Jagdish Bhagwati, Columbia University professor, author and special advisor to the World Trade Organization, the United Nations and other global organizations examined the causes of the meltdown and proposes reforms to prevent catastrophic bubbles from being created and then bursting.
Q: What allowed the derivatives to sink the system?
A: They suspended capital requirements so the financial sector could be opened up. This was the result of successful lobbying. Goldman Sachs and Henry Paulson were involved. They went to the SEC and said, "We don't need any reserves requirements." This led to overleverage and when the going gets rough, disaster.
Q: Why did the SEC agree?
A: The power of their lobby. They represented trillions of dollars. Then [former U.S. Federal Reserve chairman Alan] Greenspan joined in on that on ideological grounds ... because he read Ayn Rand. He's a libertarian. He played a supportive role and was ideologically driven. But the main thing was that there were five guys lobbying who wanted to make more money. The SEC chairman was probably intimidated by the wealth of the lobby. Treasury was equally sympathetic and then Greenspan came in -- it was a tsunami too big to resist. Also (New York) Senator Chuck Schumer also supported these guys. He's a arrogant guy. He said "if we don't do this the business will go to London." So they entered into a race to the bottom.
Q: What will prevent this in future?
A: An international board with credibility and independence. It could be called the World Risk Assessment Board.
Q: Aren't markets always cyclical, and what made this so bad?
A: There is what I call the Wall Street Treasury Complex. (U. S. financial lobby like the military-industrial complex.) We have, in both developed and developing countries, people who came to appreciate the advantage of trade and how it lifts a lot of people out of poverty by creating jobs. They carried over this trade success in two fields -- trade and international investment. This attitude entered the financial sector and that carry-over was reinforced by the Complex. They thought it was the cat's whiskers. The U.S. is a country of innovation with Silicon Valley and venture capitalism. They thought this was a sure-fire formula for success. They did not realize that if you carry over financial liberalization, it would lead to a huge downside.
Q: Are you optimistic?
A: People have their hands on the right levers. I'm optimistic because of cultural reasons. If the crisis happened in France, I'd be worried. They are pompous and ideological. The U.S. attitude is fiscal reform, monetary reform, policy reform and anything-that-works reform. If one thing doesn't work, they will try out another. It's chaotic looking, but this is how you see your way out effectively.
Q: How do we impose morality on markets?
A: The fact is huge payoffs are the problem. People like [Ponzi-schemer Bernard] Madoff are more attracted to the financial sector when the payoff is better. The Madoffs are attracted to the sector rather than the sector producing Madoffs.
Q: So what about curbing bonuses?
A: The whole sector earns too much. The Goldman brand name generates huge fees, which people are willing to pay for. There is also greed, avarice, self-interest, self-love, in descending orders of moral turpitude. There is a little bit in everyone. Here it went a bit too far. 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. Goldman's fees are high. People pay them because it is tax-deductible expense. There should be some kind of excess profits tax on the financial sector.
Q: What about the future of labour?
A: This meltdown is hard on the poor. The poor are being displaced, mechanized, assembly-lined. Five people in a glass cage with consoles are running factories now. But 30% of workers are unskilled labour. The fragility of jobs is a huge problem. We have to think of institutional ways in which to support jobs. There used to be loyalty and longevity, so professional development and training workers was a good idea. Not any more. It's too costly. The sense of volatility in jobs will be with us for years. People have to invest in their human capital instead of eating potato chips and drinking beer and watching football for hours each week. They should learn skills. Muscle power will not get you very far today. Unions must take a constructive attitude.
Q: What about rating agencies who mislabelled bad credit risks?
A: Rating agencies have to be totally independent, and there's enough evidence they were de facto paid agents.
Q: How do we counteract the power of the Wall Street Treasury Complex?
A: We must be able to look at countervailing policies. This is where academics and media come in.
Q: Is capitalism dead or dying in the new role governments must take on both economically and environmentally?
A: Capitalism is making greater use of markets. In economics, there is such a thing as a missing market (if there is no competition or innovation). So people dump things into a river until cap-and-trade requirements. Then a market is created.
Q: How can protectionism be prevented from sinking the world economy?
A: I'm a fan of retaliation; pushing back. The unions have been so fearful of international trade because they think trade with poor countries has been driving down their wages. If you buy that, then you have to support protectionism. Unions should be told that's not a justified fear. But there are other issues about the wage and job problems that require the imposition of the right kinds of policies. [Former U.S. president Bill] Clinton bashed Japan for his first year, then found religion. He fought, did not persuade, unions in favour of free trade. [U. S. President Barack] Obama is tentative on trade, and his silence is eloquent. But arguments and evidence versus opinion and ideology wins, and the case must be made. We assume too much that people won't listen and think through issues. Without explication, uninformed self-interest is a problem. Policy alternatives are important. You cannot say let the economy rip and to heck with unemployment, let existing markets rule. That's irresponsible, too, like protectionism, which is also not the answer.
Follow Diane Francis on Twitter: www.twitter.com/@dianefrancis1