Going down the road of socialism

Responding to an article that appeared in the Boston Globe about the need to address foreclosures, I wrote the following post on 9/24/08:

While I agree that some carefully selected measures to help debtors may be successful, they are not without some major risks and long term issues. For one, this would set a precedent for the government to be able to step into a contract where one party is not able to perform, tear up a perfectly legal contract (whether it’s perfectly moral is not the question here), and restructure the terms of the contract, arguably just to score some votes come election time. To do that you would have to have the consent of the creditors, or this country would certainly be going down the socialist road for sure.

It appears for now that the gov’t does in fact have the consent of the creditors by the virtue of the fact that the gov’t is the majority owner of the banks.

This is David Goldman’s perspective at Inner Workings:

Take sub-prime mortgages, for example. After hitting a low of $32.5 in mid-November, the ABX 2007 vintage AAA index of sub-prime mortgage-backed securities rose to $45 at the end of December, before tumbling back to $37.5 today. The proximate cause for the reversal was Friday’s agreement among Congressional Democrats to “cram down” mortgage payments in the event of bankruptcy, a prospective change in law that in enacted will impair mortgage cash flows.

It increasingly looks like that the bailout is not merely a passive investment but a nationalization in the true populist sense of the word.

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2 Responses to Going down the road of socialism

  1. Spengler says:

    Thanks for the link.

    I agree. It is de facto nationalization, but with some complications. Citigroup is the most global of the American banks with branches in dozens of countries. If the American government were to take it over and operate it explicitly through the FDIC, how many of its international customers would leave? It is not clear that foreign corporations and individuals would be happy to have their affairs made transparent to the US government. As a dominant shareholder the government will run the bank in interest of creditors rather than equity holders, which makes its stock quite unattractive, but its debt worth considering.

  2. fromatwoz says:

    That’s quite true. However, even without the explicit takeover of Citi’s management by the FDIC, the issue of foreign policy still remains. To writedown the value on the asset-side in order to relieve American households would be the equivalent of taking Saudi princes’ money and handing them over to the American households directly. Somebody in the Treasury or the State Department would have explain that to the Saudis.

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