July 20, 2019


Socialism has become a dirty word on the presidential campaign trail. Supporters of Republican John McCain increasingly say they fear that Democrats, led by their candidate Barack Obama, will lead the country into socialism, defined as a system under which the means of production and distribution are owned and operated by the community or society rather than private individuals.

In the financial realm, however, the Bush administration – led by Treasury Secretary Henry Paulson – has already stepped into the realm of socialism, at least temporarily. Treasury has begun buying into the ownership of major U.S. banks, with up to $250 billion in government funds. Those stakes are meant to be sold at a later date, when the economy has stabilized.

The response to the deepening financial crisis did not start this way. It began with pledges totaling up to $142 billion into failing giant companies including Bear Stearns and the American International Group, plus conceivable trillions in supporting the mortgage titans Fannie Mae and Freddie Mac, with prospects that much of the money may be recouped. When those ad hoc individual deals looked inadequate, the administration went further with its plan for using up to $700 billion to buy up exotic investment products whose value had plummeted because they were based on risky mortgages that were going sour.

Now it has taken a lead from the British, who first came up with a plan for direct government recapitalization of its nation’s banks.

In its venture into socialism, the Bush administration may want to listen to the advice of Europeans, who have had long experience with socialist governments. Britain and the other European governments are imposing strict conditions on their bailouts, such as restricting executive compensation, forbidding the payment of dividends until the government investment has been repaid and supervising lending policies.

The U.S. plan doesn’t do much to restrict executive compensation and golden parachutes and it permits continued payment of dividends. It seems reluctant to regulate the operations of the banks where it is taking temporary ownership positions.

The communist government of China, trying to show that it has not abandoned Marxism, calls its thriving economic system “socialism with Chinese characteristics.” The new American rescue plan could be called socialism with free-market characteristics. But even temporary socialist management requires supervision and regulation to prevent fraud and favoritism, not the free-market hands-off approach that let questionable mortgages flourish, let the housing bubble grow until it burst and let investors devise such a complex system of derivative products that it finally has come tumbling down.

It may well turn out that America can learn from Europeans in the international financial meetings now being planned. British Prime Minister Gordon Brown and French President Nicolas Sarkozy are thinking in terms of rebuilding the foundations of the financial systems.

What emerges, here and in Europe, is likely to be a mix of capitalism with stronger government oversight. That should be a stronger foundation than the one that just crumbled.

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