Rolling Back the Progressive Era
Frederick Hayek’s Road to Serfdom portrayed a dystopia of public officials seeking to regulate the economy. In attacking government so one-sidedly, his ideological extremism sought to replace the checks and balances of mixed economies with a private sector “free” of regulation and consumer protection. His vision was of a post-modern economy “free” of the classical reforms to bring market prices into line with cost value. Instead of purifying industrial capitalism from the special rent extraction privileges bequeathed from the feudal epoch, Hayek’s ideology opened the way for unchecked financial power to make a travesty of “free markets.”
The European Union’s financial planners claim that Greece and other debtor countries have a problem that is easy to cure by imposing austerity. Pension savings, Social Security and medical insurance are to be downsized so as to “free” more debt service to be paid to creditors. Insisting that Greece only has a “liquidity problem,” European Central Bank (ECB) extremists deem an economy “solvent” as long as it has assets to privatize. ECB executive board member Lorenzo Bini Smaghi explained the plan in a Financial Times interview:
FT: Otmar Issing, your former colleague, says Greece is insolvent and it “will not be physically possible” for it to repay its debts. Is he right?
LBS: He is wrong because Greece is solvent if it applies the programme. They have assets that they can sell and reduce their debt and they have the instruments to change their tax and expenditure systems to reduce the debt. This is the assessment of the IMF, it is the assessment of the European Commission.
Poor developing countries have no assets, their income is low, and so they become insolvent easily. If you look at the balance sheet of Greece, it is not insolvent.
The key problem is political will on the part of the government and parliament. Privatisation proceeds of €50bn, which is being talked about – some mention more – would reduce the peak debt to GDP ratio from 160 per cent to about 140 per cent or 135 per cent and this could be reduced further.
A week later Mr. Bini Smaghi insisted that the public sector “had marketable assets worth 300 billion euros and was not bankrupt. ‘Greece should be considered solvent and should be asked to service its debts,’ … signaling that the bank remained firmly opposed to any plan to allow Greece to stretch out its debt payments or oblige investors to accept less than full repayment, a so-called haircut.” Speaking from Berlin, he said that Greece “was not insolvent.” It could pay off its bonds owed to German bankers ($22.7 billion), French bankers ($15 billion) and the ECB (reported to be on the hook for $190 billion) by selling off public land and ports, water and sewer rights, ownership of the telephone system and other basic infrastructure. In addition to getting paid in full and receiving high interest rates reflecting “market” expectations of non-payment, the banks would enjoy a new credit market financing privatization buy-outs.
Warning that failure to pay would create windfall gains for speculators who had bet that Greece would default, Mr. Bini Smaghi refused to acknowledge the corollary: to pay the full amount would create windfalls for those who bet that Greece would be forced to pay. He also claimed that: “Restructuring of Greek debt would … discourage Greece from modernizing its economy.” But the less debt service an economy pays, the more revenue it has to invest productively. And to “solve” the problem by throwing public assets on the market would create windfalls for distress buyers. As the Wall Street Journal put matters bluntly: “Greece is for sale – cheap – and Germany is buying. German companies are hunting for bargains in Greece as the debt-stricken government moves to sell state-owned assets to stabilize the country’s finances.”