Slow steps to nationalizing the US financial sector
Summary: Consensus opinion has slowly moved from characterizing this as a “subprime mortgage problem” to a “mortgage problem.” That is progress, but we have far to go before they see the full picture: that US households and businesses have too much debt — and that current trends likely will lead to nationalization of our financial sector. Links are given to news reports and commentary about our slow match to this new America.
We have seen a few tentative mentions of nationalization as an option, but no discussion of what that might mean for America. Perhaps it will be, as the Democratic Party proposes for health care, an easy no-cost solution. But instead nationalizing two large sectors of the American economy will have large and unexpected effects on America. It will be the largest expansion of government power since the New Deal.
The exact form nationalization takes matters little.
- It can de jure or de facto. Governmental control has long since moved from legislation to agency dictats. Our representatives in Congress now function more as Tribunes than a legislature.
- It might be an explicit government take-over, or through existing business structures. The building might say First National Bank, but so tightly controlled so as to be functionally a government agency.
What will America look like – guessing — after a severe recession and nationalization of these two sectors?
Despite hysterical forecasts, it will not be an apocalypse. America’s people and infrastructure will still remain, and life continues. America will more closely resemble France and German.
- Economic growth will slow.
- Our government and economy will be more rigid.
- Economic and political power will concentrate.
- Social mobility will be more difficult, as challenging established power structures (profit, non-profit, political, economic) will be more difficult.
Our elites will likely see these things as progress. What we think of these changes will not matter, unless we take responsibility for our country. We have the tools to do so, if we have the will to use them.
Recent news reports and commentary about the slow nationalization of our financial system
“U.S. Mulls Next Steps in Crisis“, Wall Street Journal (18 March 2008) (subscription only) — Excerpt:
The U.S. will face the same issues that Asian nations faced in the crisis of 1997-98. Is it better to nationalize financial firms outright, or inject bonds that provide the funding to carry on, so long as the recipients agree to repay the bonds with future profits?
“Bank Bailout Is a Path to Nationalization“, James Pethokoukis, US News and World Report (21 March 2008)
“10 reasons your taxes are going up“, Paul B. Farrell, Marketwatch (24 March 2008) – Excerpt:
The Fed’s dealing with America like a third-world banana republic, effectively nationalizing our financial industry!
“Denial, Hope, and Panic“, John H. Makin, American Enterprise Institute, (27 March 2008). Excerpt:
Addressing the fundamental problem — the persistent and accelerating fall in house prices — will require legislative action that will, to some extent, nationalize the mortgage market. This approach is understandably abhorrent to many and carries with it substantial risks of involving the federal government in mortgage markets to a greater extent than is already the case.
If steps to contain the damage being caused by a free fall in house prices result in a return to the idea that house prices go only up and that they are underwritten by the federal government, we will see another housing and credit bubble even larger than the one that has already been threatening the global economic system.
We are probably at a point, however, where we need to choose between two approaches to putting a floor on house prices. Either have the Fed print so much money that a return to inflation eventually stabilizes house prices and then pushes them back up — the radical monetize approach — or, alternatively, employ the nationalize approach, whereby a federally funded agency steps in to buy mortgages at less than their current face value to help stabilize the credit markets. The Fed’s commitment to ensure price stability makes the nationalize approach the only realistic option, however unattractive it may be.
“Policymakers confront awkward home truths“, Financial Times (31 March 2008)
The uncomfortable question of how to nationalise part of the US housing market is drawing closer. The Fed’s balance sheet is huge and can be expanded to swap for unwanted mortgage securities. This may still not be enough to unwind financial market tensions and it looks increasingly likely the government will have to join the rescue, perhaps by creating a new agency that can accept defaulting mortgages and replace them with more accommodating terms for homeowners.
“Fed eyes Nordic-style nationalisation of US banks“, Telegraph (31 March 2008)
The US Federal Reserve is examining the Nordic bank nationalisations of the 1990s as a possible interim solution to the US financial crisis. …
These are steps toward a new era for America. Quiet and small steps, so as to not disturb the Candidates or the stately kabuki of the election process.
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For more information about this subject
A brief note on the US Dollar. Is this like August 1914? (8 November 2007) — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
The post-WWII geopolitical regime is dying. Chapter One (21 November 2007) — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
We have been warned. Death of the post-WWII geopolitical regime, Chapter II (28 November 2007) — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
Death of the post-WWII geopolitical regime, III – death by debt (8 January 2008) – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
Geopolitical implications of the current economic downturn (24 January 2008) – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
- A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
- What will America look like after this recession? (18 March 208) — More forecasts. The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
The most important story in this week’s newspapers (22 May 2008) — How solvent is the US government? They report the facts to us every year.
To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.