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Gwynne Dyer: Comrade George W. Bush and the banks
By Gwynne Dyer
After Comrade George W. Bush nationalized the two giants of the US mortgage market, Freddie Mac and Fannie Mae, earlier this month, Anatole Kaletsky wrote in The Times of London that "the most capitalist administration ever, in the world's most capitalist country, had decided to wipe out the private owners of its biggest and most important financial companies and replace them with state-appointed bureaucrat".
Wikipedia defines "nationalization" as "the act of taking an industry or assets into the public ownership of a national government. It is a central theme of certain brands of 'state socialist' policy that the means of production, distribution and exchange, should be owned by the state....Nationalization may occur with or without compensation to the former owners. If it takes place without compensation it is a case of expropriation."
Well, this was expropriation. When the U.S. investment bank Bear Stearns went belly-up in March, the shareholders used their political influence to get the price of the buyout raised from the originally agreed $2 per share to $10 per share. By April, however, it was known that the U.S. Federal Reserve Bank was talking to the Scandinavian authorities, who had survived a rather similar crisis in 1991-93 by nationalizing their banks without compensation for shareholders.
And that is essentially what happened with Freddie Mac and Fannie Mae, whose combined liabilities of $5.5 trillion were equivalent to about two-thirds of the existing U.S. national debt. Those liabilities of those two institutions, which hold around half of all US mortgages, have now been added to the federal government's debt, bringing it to about $14.8 trillion––approximately three times what it was when Comrade Bush first took office. But the shareholders got nothing.
In its desperate attempt to keep Freddie Mac and Fannie Mae afloat over the previous six months, the U.S. Treasury had encouraged investors to pump an extra $20 billion into them. As the situation worsened and the likelihood of a federal nationalization without compensation loomed, Yu Yongding, former advisor to China's central bank, warned: "If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately...it is the end of the current international financial system."
That is what actually came to pass this month, although the consequences will take years to play out fully. Then came last week's effective nationalization of American International Group (AIG), which made the U.S. government the world's largest insurance company.
"The move represents the largest lurch toward socialism that this country has ever seen, and signals the end of the vibrancy of America's once vaunted free market economy," said Peter Schiff, president of Euro Pacific Capital.
The current proposal by the U.S. Treasury to spend $600 billion of taxpayers' money buying up the worst of the subprime mortgages only emphasises how far we have travelled from the triumphalism of the free-marketeers in just a few months. Just as China has developed a "socialist economy with Chinese characteristics," so the U.S. is getting a socialist economy with American characteristics. (Indeed, the two countries even share some of the same characteristics, like the lack of a comprehensive national health service.)
The most extraordinary part of this upheaval is that there has been virtually no public outcry in the United States itself, the bastion of free-market capitalism, about these nationalizations. The word "nationalization" is never used, and the irony of such a socialist measure being implemented by this most doctrinaire of Republican administrations is scarcely commented on.
Republican presidential candidate John McCain let a bit of the old free-market ideology show through when he told reporters that "the Federal Reserve should get back to its core business of responsibly managing our money supply and inflation", but he is not really fighting nationalizations and government subsidies. Indeed, he agrees with Democratic candidate Barack Obama that the subsidised loans to General Motors and Ford now pending approval in the U.S. Congress should be raised from the proposed $25 billion to $50 billion.
The panicky flight from free-market orthodoxy in the United States is bound to fuel a revival of government intervention and welfare-state policies in the rest of the world. In the United States itself, however, they are likely to hang the wrong culprit in the end.
It was the ideologically driven deregulation of banks and markets by the Bush administration, encouraging wild speculation and the proliferation of murky financial instruments, that made this crisis possible. When one set of Bush-appointed regulators brought garden shears to a press conference to show their dedication to cutting the "red tape" that allegedly kept banks from realising the full potential of unregulated financial markets, a rival Bush appointee, James Gilleran, head of the Office of Thrift Supervision, brought a chainsaw to his photo-op.
So will the Republicans be punished for their willful fiscal irresponsibility? Not if Barack Obama wins the presidency, which seems the likely outcome of the November election. American voters won't remember who actually caused the financial crisis that impoverished them. They will end up blaming the party in power, the one that actually has to try to lessen the misery and clear up the mess. The Democrats, in other words.