It's about taxing them, stupid.
Free trade advocate Jagdish Bhagwati believes that windfall profits taxes on the financial sector and the creation of an independent global risk management board are necessary reforms to shore up capitalism and globalization.
In a wide-ranging interview in Toronto recently, Dr. Bhagwati fleshed out his prescriptions for the world economy and also provided his take on what he calls the "Wall Street Treasury Complex" as the cause of the latest catastrophe. He is the kickoff keynote speaker at the annual conference in Waterloo of The Centre for International Governance Innovation, founded by Jim Balsillie, co-CEO of Research in Motion. Dr. Bhagwati, a jolly genius, has been special advisor to the UN on globalization issues and an external adviser to the World Trade Organization.
He believes the issue about excessive profits and bonuses in the financial sector is a valid concern but feels it's best dealt with by taxation, to help governments pay for the damage caused to the world's economy and workers. "The incentive system is a good thing to worry about. The whole sector earns so much. Goldman, for instance, is a brand name which people are willing to pay huge fees for and which are tax deductible," he said. "Curbing bonuses will help but it won't make a big difference. Progressive taxation should come into play. There should be a windfall profits tax on abnormal profits." "Greed, avarice, self interest, self love are everywhere in descending orders of moral turpitude. There's a little bit in everyone. Here it went a bit too far." (In 2007, the worldwide bonuses paid by Goldman Sachs were equivalent to the GDP of Vietnam with 84 million people. Its New York bonuses alone were the size of Manitoba's GDP.)
Dr. Bhagwati coined the term "Wall Street Treasury Complex" which, like military-industrial complex, refers the collection of powerful and wealthy lobbyists acting in their own self-interest, from the financial community, who also, from time to time, populate the U.S. government by serving in important positions such as Secretaries of the Treasury. It's an incestuous elite who created the crisis. "We now know there were five guys from these investment banks, Goldman Sachs and Hank Paulson [former Treasury Secretary and former CEO of Goldman] involved, who went to Christopher Cox, Chairman of the Securities and Exchange Commission, and said `we don't need any reserves requirements [on derivatives]'. This led to over-leveraging and disaster," he said. "Cox was probably intimidated by the wealth of the lobby. Treasury was equally sympathetic and then Alan Greenspan came in -- it was a policy tsunami too big to resist," he said. "Greenspan came in on ideological grounds. He read Ayn Rand." "Senator [Charles] Schumer [of New York] also supported these guys. He's an arrogant kind of guy. He said `if we don't do this the investment business will go to London'. So they entered into a race to the bottom."
Unbacked derivatives and over-leveraging sank the system, and most of the players, which is why Dr. Bhagwati believes that an astute international body must review all the new financial products that hit markets: The World Risk Assessment Board or something similar. "The world needs a board with credibility and independence. When Bernanke retires, he would be a good person to be on that board. So would an academic like Ken Rogoff [at Harvard Business School]. The job would be to review all the financial instruments that are turning up all the time," he said.
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