With George Bush’s approval, Treasury Secretary Henry Paulson has tripped across a line of historic dimension. Two less likely agents of change we have seldom seen, but in executing the financial putsch on Fannie Mae and Freddie Mac, they have taken America to a new place.
Other nations have been there. In the early decades of the twentieth century Italy went there when Benito Mussolini initiated his version of state capitalism. He was followed in Germany by Adolf Hitler and national socialism. Both were able to bring about a significant increase in prosperity, however repugnant their other teachings and practices.
Though the particular arrangements may vary from one nation to another, under state capitalism government is the senior partner in the economy. That is a different arrangement from tax breaks, tax shelters, tax subsidies, tax-exempt bonds, low-interest loans, tariff protection or the kind of parasitical finagling that made George W. Bush rich. Under state capitalism, the economy is manipulated to meet government set goals. Under state capitalism, Washington rules.
Under the Freddie and Fannie takeovers, the government becomes the controlling stockholder and supplier of capital in two previously private organizations on whom the residential construction, real estate, building materials, home appliance, banking and furniture industries depend. An enormous segment of the American economy has been turned over to the government, with the enthusiastic approval of the industries concerned.
A line has been crossed, but not in accordance with any doctrine or set of economic beliefs or with a thought-out plan in mind. “The sweeping government intervention stemmed from a growing realization by Treasury and Federal Reserve officials that the two companies couldn’t survive in their present forms, and that any collapse would be devastating to the economy,” reports the Wall Street Journal, “The decision was hashed out over weeks of meetings. They included a conclave of Federal Reserve officials during their annual retreat at Jackson Hole, Wyoming; a mid-August polling of bond-market players by Morgan Stanley bankers advising Treasury; and a marathon session over the Labor Day weekend, fueled in part by Diet Coke and Coke Zero.”
As with the other steps in the direction of state capitalism these past months, the decision was made in pit-of-the-stomach fear that the whole system was moving toward implosion. As to what comes next, the businessmen-turned-government-officials who pressed the button on this one have no idea. The administrators whom Paulson and James Lockhart, the head of Federal Housing Finance Agency, have installed as the heads of these two gigantic organizations will run them the best as they can, at as little cost to the taxpayers as they can.
The Clinton-Bush II administrations finished the work of destroying and/or emasculating the regulatory framework inherited from the 1930s New Deal and replaced it with nothing. Their deregulation was the economic equivalent of opening the doors to a maximum security penitentiary and letting the most dangerous criminals in captivity out to feast on the civilian society.
What a feast it was! And, oh, how we are paying for it.
Instead of rounding up the escaped felons from their Wall Street dens and re-imposing law and order, Paulson and Federal Reserve Chairman Ben Bernanke have been running to the scenes of the crimes committed by the escapees to attend to the wounded and cart off the dead. All fine and noble, but in their ill-considered attempts to help they are creating anarchy. The are making various state capitalist precedents which have no pattern or direction but will open us up to the depredations of every business lobby and special-interest group.
Soon Paulson and company are going to have to deal with a desperate automobile industry pleading for a $25 billion loan. Once upon a time the car companies were too big to fail. They are now so shrunken they are merely too important to fail. When they get their money, another chaotic step into state capitalism will have been taken.
France has operated under a form of state capitalism since before its revolution. It is carried out with a modicum of planning and self-discipline. When the French state invests in a company, it has a plausible rationale for what it is doing.
The United States has none. Without realizing it, we are ripping holes in our free-market system and filling them with a jumble of ineffectual expedients. The Freddie and Fannie takeover will not take care of our problems. It will not hold back the night.