–‘Of Course We Need More Tax Revenue’

WASHINGTON (MNI) – Former Treasury Secretary Hank Paulson, who was
the chief crisis manager grappling with the financial system implosion
in 2007 and 2008, Wednesday told CNBC that while everyone is blaming the
banks, no one is tackling structural problems that were the most basic
cause.

Paulson also said that with U.S. tax revenues 3 percentage points
under the historical norm as a portion of GDP, “Of course we need more
tax revenues,” and the way to get them is with an entirely new tax
system that lowers tax rates.

He also said the current unemployment rate, with its welcome
improvement, does not jibe with the U.S. growth rate which is too weak
to have created as many jobs as are being recorded. Economists, he said,
tell him they’re worried something doesn’t make sense.

The Volcker Rule, which he says he always opposed, may be too
narrow, providing a false sense of security when many other banking
practices need monitoring.

“Wall Street made a lot of mistakes,” Paulson said. “But you know
what happens and it happens with every financial crisis from the
beginning of time? Financial crises stem from flawed government
policies. Always.”

He continued on what he said was the “root cause” of “a huge credit
crisis,” “Why do Americans borrow too much, save too little? Why did we
overstimulate housing? You know, there are flawed government policies.”

The same, he said, is true in Europe. “What’s going on in Europe?
You’re going to blame the banks?”

The “structural issues” are not being addressed by Congress, he
said. “The banks always make mistakes, so people pile on the banks and
they work to correct those mistakes. That wouldn’t be all bad,” he
added, “unless it has people taking their eye off the ball.”

So far “we’ve done a lot to strengthen the banking system, but the
government policies that got us here, no one’s dealt with those big
issues and those are the issues we really need to deal with,” Paulson
said.

On taxes, which he said is the issue that frustrates him the most,
“There’s no doubt we need more tax revenues. Of course we need more tax
revenues.” Now U.S. tax revenues “are 15% of GDP now. They’ve averaged
more than 18% for 40 years.”

But, he continued, “the issue shouldn’t be what do we do with this
rate or that rate. The question should be what form of taxes will give
us the revenues we need and let us be competitive and create jobs and
give us economic growth.”

He said he would “eliminate the deductions and all the distortions
and the special spending programs that are part of the tax code and
lower the rates and have something that will let us be competitive in
today’s world.”

On the Volcker Rule, for which the comment period just ended prior
to the writing of the regulation, Paulson — whose career was built at
Goldman Sachs — said, “I advocated very strong tough regulation on the
big banks but I didn’t advocate the Volcker Rule as the way to go.” The
reason? “When I looked at the failures and the problems we’re dealing
with it didn’t come from proprietary trading.”

“From my experience banks get in trouble even more from customer
accommodating trades, big bridge loans or stepping in to do a big oil
hedging transaction or whatever.” Focusing just on proprietary trading
and thinking “we solved the problem” is misleading.

“I’m not saying the Volcker Rule is going to be a problem,” he went
on. “It could be helpful. But it’s going to be very important that the
rules are written so the banks can maintain inventories. Because if they
can’t have inventories how do they provide the liquidity and how do they
do their market making and risk management function in a way so that
there’s not a big cost?”

On the jobs numbers, “I’m not an economist, I just look at it and
I’m encouraged by the recent economic news,” Paulson said. “But I think
it’s going to be a long slog and I think it’s going to be years before
we get our unemployment to an acceptable rate.”

Something, however, he said, is wrong with the jobs numbers.
“Here’s the anomaly that many of economists I’ve talked to are
struggling with,” he said. “If you take a look at the recent job
creation, which has been quite gratifying, and you look at that, you
can’t square it with the growth rate.”

Economists, he said, think it would take a 5% growth rate to create
as many jobs as there are since 2010. “Of course we haven’t had that
kind of growth. And so to me, that’s again rather troubling.”

“I’m not being an alarmist,” he continued. “I just think until we
deal with the huge structural issues we’ve got and work across the aisle
and compromise we’re not going to get the economy on the kind of
sustainable growth track we need.”

Extending still another bouquet to the current Treasury Secretary,
who worked with him while N.Y. Federal Reserve Bank president, “I have
to take this time to say that Tim is a terrific Treasury secretary and
all of us should be very grateful he’s in that job today.”

Since Geithner has said he won’t be part of any second-term Obama
administration, Paulson told CNBC the next Treasury secretary has to be
someone “who can build a strong relationship with the president” with
the “skill set and mindset to work across the aisle” and forge
bipartisan legislation. Deficits, entitlement reform, tax reform and
more needs “someone who knows that no matter how smart you are, no
matter how great your ideas are, they’re worthless unless you can sell
other people and get them to act.”

** Market News International Washington Bureau: 202-371-2121 **

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