Thursday, June 23, 2011

Financial Players Threaten Democracy

Amartya Sen (h/t Mark Thoma):
Two distinct issues need to be separated. The first concerns the place of democratic priorities, including what Walter Bagehot and John Stuart Mill saw as the need for "governance by discussion". Suppose we accept that the powerful financial bosses have a realistic understanding of what needs to be done. This would strengthen the case for paying attention to their voices in a democratic dialogue. But that is not the same thing as allowing the international financial institutions and rating agencies the unilateral power to command democratically elected governments.
Second, it is quite hard to see that the sacrifices that the financial commanders have been demanding from precarious countries would deliver the ultimate viability of these countries and guarantee the continuation of the euro within an unreformed pattern of financial amalgamation and an unchanged membership of the euro club. The diagnosis of economic problems by rating agencies is not the voice of verity that they pretend. It is worth remembering that the record of rating agencies in certifying financial and business institutions preceding the 2008 economic crisis was so abysmal that the US Congress seriously debated whether they should be prosecuted.
Since much of Europe is now engaged in achieving quick reduction of public deficits through drastic reduction of public expenditure, it is crucial to scrutinise realistically what the likely impact of the chosen policies may be, both on people and the generating of public revenue through economic growth. The high morals of "sacrifice" do, of course, have an intoxicating effect. This is the philosophy of the "right" corset: "If madam is at all comfortable in it, then madam certainly needs a smaller size." However, if the demands of financial appropriateness are linked too mechanically to immediate cuts, the result could be the killing of the goose that lays the golden egg of economic growth.
This is an interesting perspective, and I think the run-on effects of austerity are going to be the opposite of what the pain caucus promises.  The case of Ireland, moreso than Greece, is one in which the financial players are getting private debt bailed out by the government and taxpayers.  At least in Greece it is the actual government which ran up the debts.  The Irish case is an even worse deal for the Irish people, and it is a disgrace that Tim Geithner used U.S. power to protect creditors from haircuts.  While the Eurozone is a special case, I think the creditors' insistence on being made whole is a joke.  Buying bonds comes with risks, taking haircuts is part of that risk-taking.  The power the IMF has, typically on developing countries, must be questioned.  It is a threat to democracy to give developed nations the power to order around developing countries, just so the developed countries banks don't lose money.

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