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.

Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about this subject

  1. 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.
  2. 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.
  3. 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).
  4. 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.
  5. 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.
  6. A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
  7. 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.
  8. 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.

9 thoughts on “Slow steps to nationalizing the US financial sector

  1. How exactly is this “new era for America” really so different from our present plutocracy? The Founding Fathers were essentially the Trilateral Commission of their day. Gouverneur Morris and George Washington were among the wealthiest landowners in America. Morris feared giving the plebes and proles the power to govern themselves and was every bit the aristocrat. Washington created the Society of the Cincinnati and opposed Shays’ Rebellion. Our national image as some kind of agrarian Jeffersonian paradise is merely a Platonist “noble lie,” covering for a uniquely American twist on aristocracy.

    Meritocracy in the U.S. may be another myth. E. Digby Baltzell’s work recognizes the importance of a ruling elite in providing social leadership, so long as it refreshes itself by allowing talented members of the lower classes to enter its ranks. Horatio Alger-type myths are useful motivators.

    So what’s my point, as one of my Notre Dame theology professors used to ask me? My point is that the U.S. is merely trading one organizing mythos for another while maintaining the same social structure it has always had. This is not necessarily bad. Nationalization of banks will not prevent the next Steve Jobs from becoming a billionaire as long as venture capital is available.
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    Fabius Maximus replies: I think the comparison with Europe answers your question. First, there are success stories like that of Steve Jobs in Europe, but they are much less common (despite the EU’s greater population). Second, lower growth rates will affect the middle class far more than the rich — which is why the EU’s middle class is much smaller. Numbers — magnitudes — matter.

  2. This is more complex than Fabius makes it. Politicians are hurrying to save homeowners who might lose their homes. Nothing wrong with that. The Fed has already moved to bail out financial institutions (Bear Stearns, the latest) under the indisputable and historical argument that failures of major institutions can’t be allowed to happen.

    Bush is also proposing some super-agency or officer to oversee all government-related financial institutions. Sounds ominous, but note this is not the same as regulating financial institutions. That is not going to happen, or if there is some attempt at regulating who can trade what, and under what conditions, private capital will quickly find a way around such puny restraints.

    The problem we face, and have always faced, is not government intrusion on some imagined realm of untrammeled free economic activity, but free economic activity itself, to which the government has always merely been a willing handmaiden.
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    Fabius Maximus replies: “Sounds ominous, but note this is not the same as regulating financial institutions.” You are kidding, right? US financial institutions are among the most tightly regulated in the nation. By all accounts they will soon be more tightly regulated. Only the degree is still unknown.

    The current round of proposals was drafted for a Republican Administration. I suspect 2008 will see a more serious economic crisis, a solid congressional majority for the Democratic Party, and a Democratic President. Certainly the first two. I suspect you will be astonished at the result.

    “but free economic activity itself, to which the government has always merely been a willing handmaiden.” This is a result of US public policy, not an act of God. It is true to a far less extent in many other nations, such as the EU and Japan. I suspect it will soon be less true of the US.

    These are forecasts, hence only guesses. We might not long have long to wait to see what happens.

  3. How do you jive this with the sorts of things that John Robb, for example, as well as others, to the effect that the nation-state is becoming obsolete? Would it not make more sense to project that the financial system would instead become somehow transnationalized?

    Several wrinkles:
    * Will the federal government prop up the financial sector or will the financial sector suck the federal government down?
    * Banks, by their nature, are lenders; the federal government, however, is a borrower. Contradiction?
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    Fabius Maximus: You are referring to Martin van Creveld’s “Decline of the State” theory. See here for links to more information on this. The current crisis and MvC’s theory operate on different time scales. One is now, the other takes place over generations.

    As to your questions.

    #1: possible, but not likely. The socialization of private losses is a powerful trend, but not yet so large as to bankrupt the US government. It is adding to our public debt as the boomers retire, which is not good timing.

    #2: No. The government is usually a borrower, which means for most nations that the private sector is a net saver (funds from foreigners are the third term in the equation).

  4. (FM) “US financial institutions are among the most tightly regulated in the nation. ”

    (Plato’s Cave) There’s a semantic problem here. I don’t mean just Fannie Mae, but all financial institutions, and not just Bear Sterns and its ilk, but major European banks too. The global financial system is an empire unto itself, and it’s recent speculative mania is beyond the ability of even its own managers to control. Governments are going to play a mop up role in this situation. Your own very lucid arguments about the end of the WW II economic regime imply as much.
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    Fabius Maximus replies: I disagree on all points. First, the EU banks and brokers are more tightly regulated than our own. Second, the speculation was very much within the ability of its managers to control.

    This is a classic agents vs. owners problem. The managers, agents, were well rewarded for short-term speculative profits — and ramped up speculation accordingly. The long-term effects, loss of capital and reputation, are borne only by the owners. The managers continue to get paid, even during downturns. If the rare cases where they get fired, they retire wealthy.

  5. People might want to take a look at the National Cooperative Bank. National Cooperative Bank (now NCB) is a cooperative financial institution chartered by the United States Congress in 1978, primarily to serve the financial needs of cooperatives. It was privatized in 1981, but maintains its cooperative character with over 2,600 member-owners.

    Also, once upon a time, the U.S. Post Office ran a postal savings bank, which many people used in lieu of private savings banks. ( It still may do so. ) Of course, you can purchase money orders through the post office.

  6. Ah, but what is being proposed for the US financial system is not the tight regulation model that was introduced after the great depression and, to a certain and smaller (and much less than most people think) extent exists in some parts of Europe (not the UK though), which hasn’t stopped a sea of red ink over there as well.

    Rather it is an extended ‘self-regulation’ model, ran in partnership with bureaucrats, with less scope for oversight by Congress than exists now. Think more a MITI model, more a semi-facist (in the true definition of the word) set-up. The idea is that the current financial system model can continue unabated and that the ‘good times’ will come back again someday and the ‘masters of the universe’ can get back to selling to each other and taking home huge paycheques. All backed by the unlimited purse of the Govt. True Leninism, albeit for only a small section of the population, the rest can rummage through the rubbish tips.

    Unregulated financial systems will ALWAYS collapse in an orgy of debt and speculation, the only way to avoid it it to strictly limit them to actually lending for real investments. This applies to nationalised banks as well. In Australia nearly all our State owned banks went under in the 80’s due to bad and speculative lending. It’s not the ownership that matters, it is the controls.

    For the mechanism of how this happpens look up Minsky’s Financial Instability Hypotheses. A good place to start is: Debunking Economics.

    Debunking a few economic myths:

    * Social mobility has always been lower in the US than the UK or most EU countries as many studies have shown.
    * The middle class has done much better there than in the US (where it is shrinking and been going backwards financially for quite a few years now).
    * The working classes have done much better than in the US, where standards of living have been declining for decades now.
    * Growth has been pretty good in the EU and productivity (which is one of the engines of growth) has been rising faster for some time now.
    * Non-military R&D spending (another engine of growth) is much higher in the EU and is being expanded further.
    * And, when you correct for all the distortions in the official figures (see the Shadowstats website) unemployment rates has been similar or even better than the US (which is probably double or more that the official figures).

    They actually make things there and have a trade surplus.

    And, in conclusion, the post war period, 1945-1970, with tight controls on finance and lending, heavy taxes, etc was the period of the greatest sustained growth the western economies have every seen, along with rising standards of living in all sections of the population. Since that model was switched to our new model the world economy has gone though incredible instability, with regular major financial collapses (think Russia, Asia, South America, Japan, etc). Growth has been lower in the developed economies, wages have been under pressure and declined in many places, inequality has boomed and (true) unemployment rates have never recovered, anywhere, to the pre 1970 levels. Not exactly a successful economic model, but there are so many vested interests that make a lot of money out of it that there will be major attempts to shore it up and keep it going.
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    Fabius Maximus replies: The current proposals are irrelevant. The Bush Administration’s reform proposals seem unlikely to be passed before the election. I believe that in 2009 we will have a serious recession, a large Democratic Party majority in Congress, and probably President Obama. They will draft their own reforms.
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    One thing you omit from your comparison of the EU with the US. Incomes are substantially lower in the EU than in the US.
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    I doubt some of these “debunking” items, but am open to seeing some quantitative analysis. Just to pick one with which I am familar, the shadowstats’ analysis do not allow comparisons of US unemployment numbers with those of the EU, which have their own distortions and are calculated differently.
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    The lesson I take from their work, and the many others in the same field, is that high level economic data are abstractions. Counting income or GDP for a large and rapidly changing economy is not like counting apples.
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    The US government’s data collection people do the best they can with the absurdly small funds we provide. If you want better numbers, I suggest asking your Congressmen to increase their budgets. In this, as in all things, we get what we pay for.

  7. “What will America look — guessing — after a severe recession and nationalization of these two sectors?”

    Far be it for me to correct or question you Sir, but is the statement supposed to read “What will America look ‘like’-guessing-after a sever recession and nationalization of these two sectors?”

    If the question is correctly discerned then one possible model might be America will look like Argentina after a recession and nationalization of the two sectors. No one in Argentina keeps money there if at all possible.

    If elitist “progress” continues, Zimbabwe would be the model.
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    Fabius Maximus: Thanks for catching the missing word! And, as you note, there is no guaranteed stopping point for America’s evolution. We could slide, eventually looking like Argentina, or even Zimbabwe. My point was that these dire scenarios are not likely over any short to medium term horizon.
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    History suggests that such deterioration would likely take several generations. Argentina was stable and prosperous until aprox WWII (Juan Peron’s Presidency in 1946). Even Zimbabwe took two decades to disintergrate following regime change in 1980.

  8. Thanks Plato, I will a bit later post references and links to all the points I made, hopefully next week, I’ve just got a few deadlines to meet. But go to:

    ShadowStats: http://www.shadowstats.com/
    Minsky (and other interesting things, [including reasons why I and others respect Marx as an analyst of his times, though as a theortician he was an idiot]: http://www.debunking-economics.com/
    For fun, and who also makes some interesting and very relevant points (bit like the economic equivalent of the War Nerd) the Great (bow down and revere [BDAR];) ) “The Mogambo Guru” (gasp) at (one source): http://www.atimes.com/. For excellent historiacal analysis read (also at Asia Times) Henry C K Liu .

    There are many others. The economic equivalents of Fabius, Bill Lind, etc. They, from many different directions and view points have stated, for many years, that the current economic model is busted and doomed to failure. Unfortuntely they were not listened to.

    Imagine a world where Bill Lind (et al, including Fabius) were listened to. Where (e.g. say) Henry C K Liu was listened to. A much, much better world, without the crises (= pain for Joe Soap) we are facing now.

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