In the course of an interview about the financial crisis broadcast on October 19, Leslie Stahl of CBS’ 60 Minutes plaintively asked a Bank of America official whether, in light of the banking bailout, the US was becoming a “socialist” country. It was the latest in a number of alarmist references to socialism in our public discourse. During the presidential primary season, GOP aspirants were prone to see the socialist specter in any proposal for national health insurance, and eventual Republican nominee John McCain took to calling Barack Obama a socialist for arguing in favor of a tax plan that would “spread the wealth around.”
This reaction tells us two things. First, there is an irrational fear among certain Americans of what they call socialism; second, a majority of such fear mongering is rooted in either a total misunderstanding of what socialism is, or a deliberate effort to use apprehensions about it for crass political purposes. When it comes to the current financial crisis, in particular, no one in authority on this side of the Atlantic is proposing or implementing anything like classic socialism—that is, exclusive government ownership and operation of the means of production and distribution.
Treasury Secretary Henry Paulson’s bailout initiatives have frequently been referenced as exhibit one in the socializing of America. To be sure, Paulson, a lifelong Republican, veteran of the Nixon administration, and former Wall Street investment banker, has inserted the federal government into the banking industry in a major way. Nevertheless, calling his moves socialism is ludicrous. True to his political and corporate lineage, the secretary has sought out the least coercive, most conservative approach possible in a time of massive turmoil and looming catastrophe, a voluntary public-private partnership arranged but not mandated by the Treasury. It may be someone’s idea of socialism, but the Bush-Paulson solution is nothing Karl Marx, let alone Eugene Debs and Norman Thomas, would recognize or approve.
What Big Banking’s best friend in Washington, backed by a frightened, confused, and easily led Congress, has done for his former colleagues is present them with a humongous gift from the taxpayers, few strings attached, and politely request that they stimulate the lagging economy by making credit available once more. In return for its investment, the Government will get no seats on bank boards, just unspecified ownership stakes (presumably minority, non-voting shares) and 5% annual dividends (half what private shareholders receive), while leaving majority ownership and day-to-day management in the hands of the bankers. According to Paulson’s boss, President Bush, “The government’s role will be limited and temporary.” The Treasury, in short, will not run the banks, merely provide a cash infusion, or recapitalization, they may or may not really need, in order to ease their fears, calm their jitters, and end hoarding of funds.
Recipients of this public largesse ($125 billion of the $700 billion Troubled Asset Relief Program passed by Congress) will include the nation’s nine biggest financial institutions: Morgan Stanley, J. P. Morgan Chase, Bank of America, Bank of New York Mellon, Citigroup, Wells Fargo, State Street, Merrill Lynch, and Paulson’s own employer until 2006, Goldman Sachs. Another $125 billion will be made available to other, smaller banks, and $100 billion more will be spent buying toxic bank assets. That uses up fully half of the $700 billion rescue package, which is likely to be no more than a down payment.
Nowhere in the bailout enabling legislation is there any mention of replacing incompetent bank officials or (except for a handful of top officers) limiting their compensation. Nowhere is there mention of taxpayers, through their government, acquiring controlling equity stakes in the bailed-out banks. Nowhere is there any suggestion of tighter banking regulations, or federal operational direction, or mandatory renegotiation of the threatened mortgages of millions of American homeowners. The whole exercise can be characterized as either corporate socialism (government policy benefiting banks by writing off their losses and freeing them of market risk) or lemon socialism (partial nationalization of failing institutions, so that the taxpayers become responsible for the losers of the free-enterprise system).
The Paulson plan for reviving the US banking sector, a fully voluntary scheme agreed to by the banks, does not follow the pattern of his ad-hoc September rescue of mortgage guarantors Fannie Mae and Freddie Mac and insurance behemoth American International Group (AIG), all three of which were effectively nationalized, with the Government replacing management and assuming an 80% ownership stake in the companies for the foreseeable future. In the case of the banks, which account for an astounding 40% of US corporate profits and 30% of stock-market value, the Treasury reverted to the bad precedent it established last year with respect to the late, unlamented investment firm Bear Stearns: throwing federal money at misbehaving institutions to make good their debts without exacting a quid pro quo.
For a truly coordinate response to the dislocations caused by wayward bankers, it’s necessary to look outside the US, specifically to Great Britain, where Prime Minister Gordon Brown has shown the way when it comes to bank-rescue packages. Brown, whose Labour government was politically on the ropes just weeks ago, has revived his chances for reelection with a dramatic program of genuine, not faux, bank reform. The prime minister prefaced his policy shift with a breakout speech at the annual Labour party conference in late September, during which he attacked “the dogma of unbridled free-market forces.” Two weeks later, calling for an ethic of fairness in economic policy, he unveiled his government’s plan for the financial sector with the words, “We do not live by markets alone.”
Forming the centerpiece of Britain’s $693 billion rescue plan is the idea, which Brown pioneered and Paulson copied (after a fashion), that governments should acquire equity stakes in banks. But the Labour PM, unlike Bush and Paulson, imposed the takeover as a mandatory public necessity, and his government will become majority shareholder in several banks, notably the venerable Bank of Scotland. Moreover, British bankers, unlike their American brethren, will have to toe the Government’s line on policy in order to get their money. In the world of Bush-Paulson, where public concerns take a back seat to private interests, that remains a novel notion.
Wayne O’Leary is a writer in Orono, Maine.
From The Progressive Populist, December 1, 2008
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