Fascinating interview with F.A. Hayek, author of The Road to Serfdom. Towards the end of the clip, Hayek recalls warning Keynes that two of his pupils were misusing his theories with dangerous implications. Keynes replied that if inflation turns out to be worse than expected, he would “turn public opinion around”.
Hayek: ”Six weeks later he was dead, and couldn’t do it. I believe he would have been fighting the inflationary policy”.
Reason: Of your bestselling The Road to Serfdom, John Maynard Keynes wrote: “In my opinion it is a grand book…. Morally and philosophically I find myself in agreement with virtually the whole of it: and not only in agreement with it, but in deeply moved agreement.” Why would Keynes say this about a volume that was deeply critical of the Keynesian viewpoint?
Hayek: Because he believed that he was fundamentally still a classical English liberal and wasn’t quite aware of how far he had moved away from it. His basic ideas were still those of individual freedom. He did not think systematically enough to see the conflicts. He was, in a sense, corrupted by political necessity. His famous phrase about, “in the long run we’re all dead,” is a verv good illustration of being constrained by what is now politicallv possible. He stopped thinking about what, in the long run, is desirable. For that reason, I think it will turn out that he will not be a maker of long-run opinion, and his ideas were of a fashion which, fortunately, is now passing away.
Reason: Did Keynes turn around in his later years, as has frequently been rumored?
Hayek: Nothing as drastic as that. He was fluctuating all the time. He was in a sort of middle line and he was always concerned with expediency for the moment. In the last conversation I had with him (about three weeks before his death in 1945), I asked him if he wasn’t getting alarmed about what some of his pupils were doing with his ideas. And he said,” Oh, they’re just fools. These ideas were frightfully important in the 1930s, but if these ideas ever become dangerous, you can trust me—I’m going to turn public opinion around like this.” And he would have done it! I’m sure that in the post-war period Keynes would have become one of the great fighters against inflation.
Greece is slowly sliding towards the inevitable. Namely a big, meaty haircut for bondholders. Of course, the banks and financiers will not take losses lying down. They will demand asset sales, and higher taxes. Greece will suffer along for a while.
Fitch today said Greece has entered “selective default” due to the private sector involvement in the latest kick-the-can schemery. These short-term fixes will be attempted, even though they seem destined to fail.
Greece must get out from under its enormous debt load to have any chance at real growth in the next decade. When these half measures and schemes do fail, how big of a hit will bondholders need to take?
We have long thought that the most likely outcome for Greek bondholders would be that they would take a small haircut first followed by a larger one at a later date. To give Greece a fighting chance they probably need a write down close to 65 percent.
An eventual agreement on debt haircuts will only be one part of a wider agreement and reform efforts, of course. But it will be crucial in order to get the people and Unions to agree. Banks and other entities who own the bonds will simply have to take losses. It will be ugly, with insurance companies and all sorts of firms caught up in the financial chaos. But it’s going to happen, and the sooner it does, the sooner Southern Europe can return to real growth.
“The last duty of a central banker is to tell the public the truth.”
Alan Blinder
“When a man has so far corrupted and prostituted the chastity of his mind as to subscribe his professional belief to things he does not believe, he has prepared himself for the commission of every other crime.”
Thomas Paine
As the US Federal Reserve System approaches its 100th Anniversary in a few years, and as central banks and their political allies around the world promote the bailout and enrichment of the biggest banks and wealthiest individuals, to be paid for by the impoverishment and sacrifice of the people, it might be well to remember the lessons of history with regard to a fiat currency controlled by private corporations under the guise of an ‘independent monetary authority.’
The paper system being founded on public confidence and having of itself no intrinsic value, it is liable to great and sudden fluctuations, thereby rendering property insecure and the wages of labor unsteady and uncertain.
The corporations which create the paper money can not be relied upon to keep the circulating medium uniform in amount. In times of prosperity, when confidence is high, they are tempted by the prospect of gain or by the influence of those who hope to profit by it to extend their issues of paper beyond the bounds of discretion and the reasonable demands of business; and when these issues have been pushed on from day to day, until public confidence is at length shaken, then a reaction takes place, and they immediately withdraw the credits they have given, suddenly curtail their issues, and produce an unexpected and ruinous contraction of the circulating medium, which is felt by the whole community.
The banks by this means save themselves, and the mischievous consequences of their imprudence or cupidity are visited upon the public. Nor does the evil stop here. These ebbs and flows in the currency and these indiscreet extensions of credit naturally engender a spirit of speculation injurious to the habits and character of the people. We have already seen its effects in the wild spirit of speculation in the public lands and various kinds of stock which within the last year or two seized upon such a multitude of our citizens and threatened to pervade all classes of society and to withdraw their attention from the sober pursuits of honest industry.
It is not by encouraging this spirit that we shall best preserve public virtue and promote the true interests of our country; but if your currency continues as exclusively paper as it now is, it will foster this eager desire to amass wealth without labor; it will multiply the number of dependents on bank accommodations and bank favors; the temptation to obtain money at any sacrifice will become stronger and stronger, and inevitably lead to corruption, which will find its way into your public councils and destroy at no distant day the purity of your Government.
