inc., through programs such as its discount window, the Primary Dealer Credit Facility and the Term Securities Lending Facility. Collateral is an asset pledged to a lender in the event that a loan payment isn’t made.

The Fed made the loans under 11 programs in response to the biggest financial crisis since the Great Depression. The total doesn’t include an additional $700 billion approved by Congress in a bailout package.

Fed’s Position

Bloomberg News on May 21 asked the Fed to provide data on the collateral posted between April 4 and May 20. The central bank said on June 19 that it needed until July 3 to search out the documents and determine whether it would make them public. Bloomberg never received a formal response that would enable it to file an appeal. On Oct. 25, Bloomberg filed another request and has yet to receive a reply.

The Fed staff planned to recommend that Bloomberg’s request be denied under an exemption protecting “confidential commercial information,” according to Alison Thro, the Fed’s FOIA Service Center senior counsel. The Fed in Washington has about 30 pages pertaining to the request, Thro said today before the filing of the suit. The bulk of the documents Bloomberg sought are at the Federal Reserve Bank of New York, which she said isn’t subject to the freedom of information law.

“This type of information is considered highly sensitive, and it would remain so for some time in the future,” Thro said.

The Fed didn’t give Bloomberg a formal response because “it got caught in the vortex of the things going on here,” said Michael O’Rourke, another member of the Fed’s FOIA staff.

Thro declined to comment on the lawsuit.

The case is Bloomberg LP v. Federal Reserve, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net.

What Can Go Right               

To read the message of gloom in the press going into Election Day, you’d think that it’s a near certainty that within a couple of years we’ll all be living in (heavily mortgaged) tents, heating up cans of beans with our last remaining stocks of propane. You’ll find publications—like, say, this one—serving up a time capsule of news from the 1930s Great Depression. You’ll find writers—yes, like this one—telling you that however bad you think the mortgage and financial crises are, they’ll get worse.

But the imploding real estate and financial services markets aren’t the only drivers of the economy. John McCain was rightly pilloried when he said that “the fundamentals of the U.S. economy are strong.” It was the wrong message for the wrong day. The United States has genuine fundamental economic problems. But it has real strengths, too. In fact, as much as McCain was criticized for serving up the “fundamentals are strong” line, it’s probable that when Obama takes office in January, he’ll spend his first day sending out a very similar “we’re not that far down” signal. And, in fact, we’re not Iceland. The United States isn’t close to getting kicked back to the ’70s. So, a few things that can give us reason for optimism:

1. Tech Is Stronger Than Ever. The United States is still home to some of the world’s most successful companies, and a few of them have spent the last few years on a hell of a tear. You’ve heard of some of them: Apple, Google, Intel. The global frenzy over the iPhone showed that there’s an enormous world demand for Apple’s products, and Apple has barely started to fill it. Google, somehow miraculously quarter after quarter, continues to meet sky-high expectations. Intel has done a spectacular job of maintaining its near monopoly of PC microprocessors while carefully hedging its bets and separating its fortunes from Microsoft.