Comrade Paulson, nationalised banks & socialism for the rich.

You have to admire the spin.  The US Treasury Secretary, Comrade Hank Paulson, pictured here, announced  today, Sunday 7th September, 2008  that the US government is natonalising two huge US banks, Fannie Mae and Freddie Mac.  Which means in effect that Comrade Paulson is  socialising the losses of the shareholders and investors in these banks –  $5.4 trillion of guaranteed mortgage-backed securities (MBS) (mortgage backed securities) and debt outstanding. These liabilities are equal to all the publicly held debt of the United States. This in the words of Prof. Roubini is ‘socialism for the rich, the well connected and Wall St.” (see below).

Only Comrade Paulson didn’t say that he was socialising losses or nationalising banks. He said they were placing them ‘in conservatorship’.

I like it.   Please can we place the NHS safely in ‘conservatorship’ – conserve it for the nation, ensuring it is not privatised.  And please, please can we place the railways in ‘conservatorship’……No, we’re not a bunch of communists, honest guv. We don’t want to nationalise; we simply want to conserve.  That’s my party line from now on…..

Peoples Bank of China

I wrote about Fannie Mae and Freddie Mac on 22nd July this year, warning that ‘their insolvency threatens a global systemic crisis’ and, drawing heavily on Setser and Roubini, reviewed the likely impact on our globalised highly integrated financial economy, in particular China and Russia. Am re-posting my blog of that date, because you might find the links helpful….

“……The effective insolvency of two US government sponsored banks or enterprises (GSEs) – Fannie Mae & Freddie Mac – will now impact not just all those US individuals, institutions and local governments that may have invested in these banks; not just on US taxpayers who are expected to bail them out; but also on you and I (our banks may well hold Fannie and Freddie securities); and the central banks of the world that have bought their debt – confident that it will always be repaid.

As Professor Nouriel Roubini argues:” Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.”

We know, because of Brad Setser’s sustained and diligent research, that the central bankers of Russia and China have exposed their taxpayers to losses at Fannie and Fred to the extent of about 10% of their countries respective GDPs. Those are huge potential losses……

Roubini has many points to make on this massive crisis of insolvency:

“these were effectively public institutions – not private ones – used by the government (especially this administration) to pursue public policy goals. The hawkish rhetoric about the “moral hazard” the from implicit guarantees that Greenspan, Bernanke, Paulson, Bush and the administration peddled for eight years was thrown out of the window the moment the housing and mortgage bust started. Instead, for the last few months the GSEs – that were already bleeding and becoming insolvent on their own portfolio – have been used by the government to back stop the mortgage markets: their portfolio limits were raised, their regulatory capital was reduced and the limits to what conforming mortgages (that the GSE can repackage/insure) are were raised from $420k to over $720k. So much for barking in public about “moral hazard” and then going ahead and using already distressed GSEs to bail out the mortgage market and make them even more insolvent. Now this “the emperor has no clothes” farce has been revealed to be what it always was: a high-flatulin “moral hazard” farcical rhetoric with zero substance and credibility.”

Could not have put it better myself.

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4 comments to Comrade Paulson, nationalised banks & socialism for the rich.

  • Alan Smith

    Dear Ann,
    Heard you being interviewed on ABC Radio National.
    Love your blog, despite how angry it makes me.
    Can you point me

    to an article that can show me in simple terms how this house of cards was made.
    A schematic representation would be great.
    As a pharmacist

    who talks to many people every day, I have not met one that understands.
    Among other professionals I know, I do not know one who understands

    what is going on with Freddie Mac , Merill Lynch etc
    My understanding is very poor & I would like to make the understanding of this amazing

    travesty available to more people

  • ann

    Alan, that is a big ask…but will try…Schematic representation? Not at all sure…but will link you to a couple of my

    articles to see if that helps. My experience is that you have to understand it yourself, internalise it yourself, and only then will you b e able

    to understand the newspapers and day-to-day events, and explain it to your customers…What I am clear about it, is that if we are to hold our

    politicians to account, we need a lot more people like you, keen to learn and understand…All the best.

  • Prof. Dipak Basu, Nagasaki University

    Prof.Roubini was wrong in 1998 to explain the Asian Financial Crisis. There is no reason that he is correct to

    say ‘this is socialism’.
    The crisis in 1998 was caused by (a) Chinese devaluation in 1994 which had destroyed the export s demands for most of

    the South-East and East Asian countries and (b) massive flows of short term portfolio investment to the East Asian countries, which suddenly went

    out when the balance of payment crisis had emerged due to (a). Prof.Roubini and the Western experts put the blame on crony capiltalism.
    The same

    is true today. Look at the balance of payments of both USA and UK. These are in red for a long time; it means USA is just printing its own money

    to survive; money is going to China, but not coming back in the same way.
    Another reason is the Anglo-American model of housing finance is

    wrong. In socialism, housing is the responsibility of the government, not of the market. That keeps the housing price zero ( as it was in the

    Soviet Union) or very low in the public sector( as it was in Britain before Mrs.Thatcher). Market has pushed up the prices of the houses to an

    unaffordable level, people have to borrow five or six times their annual income and they have not much to live on.
    Socialism in the housing

    market at least is the answer. If the government starts building houses the market price of houses will go down to a low level. Those who have

    negative equity, their debts should be paid off ( the negative equity part of the debt) by the government with some restrictions on the space of

    the housing. Thus, Keynes is not the answer, but Marx is.

  • ann

    Prof. Basu, thank you very much for your comments, much appreciated. Agree with you about the causes of the 98 crisis..the

    charge of ‘crony capitalism’ is too simple….would like to add the attempt by the IMF to amend its Articles at the Hong Kong 1997 IMF meeting

    (which I attended) to oblige countries to liberalise their capital markets….Fortunately the Asian countries represented at that meeting blocked

    the amendment.

    Not sure what you mean about ‘money is going to China’…my understanding is that the flows are the other way, from China

    to the US…See Brad Setser’s blog “Follow the Money” for more on this…

    http://blogs.cfr.org/setser/

    Ann Pettifor

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