Is the Fannie/Freddie Bailout "Socialism"?
Conservatives are using the S-word to describe the government takeover of the mortgage giants. Try corporate welfare.
Within conservative circles, most politicians and commentators recognize corporate welfare when they see it. They just downplay its true nature by giving it more palatable names, like "providing stability to financial markets" or "implementing a liquidity backstop"—terms Treasury Secretary Henry Paulson used on September 7 when he announced the massive government bailout of mortgage giants Fannie Mae and Freddie Mac. But there are always a few true believers—who deserve credit for their consistency, if nothing else—ready to use the dreaded S-word. Free-market zealots like those at the libertarian Cato Institute are now arguing that the problem with Fannie and Freddie is that they were "socialist from the start," while others are applying the term to the federal takeover. Republican Sen. Jim Bunning of Kentucky said that when he first heard about the bailout plan, "I thought I woke up in France. But no, it turns out socialism is alive and well in America."
If only this were true. We'd probably be a whole lot better off if the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), which together guarantee more than 40 percent of the mortgages in the United States, had been "socialist from the start"—that is, government entities owned and run in the public interest. Instead, they are so-called government-sponsored enterprises, or GSEs—publicly chartered, but stockholder owned. They are run as private corporations, with an army of lobbyists to advance their interests, but with "implicit" federal backing. As Paul Krugman puts it, "This implicit guarantee means that profits are privatized but losses are socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose."
Even the government "takeover" involves putting these companies into conservatorship, which means assuming responsibility for them—on a temporary basis, at least hypothetically. It falls short of making them part of the government whose taxpayers are saving them from bankruptcy at a cost of at least $25 billion, according to an estimate by the Congressional Budget Office, and possibly much more. And in the end, it will help all the banks and other lending and financial-services institutions that in turn depend upon the solvency Fannie and Freddie, as much as it will aid struggling homeowners by stabilizing the housing market.
Herbert Hoover tried a similar public-private setup with the Federal Home Loan Bank Act of 1932, which aimed to support banks in making loans to homeowners. But its impact was limited, and when Franklin Roosevelt came into office, he asked Congress for legislation that focused more directly on the needs of working-class and middle-class homeowners, rather than the lending institutions, through something called the Home Owners' Loan Corporation.
Here's how Arthur Schlesinger describes it in his book The Coming of the New Deal: "The Home Owners' Loan Corporation, which went into action in the summer of 1933, bought mortgages from holders who could carry them no longer, financed the immediate payment for taxes and repairs, and rewrote the mortgages to provide easy repayment over a long term and at relatively low interest rates…[O]wners of about one-fifth of the nation's non-farm dwellings sought HOLC loans. More than a half were granted. In the end…HOLC actually held about one-sixth the total urban home mortgage debt." There were tricky problems in appraisals, loan criteria, servicing, and in due course its own foreclosures, but the HOLC actually managed to end its four-year run with its accounts $11 million in the black. It's widely credited with saving millions of low- and middle-income Americans from foreclosure, while also expanding home ownership in the process.
Andrew Jakabovics, associate director for the Economic Mobility Program at the Center for American Progress, was among the first to float the idea of the HOLC as a model for dealing with the current crisis. Back in the September 2007, he wrote; in The New Republic, "as the threat of eroding house prices looms larger, a neighborhood's downward spiral can be hastened by panicked homeowners willing to take any offer before their house becomes nearly worthless. By providing direct assistance to homeowners through a government entity modeled on the HOLC but with the ability to negotiate the complexities of the present securitization process, we can eliminate the panic and stabilize neighborhoods in addition to helping individual homeowners."
Earlier this week, on the Center for American Progress' website, Jakabovics outlined a plan that called for a more active approach by conservators, including government refinancing and resecuritization of loans: "American taxpayers will do better when the...conservators refinance or restructure the outstanding troubled mortgages in the two GSEs' portfolios to provide lower interest rates or loan balances, rather than having the GSEs sit on a pile of delinquent, non-performing loans leading to foreclosures next door." Last March, Sen. Chris Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), chairmen of the Senate and House banking committees, respectively, were also talking about a plan they compared to the HOLC—though their plan called for the government to back mortgages from private lenders, rather than issue mortgages itself. In effect, even the most progressive solutions call for some version of public-private partnerships—better conceived and better regulated, but preserving the role and profits of the private sector. No one has yet proposed creating government-owned and -run lending institutions directly responsible to the populace, even though this might well turn out to be fairer, cheaper, and more efficient. (In a way, it runs parallel to the Democrats' support of a "universal health care" plan that preserves the role and profits of private insurance companies, rather than the fairer and cheaper single-payer model.) Why is this? Presumably because by keeping private financial institutions in the mix, Democrats can not only continue collecting their campaign contributions, but avoid anything that smacks of the politically deadly S-word.
The right, of course, shows no such restraint in advancing its ideological position—and the statements of the two presidential candidates on the Fannie/Freddie crisis illuminate the pitfalls of the Democrats' timid approach. Henry Paulson has said the government's long-term plans for the two GSEs will be determined by the next administration. For McCain—who comes off as somewhere to the right of the Bush administration when speaking on this issue—the solution is simple: privatization. He seems to echo the position of the Cato Institute, which declares, "This is not a market failure as so many are now claiming. It is a government failure, pure and simple." As Bloomberg News described it, "McCain is clear on what he wants to do. He backs a solution put forward by former Federal Reserve Chairman and fellow Republican Alan Greenspan that would break the companies up and sell the pieces off." McCain's top economic adviser, Douglas Holtz-Eakin, told the network that McCain would "get them completely off the taxpayers' back."
On the other side, the Obama campaign has called McCain's push for privatization "hasty" and "ideological," but as of Tuesday had offered no clear alternative. Obama's economic adviser, Jason Furman, told Bloomberg that "the outcome would depend on 'disentangling' the important roles that Fannie and Freddie perform that can't be replicated by the private sector from those functions that can be handled by the market." Not exactly something you can turn into a campaign slogan.
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The US army are the largest socialist movement in the world and it works.
I'm sorry but I didn't read the entire article as I am a bit upset at the appalling reporting from Dave Gilson.
Not your problem Mr Ridgeway.
I think we could use a little Socialism to counteract the out of control Private Enterprise system that has got us into this mess..
The Saving and Loan debacle was caused by the same attitude of letting Private Enterprise run wild with no Regulation in place to hold them in check..
McCain is only calling for privatization because he's campaigning. If he were in Bush's shoes, he'd do the same stupid thing. he's a liar.
F&F were socialist when they were first established. They were government entities. They have since been privatized but remained in the safety net that is corporate welfare, so they could hardly be considered part of the free market.
it's impossible to claim this as a market failure, when the market is not even permitted to operate.
PS even many socialist organizations are calling the F&F takeover socialist. and they think it's a good first step in nationalising everything. baby steps...then a long drop off a cliff.
Tom,
"The US army are the largest socialist movement in the world and it works."
it works? you mean it kills, destroys and will soon overreach it's bounds to the point of failure? socialist? yes. works? not in any productive or humanitarian way, as is typical of all socialist institutions.
I'm a socialist and Mr. Ridgeway is right. The executive arm of the ruling class is the government. These quasi public entities had private shareholders and private bondholders, and were not controlled or regulated 'in the public interest.' Now this bailout will see that the bondholders still get their money, courtesy of the taxpayers. The taxpayers are mostly the U.S. working class. Hence, the working class is being fleeced to pay bondholders, and we are being held upside down and our pockets picked by the ... government, which is an arm of the large bourgeois ruling class.
Really simple. Not socialism. Capitalism for the large corporations. The "Cato" institute, when not running defense for capitalism, represents the little businessmen who can't tell the difference between the working class and the big capitalist class.
Tom, how does the US Army exactly "work" as a socialist movement when a majority of it has been outsourced to private corporations? Wouldn't the thousands of mercenaries currently being hired by the government make that claim false? Their reason for privatizing a good portion of the military (and most of the CIA as scary as that is) is because the old socialist organization wasn’t working. Though, we have seen how well outsourcing our military has done… :\
The guilty have made their millions and left the building. Now it's up to dollar holders to pay.
http://the-great-retirement-experiment.com/Products/Hidden%20Bailout%200...
Once we recognize that what is happening here is not a massive credit default, but a monetization by the US government of those losses on a potentially multi-trillion dollar scale, then our investment strategy changes dramatically. We are no longer investing for the crisis – but for the bailout. The combination of this bailout and the Federal Reserve's unprecedented actions in forcing interest rates so far below the rate of inflation creates a “target-rich environment” for the execution of arbitrage strategies by both corporate and individual investors.
The federal government is not going to let the financial system fail. It will create however much money needs to be created to bail out the institutions and attempt to bailout the economy, as it has already shown in real world test after test, from the so-called “tax rebate”, to Bear Stearns, to Fannie Mae and Freddie Mac. Which means that the government is prepared to destroy the dollar, and is not just prepared to, but is currently actively destroying the value of the dollar rather than let those firms fail.
While I agree that this is government bailout with socialized losses, it seems to me the market was working. The market was punishing these organziations and banks (possibly even destroying them).
This market reaction was proper because fannie and freddie (and banks) took on excessive risks. The government, empowered to stop this did nothing, so the market put a stop to them.
Foreclosures, properly, are causing prices to return to earth and hopefully become affordable again for the working man.
Socialism is the result of the greedy taking advantage of the lazy.
Live within your means.
The realization that Corporate Welfare (with its built-in "heads they win, tails we lose" structure) far exceeds any level of "socialism" in its destructive properties ... is probably the biggest blind spot among otherwise intelligent "libertarian" (i.e., anti-authoritarian, yet individualist) thinkers. It took me too many years to understand why, which has resulted in a lot of wheel-spinning in a losing cause, instead of building my own fortresses against the Statist menace. Excellent perspective by Ridgeway here, but that's no surprise.
That really doesnt make any sense.
Solving the Banking Crisis
The destruction of Freddie Mac and Fannie Mae, and the possible collapse of hundreds of banks, would wreck tremendous damage to our economy and the world economy. Instead of bailing out the banks at taxpayers' expense, however, I modestly propose another solution.
Set up a new independent corporation to buy the bad loans from the lenders at 70 cents on the dollar. The funding would come from new bondholders (even some of the investment houses that got us into this mess in the first place), not taxpayers. Banks would be happy to be rid of their bad loans and bondholders would be willing to take a chance on buying a bond where the chance of failure of the underlying loans is already 30% discounted. Bank balance sheets would instantly improve, helping them adjust their reserve ratios and making it possible for them to lend again - this time with regulations that make sense. This would also help millions of homeowners who need loan adjustments.
Of course, the people running this new corporation - call it "Rescue Mae" - would have to have an impeccable reputation (or else bondholders would balk), be independent, and act prudently in choosing what to acquire. (If this purchase is still not enough to clear the really toxic loans off the books, wait a couple of months and then set up a second bond issue to buy the remaining bad loans at 50 cents on the dollar). The opportunity to sell these loans off at these prices should not be open more than a couple of months, in order to encourage resolution. In addition, Rescue Mae would have a finite lifespan until the loans are worked off - this is NOT to be an ongoing solution to compensate for lender malfeasance.
After the current crisis settles, new regulation must be enacted to ensure this never happens again. We had such regulation for decades after the Great Depression, until it was systematically dismantled during the 1980s-2000s.
1. Banks should keep loans on their own books instead of selling them off; they need to “have skin in the game.”
2. All lenders or buyers of loans should have sufficient capital reserves so the taxpayer will not be on the hook to bail them out. The larger economy should not suffer for the bad actions of a few lenders.
3. We need to get over this idea that every adult with a pulse should be a homeowner. Renting is often a sensible solution, especially when a person may need to move quickly to find another job (See: Detroit: Auto Plant Closings) or for other reasons. I did not buy my own home until I was 44, then I paid it off in full in four years. We need to remind people that their home is not an ATM and that they should pay it off by the time they retire.
4. Subprime should cease to exist as a category; it does not work for either borrower or lender and methods to make it palatable for lenders - such as jacking up interest rates - actually cause the very problem - defaults - that banks need to avoid. Eliminating subprime would not reduce the number of loans significantly - congressional estimates say that 2/3 of the subprime loans could have been financed with conventional prime loans; the lenders simply used subprime to collect extra fees. This is unconscionable and a case of the tail wagging the dog.
5. Finally, 20% down should be the rule for all homebuyers, and background and credit checks must be required as well. Anything less is negligent and fraud.
These rules worked for decades and will work again.
Solving the Banking Crisis:
Make daily calulated interest a crime.
my grandma put 500g's into freddie mac 1 yr ago on advice of prominent bank!! i think she may have lost it all!!
Hell Yes! Corporate welfare has drained the public coffers and we have already slipped over the edge of the black whole. The world is on the edge of a depression and everyone is acting like the titantic is not sinking. We get the goverment we deserve and deserve the government we get!
The problem with the bailout is not that it's socialism, the problem is it's bad socialism. Instead of benefits going to the responsible members of the public, the speculative investor class reaps a windfall by being saved from the consequences of their foolish greed. On the other hand, those who use the "s" word to condemn any type of government regulation or intervention are extremist nutjobs. They fail to see that there is a continuum from absolute socialism to absolute capitalism, and that every government and every government activity falls somewhere along that continuum. We don't call the public school system socialist because we've had it forever and it gave our society the capacity to function as a democracy. Yet it is a classic case of successful socialism.
It would be impossible to allow the operation of a completely free market in any aspect of our existence, because anything the government does has an effect on the market. The government decides to buy a dozen stealth fighters and the decision of who gets the contract determines which town has prosperity and which has unemployment. We invade Iraq and some industries prosper as armaments suppliers while the drain on other government programs caused by the war expense causes valuable domestic programs to stagnate or fail for lack of funding. Now we have the dilemma of how to move electricity across state lines, something only the federal government has the ability to address, and the libertarians cling to their extremist ideology that condemns government regulation as an infringement on personal liberty. Efforts to encourage alternative energy sources by distilling corn for ethanol raise food prices and cause world shortages. Supplying food to impoverished nations undercuts the ability of local farmers in those countries to make a living. And on and on. Until the idealogues realize that any government program or regulation is a balancing act that should be aimed at maximizing benefit while minimizing cost and collateral damage, the debate will continue to be confounded with stupidity. Using the "S" word makes about as much sense as pro-choice advocates waving coathangers at pro-life advocates who hold up photos of dead fetuses. Anyone who expects a candidate to put his economic plan on a bumper sticker is a fool. And politicians who are afraid to articulate sound policies for fear of being called socialist or upsetting the insurance companies or the Wall Street brokers aren't worthy of the offices they seek.
But I could be wrong.
So what's new? Before WW2 the British privately owned and run railroad system
paid good dividends on its operations.
It was never publicised that the passenger section, always a loss area,
was subsidised pound for pound by the government. i.e. the taxpayer. When the Socialist Government after the war nationalised the rail system it stopped the subsidy and ran it at a loss. This gave the excuse required that Lead to the emasculation of the industry, and decimation of railroad services by the government of the Thatcher era.
P.S.
"Free" enterprise. No such animal.
Somewhere along the line there is a control. Adolf Hitler, with a different scenario in mind once said.
"A country that does not control its own finances does not control its own country."
Who does actually control your country's finances, or for that matter mine? The way the money market bounces up and down for no OBVIOUS reason leaves me with the impression it isn't my Government controlling ours.
Larry, who's a Canajun and probably a bloody socialist,sez: The government should have acted like Scrooge and Marley...make good the fraudulent losses out of their own reserves, but only on condition that they get 51%, ie. control, of the company thereafter. Then they could run their own program like the HOLC or something similar, and do some good for the little people for a change. Rewarding the billion dollar losers is a mug's game.
Larry sez: I just read lawyerfan's comment. What he said.
Yes, Fannie and Freddy were socialist institutions at their inception - and successful ones. "Privatizing" turned them into something that combined the worst features of capitalism and socialism; allowing capitalists to skim the profits, while government covered the losses. Like most right-wing privatization schemes, it was a plan to let in the looters. Better they should be made government agencies once again.
it is not socialism it is capitalism.
capitalism must self destruct.
we are seeing it self destruct now.
the human species has not evolved enought for capitalism
greed will cause it to self destruct
reagan put capitalism on steroids
hastened the process of self destruction
so easy to see but must step outside capitalist paradigm
we borrow from communists, socialists and kings to keep our capitalism afloat then brag how great it is
and even want more of it
that is the power of paradigms
the end result bye bye middle class and hello fascism
"We get the goverment we deserve and deserve the government we get!"
how few americans understand this simple sentence.
the evidence is in the politicans we elect.
My Mom worked as a secretary at Fannie Mae for year, saving most of her income in Fannie Mae stock, while living on Dad's income. The analysis, "If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose," is incorrect. Her many years wages are now almost worthless.
Should The US government bail out American corporations?
Does corporate America share its profits with the tax payers? The answer is absolutely not.
Do they share the profits with their employees? The executives are paid millions.
The US Government should bail out all corporations large and small is that right? The answer is no. If it is a viable business, they can raise the money from investors, if not, let them close shop.
If the government decides to bail them out if should be at a cost (like shares in the company) where the government will make money and have a say in running the company. Even better have a public referendum where the voters decide.
Carmakers want money from the government; the financial institutions want money - where does it stop?
It is about time corporate America should learn they have to stand on their own feet. Where is corporate America financial responsibility?
They claim the government is abusing its financial responsibility; it seems Corporate America is no better. They also go to their workers to take a pay cut, is that fair? It seems the little guys are the ones that always pay the price for corporate financial abuse and miss-management.
Other corporations in the world are not asking to be bailed out - they go out of business.
Jay Draiman
PS
The corporate barracudas have no conscience they will step on anyone, stab anyone in the back and fudge the numbers to climb up the corporate ladder and receive the hefty bonuses.
As family values have declined in the last half a century so has corporate integrity and honesty, it seems that corporate America will do almost anything for the buck ($) no holes barred.
What a shame that corporate America has sunk so low.
The government is no different, honesty and integrity is a foreign language, they only serve the special interest groups. (We all know why).
What happened to the American people who placed their trust in the government? (The public officials they voted for).
We are faced constantly with another corporate or governmental scandal of wrongdoing. When is the American public going to wake up and demand an honest government and honest corporate America? Americans wake up before it is too late.
Jay Draiman
Long Live the International Socialist Revolution !!
Say what you will about Michael Moore but there is one thing he got right. He pointed out that GW Bush went belly up with every business he ran before being elected Governor of Texas. MM predicted the same result with him in charge of our country. That being said I do not believe Bush is directly responsible for this mess but I do believe we would have been better positioned to deal with this credit debacle had we not been mired in Iraq while floating record deficits.
Then again, I'm no expert...and I'm a bit distracted counting my silver coins while drinking vodka tonics.
A little socialism is like a little ebola!
Not too bad at the start, but the result is not pleasant.
This bailout is classic fascism in the very pure Benito Mussolini tradition. It is the perfect merger of government and big business. The coalescing of these two entities into one was precisely what Mussolini was about. It should certainly appeal to Joe Lieberman, since he never met a fascist he wouldn't shmooze -- Benito's pal, Herr Hitler was a bit of a bummer for Joe, but he'd a loved ol' Benito.
I think a few vodka and tonics would probably give us all a better perspective on this whole mess. I don't applaud a move towards socialism at all. Where the hell is Ross Perot when you need him?? He could take this country and run it like a business.
And a few more things.... There is a local bank here that now has an advertisement where it's President said back when banks were approving loans for anyone with a pulse, he says he was getting pressed to start being more lenient on the loans. He didn't do so and presently is glad he held to his regular loan standards. It's all about greed. They opened the f'ing flood gates and loan officers were approving everyone and setting people up to fail with Interest only loans and ARM's that were doomed from the start. Our country is learning that corporate greed and a "Godless" society is failing miserably.
Open up your Bibles and read about many a failed empire that crashed down when they forgot about God and forgot about families.
This is not a Savings and Loan mess or an insurance mess. It is a society that has come to believe that the most important thing out there is whether or not Britney Spears was wearing panties or shaving her head yesterday.
Parents spend little time with kids. CEO's turn a blind eye to anything affecting there stock portfolios, and families have disentegrated.
Call it what you will. Greed (along with the war) has led our country to a time difficult to recover from. American have found that we are not
an untouchable society. September 11th
had us shaken as we watched events unfold in our own backyard that we used to just see on CNN.
National Defense is hardly a socialistic principle.
Socialism is a really odd name this.. The rich abusing their power to force average people to pay for their loses, while they continue to rake in all the profits. That is capitalism as I far as I can see. I just hope enough people get angry that those elites finally get what they deserve, speeding their way to hell.
this is not socialism at
this is not socialism at all. I am not sure what you are trying to say here. This is so way off base.
