Public Ownership -- But No Public Control

By Robert Weissman

Multinational Monitor
Editor's Blog

October 14, 2008

It is an extraordinary time. On Friday, the Washington
Post ran a front-page story titled, "The End of
American Capitalism?" Today, the banner headline is,
"U.S. Forces Nine Major Banks to Accept Partial
Nationalization."

There's no question that this morning's announcement
from the Treasury Department, Federal Reserve and
Federal Deposit Insurance Corporation (FDIC) is
remarkable.

It was also necessary.

Over the next several months, we're going to see a lot
more moves like this. Government interventions in the
economy that seemed unfathomable a few months ago are
going to become the norm, as it quickly becomes
apparent that, as Margaret Thatcher once said in a very
different context, there is no alternative.

That's because the U.S. and global economic problems
are deep and pervasive. The American worker may be
strong, as John McCain would have it, but the
"fundamentals" of the U.S. and world economy are not.
The underlying problem is a deflating U.S. housing
market that still has much more to go. And underlying
that problem are the intertwined problems of U.S.
consumer over-reliance on debt, national and global
wealth inequality of historic proportions, and massive
global trade imbalances.

Although it was enabled by deregulation, the financial
meltdown merely reflects these more profound underlying
problems. It is, one might say, "derivative."

Nonetheless, the financial crisis was -- and
conceivably still might be -- by itself enough to crash
the global economy.

Today, following the lead of the Great Britain, the
United States has announced what has emerged as the
consensus favored financial proposal among economists
of diverse political ideologies. The United States will
buy $250 billion in new shares in banks (the so-called
"equity injection"). This is aimed at boosting
confidence in the banks, and giving them new capital to
loan. The new equity will enable them to loan roughly
10 times more than would the Treasury's earlier (and
still developing) plan to buy up troubled assets. The
FDIC will offer new insurance programs for bank small
business and other bank deposits, to stem bank runs.
The FDIC will provide new, temporary insurance for
interbank loans, intended to overcome the crisis of
confidence between banks. And, the Federal Reserve will
if necessary purchase commercial paper from business --
the 3-month loans they use to finance day-to-day
operations. This move is intended to overcome the
unwillingness of money market funds and others to
extend credit.

But while aggressive by the standards of two months
ago, the most high-profile of these moves -- government
acquisition of shares in the private banking system --
is a strange kind of "partial nationalization," if it
should be called that at all.

Treasury Secretary Henry Paulson effectively compelled
the leading U.S. banks to accept participation in the
program. And, at first blush, he may have done an OK
job of protecting taxpayer monetary interests. The U.S.
government will buy preferred shares in the banks,
paying a 5 percent dividend for the first three years,
and 9 percent thereafter. The government also obtains
warrants, giving it the right to purchase shares in the
future, if the banks' share price increase.

But the Treasury proposal specifies that the government
shares in the banks will be non-voting. And there
appear to be only the most minimal requirements imposed
on participating banks.

So, the government may be obtaining a modest ownership
stake in the banks, but no control over their
operations.

In keeping with the terms of the $700 billion bailout
legislation, under which the bank share purchase plan
is being carried out, the Treasury Department has
announced guidelines for executive compensation for
participating banks. These are laughable. The most
important rule prohibits incentive compensation
arrangements that "encourage unnecessary and excessive
risks that threaten the value of the financial
institution." Gosh, do we need to throw $250 billion at
the banks to persuade executives not to adopt incentive
schemes that threaten their own institutions?

The banks reportedly will not be able to increase
dividends, but will be able to maintain them at current
levels. Really? The banks are bleeding hundreds of
billions of dollars -- with more to come -- and they
are taking money out to pay shareholders? The banks are
not obligated to lend with the money they are getting.
The banks are not obligated to re-negotiate mortgage
terms with borrowers -- even though a staggering one in
six homeowners owe more than the value of their homes.

"The government's role will be limited and temporary,"
President Bush said in announcing today's package.
"These measures are not intended to take over the free
market, but to preserve it."

But it makes no sense to talk about the free market in
such circumstances. And these measures are almost
certain to be followed by more in the financial sector
-- not to mention the rest of economy -- because the
banks still have huge and growing losses for which they
have not accounted.

If the U.S. and other governments are to take expanded
roles in the world economy -- as they must, and will --
then the public must demand something more than efforts
to preserve the current system. The current system
brought on the financial meltdown and the worsening
global recession. As the government intervenes in the
economy on behalf of the public, it must reshape
economic institutions to advance broad public
objectives, not the parochial concerns of the Wall
Street and corporate elite.

[Robert Weissman is editor of the Washington, D.C.-
based Multinational Monitor,
<http://www.multinationalmonitor.org> and director of
Essential Action <http://www.essentialaction.org>.]

Oct 15, 2008 - 05:22PM, dazed06 wrote:

I dont knowhow anyone could think that the public would be in control of anything. THose are word that sound good to the American people.

And for good reason, the public needs more control over crucial institutions. Free-market fundamentalism is dead. The Republicans should admit that instead of pretending nationalizing banks has nothing to do with capitalism failing miserably.

Oct 15, 2008 - 05:36PM, dazed06 wrote:

Oct 15, 2008 - 05:30PM, LaRaza wrote:

Oct 15, 2008 - 05:22PM, dazed06 wrote:

I dont knowhow anyone could think that the public would be in control of anything. THose are word that sound good to the American people.

And for good reason, the public needs more control over crucial institutions. Free-market fundamentalism is dead. The Republicans should admit that instead of pretending nationalizing banks has nothing to do with capitalism failing miserably.

NEver was a free market so. You still have no control and will be out of money for years to come. you can keep up this argument about the republicans. I dont care about that.

It will never be enough of a free market for Ron Paul and his fanatic support base. We don't want old people struggling to feed themselves, thank you very much.

Oct 15, 2008 - 05:52PM, dazed06 wrote:

Oct 15, 2008 - 05:44PM, LaRaza wrote:

Oct 15, 2008 - 05:36PM, dazed06 wrote:

Oct 15, 2008 - 05:30PM, LaRaza wrote:

Oct 15, 2008 - 05:22PM, dazed06 wrote:

I dont knowhow anyone could think that the public would be in control of anything. THose are word that sound good to the American people.

And for good reason, the public needs more control over crucial institutions. Free-market fundamentalism is dead. The Republicans should admit that instead of pretending nationalizing banks has nothing to do with capitalism failing miserably.

NEver was a free market so. You still have no control and will be out of money for years to come. you can keep up this argument about the republicans. I dont care about that.

It will never be enough of a free market for Ron Paul and his fanatic support base. We don't want old people struggling to feed themselves, thank you very much.

They struggle to feed themselves now. I dont see the government givin a shit.  NO such thing as a free market when the government manipulate currecy and rule. I know the truth hurts.

No way in hell we're letting the corporations manipulate currency. You're too far gone to be saved. Fuck off.

Oct 15, 2008 - 05:56PM, dazed06 wrote:

Oct 15, 2008 - 05:58PM, LaRaza wrote:

Oct 15, 2008 - 05:52PM, dazed06 wrote:

Oct 15, 2008 - 05:44PM, LaRaza wrote:

Oct 15, 2008 - 05:36PM, dazed06 wrote:

Oct 15, 2008 - 05:30PM, LaRaza wrote:

Oct 15, 2008 - 05:22PM, dazed06 wrote:

I dont knowhow anyone could think that the public would be in control of anything. THose are word that sound good to the American people.

And for good reason, the public needs more control over crucial institutions. Free-market fundamentalism is dead. The Republicans should admit that instead of pretending nationalizing banks has nothing to do with capitalism failing miserably.

NEver was a free market so. You still have no control and will be out of money for years to come. you can keep up this argument about the republicans. I dont care about that.

It will never be enough of a free market for Ron Paul and his fanatic support base. We don't want old people struggling to feed themselves, thank you very much.

They struggle to feed themselves now. I dont see the government givin a shit.  NO such thing as a free market when the government manipulate currecy and rule. I know the truth hurts.

No way in hell we're letting the corporations manipulate currency. You're too far gone to be saved. Fuck off.

lol

Fuck you! no one asked you to respond to my post. I dont need the saving you as does. Turn to your almighty government. They will save you, Rob you and give you a little back in return.

Gov't does not have to be that way and is not inherently evil as you believe.  Gov't can be very helpful and useful and even in the US in many instances it is even though it still needs improvement and the interests of the public should the first and foremost concern, not an afterthought.

The US economy is mainly a free market one, having some interference doesn't make it not free market and doesn't make it socialist.