Jagdish Bhagwati is characteristically blunt in a full-bore attack on capitalism's critics in a recent World Affairs piece. He accuses anti-capitalists of having short memories, selectively using examples, and missing "both the point of the issue and the sweep of history".
HIs argument, in short, is that the expansion of capitalism around the globe over the past half-century has been a success: poverty rates have massively declined in India and China (and elsewhere), political liberties have expanded in many places, and that improving wages for the poor and the expansion of the welfare state is impossible without the long-term growth that capitalism offers:
Thus, we need not apologize for liberal policy in terms of its effects on overall prosperity, on poverty in poor countries, or on the wages of the poor in rich countries. To compare an interruption of this remarkable progress to the collapse of the Berlin Wall is like drawing a parallel between a tsunami and a summer storm that brings rain and a rich harvest to parched plains.
Then he sets his sights on regulatory capture, his preferred explanation for the financial crisis:
Of course, the notion that freer financial markets and increased reliance on self-regulation would help the greater good played a role in what happened. The postwar period had shown, as noted above, the powerful effect of liberal economic policies on trade and direct foreign investment. But to carry over the legitimate approbation of freer trade in particular to the altogether more volatile financial sector, which represents the soft underbelly of capitalism, was surely unwarranted. ...
Furthermore, we should not underestimate the role that good old-fashioned lobbying played in the crisis. One of the seminal moments occurred when the heads of the big five investment banks, among them future Treasury Secretary Hank Paulson (then CEO of Goldman Sachs), “persuaded” the SEC to impose no reserve requirements on their lending. The result was reckless over-leveraging that accentuated the crisis when the housing bubble burst and securitized mortgages became toxic assets. But this had to do more with lobbying for profit than with ideology.
That may all be true, but fundamentally this was a market failure: the market mispriced risk in a systematic way, then spread that risk throughout the financial system in such a way that if anything went wrong everyone would be exposed. Of course, something did go wrong. This was compounded by the fact that regulators either ignored these financial instruments entirely or also misjudged the risk, but that was not the root cause.
To fix this, Bhagwati suggests an independent panel of experts who are "familiar with Wall Street but are not part of it" to evaluate new financial instruments, and provide assessments to regulators. I'm all for this, since I think this financial crisis -- like nearly all financial crises -- was caused primarily by a lack of transparency. To the extent that an advisory board can improve transparency, I'm in favor. But I'm not sure how this can be done without including some people from Wall Street. It's not enough to be "familiar" with Wall Street; current regulators are "familiar" with their subjects. This sort of job requires extensive knowledge of financial instruments, corporate culture, and a wide range of other things.
But I broadly agree with Bhagwati: this crisis is not a transformative moment for the international economic system, and any alterations to it will be marginal tweaks rather than paradigm shifts. As I've put it in the past, the new economic order is going to look a lot like the old economic order.