Bush and the banks

2008-09-30 00:00

After Comrade George W. Bush nationalised the two giants of the United States 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, [has] decided to wipe out the private owners of its biggest and most important financial companies and replace them with state-appointed bureaucrats.”

Wikipedia defines “nationalisation” 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 … nationalisation 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 buy-out 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 1991-1993 by nationalising 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 U.S. mortgages, have now been added to the federal government’s debt, bringing it to about $14,8 trillion — about 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 nationalisation without compensation loomed, Yu Yong-ding, 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 nationalisation 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 the U.S.’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 sub-prime 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 panicky flight from free-market orthodoxy in the U.S. is bound to fuel a revival of government intervention and welfare-state policies in the rest of the world. In the U.S. 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, en-couraging 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 wilful 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.

 

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