Oh! Calcutta!

The French magazine Le Point reported that Dominique Strauss-Kahn’s last words, before being hauled off the Air France AF023 flight to Paris by two New York Port Authority detectives, were addressed to one of the air hostesses “loudly and openly” and in front of witnesses: “Quel beau cul!”.

Admittedly this utterance sounds better in French than in English. Camille Clovis Trouille (1889-1975) - a minor part-time painter and decorator, Surrealist and anti-clerical – used a pun on that kind of French remark to name his painting of a naked woman’s buttocks: “Oh! Calcutta! Calcutta!”. And Kenneth Tynan used both that title and that painting in his 1969 Broadway show, featuring extensive scenes of total nudity, that at the time became the longest running and is said to be still today the sixth-longest running in Broadway’s history.

Nevertheless, the remark is not endearing or charming, but gross and aggressive. DSK is sub judice and the courts will decide whether he is guilty and of what. But there can be no doubt, regardless of the courts’ eventual ruling – especially if it is the case that his line of defence is the consensual nature of sexual acts with the Sofitel chambermaid - that he is “a man with a problem that may make him ill-equipped to lead an institution where women work under his command”. These are the words used by a colleague of his, with whom he had an affair, in a letter she addressed to the IMF Executive Board in 2008. A public external enquiry on that case cleared DSK because there had been “no harassment” but ruled that he had made “a serious error of judgment”. The Fund lacked - and still lacks - “clear and protected arrangements for reporting possible misconduct” and “clear disciplinary arrangements” to deal with it if it occurred.

Unfortunately, DSK’s latest little error of judgment has already had the most devastating consequences, not only for him and his family but for the IMF, which in the three and a half years of his tenure he had steered to a larger scale and to a greater role in global governance during the greatest world economic crisis since 1929; for the sovereign debt crisis in the Eurozone and the future of the euro; for the French presidential elections in which he had been a frontrunner who could have led the Socialists to their first victory since Mitterand’s 1988 re-election.

DSK is a Keynesian, like his Chief Economist Olivier Blanchard (from MIT). He persuaded IMF shareholders to raise $500bn additional capital thus trebling its resources. At the emergency summit of G-20 leaders on 15 November 2008 he proposed, and obtained, a large scale global fiscal stimulus of the order of 2% of global GDP, and encouraged a parallel monetary expansion. He opposed calls for an early exit strategy (for instance by the German Chancellor Angela Merkel and the ECB President Jean-Claude Trichet), which he viewed as premature, and above all a collective exit strategy considered by the G-8 of 8-10 July 2009 at L’Aquila, which would have been disastrous.

He junked the old “Washington Consensus” that had inspired IMF operations in the 1980s in Latin America and in the 1990s in the post-socialist transition economies. He was well aware of debt sustainability issues, but was also very conscious of the impact of fiscal austerity on poverty and distribution. Under his leadership there was concern for gradualism, and for client countries’ ownership of stabilization programmes. He aimed higher than he could reach, just to make progress; an instance would be his argument for a new role for the IMF as a global Lender of Last Resort, which was inappropriate, for which he never really developed a case and let drop.

His revolution was unfinished. He was acknowledged to be a very good diplomat, who listened to both North and South; was trusted by the Greeks, was the only non-German with an influence on Angela Merkel.

He is virtually irreplaceable. The problem with Christine Lagarde is not the Tapie affair, of which she is likely to be cleared on 10 June, but – as Martin Wolf puts it in the FT of 25 May – “her limited knowledge of economics”. DSK’s letter of resignation as IMF Managing Director ended, incongruously, with the words “Au revoir”. Sadly, he clearly meant “Adieu”.

Humouring Gordon Brown

On 6-7 November 2009, at St. Andrews in Scotland, the G-20 finance ministers and central bankers, “representing around 90 percent of the world's wealth, 80 percent of world trade, and two-thirds of the world's population”, were told by British Premier Gordon Brown that “it was time to consider a global financial levy, such as a tax on transactions or an insurance fee, to build up a "resolution fund" as a buffer against future bailouts. Banks needed "a better economic and social contract" that reflected their responsibilities to society. Any measures must be implemented by all major financial centers, Brown noted” (IMF Survey Online, 23 October).

The IMF Survey Online goes on to say: “The IMF has been working on suggestions for such a levy and plans to have some initial ideas by its Spring Meetings in April, to be held in Washington.” Was Gordon Brown so eloquent and convincing, then, winning over the attention and consideration of IMF officials and World leaders, wearing his Saviour of the World hat?

Absolutely not. IMF Managing Director Dominique Strauss-Kahn told reporters the IMF was considering several options for the G-20 to look at. "We can't go on with a system where some individuals take risks that finally all taxpayers, like you and me, have to pay for.” But he added in the same breath: “The financial industry has made such big innovations that it is probably impossible to find a transaction tax that will not be avoidable by potential taxpayers. So it will be based not on transactions but on something else." “He made it clear that there was no consideration of a currency transactions tax.” Brown was engaging in a familiar behaviour pattern - pretending an activity was at his instigation, and displaying his trademark ineptness in mis-representing others' activity.

Of course. In 1972 James Tobin first suggested a tax on financial transactions, with the dual purpose of reducing their size and volatility, and raising funds to finance investment and growth in less developed countries. He originally envisaged a tax rate of 1% on all foreign exchange transactions, but later reduced it to 0.1% to 0.4% (still a tidy sum if it worked, considering that the volume of financial transaction is of the order of ten times world GDP). At that time it might have been possible to introduce it effectively in economies that were still relatively closed to financial flows. Then the UK still had even a dual exchange rate, one for current transactions, and one for investment carrying an investment premium; an individual or company based in the UK could only invest abroad by borrowing from the holders of investment sterling and paying them back in the same sterling.

Given the very high degree of financial globalization today, such a tax could only be global: it is sufficient for one country not to introduce the tax, for that country to attract the bulk if not all of the global financial turnover thus offering the entire world the opportunity to avoid it. The trouble is that there are no global governance institutions that could institute it or enforce it globally. And even if the tax was genuinely introduced as a global tax, it could be avoided by transactions taking place in cyberspace: the argument that a tax levied at a small rate would be preferred to a tax-free but less secure transaction no longer applies today: financial transactions in cyberspace are much more secure than they used to be, and any large transaction can be fragmented into a large number of small sequential transactions, each taking place after all the earlier fragments have been successfully executed, in such a way as to minimize any associated risk. Internet is another country. Moreover, the objective of reducing the size and volatility of financial transactions might require, in times of turbulence, much higher tax rates than a fraction of a percentage, higher than any conceivable insecurity premium of unofficial market channels, again leading to tax avoidance. It is no accident that James Tobin ended up practically disowning his tax.

Moreover, as Charles Goodhart argues: “most serious advocates of a Tobin tax admit that it would have the effect of raising both the volatility and the costs of financial markets in the long run.” [Goodhart has a better idea and recommends “a tiny tax imposed on every individual addressee in an internet message, payable by the sender, and collected by the server from the sender. ... First, it would kill spam. Second, it would make senders think who really needs to receive the message. Third, the internet, being so much cheaper than any other current message service, would remain the preferred channel of communication, so the tax base would be immobile. Fourth, and most important, it would be a significant source of revenue.” Eurointelligence, 26-11-2009].

Dominique Strauss-Kahn said there were two possibilities for a financial sector tax, including a "possible windfall tax for 2009, a one shot thing." The other would be a more long-term tax, at a rate which could be inversely proportional to the degree of bank regulation in each country. “We don’t want an extra-simplistic solution that will not be effective. I am very pragmatic: I would prefer a second best solution we can all implement."

So the Gordon Brown inspired tax will be a transaction tax which “will not be based on transactions but on something else”. Which is par for the course for a democratic leader who has not been elected as such democratically, and a Labour politician who has not based his policies on Labour values and electoral promises.

There are two very good reasons for Dominique Strauss-Kahn not to have rejected Brown’s "extra-simplistic solution that will not be effective" outright. First, in English it is considered “rude” to say No, a restatement of one’s different view is preferred. Second, contradicting a madman only encourages him.