Slow-Motion Socialism

It is a sign of how topsy-turvy capitalism has become that stock markets skyrocketed today on the news that some governments are taking complete or partial control of their major banks. Nationalization, traditionally the anathema of private enterprise, is now welcomed as its savior “amid fears,” as the Financial Times states in today’s edition, “that the global financial system is on the brink of collapse.”

These latest moves in Europe and possibly the United States follow a series of stock market plunges that are now being routinely described as a “slow-motion crash.” By turning to direct government investment or full takeover of financial institutions, the latest rescue efforts are starting to look like slow-motion socialism.

The $700 billion U.S. bailout, which until now was supposed to be the solution to the crisis, was criticized by many on the right as a dangerous move toward socialism, while leftists denounced it as socialism for the rich. That was mostly rhetorical. Public ownership of banks is closer to the real thing.

But what kind of quasi-socialism will this be? Left to their own devices, mainstream policymakers like ex-Wall Streeter Henry Paulson will see to it that public investment in banks does not seriously threaten vested private interests. There’s already discussion in today’s Wall Street Journal of how government investment would be done in a way that protects the banks’ existing shareholders. Protecting pension fund and 401(k) holdings in the financial sector is a good idea, but this does not mean that the federal government needs to be a completely passive investor.

On the contrary, now that the crisis has broken down the taboo against direct federal investment in corporations, we need to be sure this extraordinary intervention does more than help banks get through the immediate credit crunch. Unless there are fundamental changes in the way these institutions operate, we’ll be facing another crisis very soon.

While some of these changes need to come through re-regulation, the federal government should use its position as a major shareholder to bring about changes from the inside as well. This should begin, of course, with ousting the top executives who helped to create the current situation. The next step would be to shake up corporate boards and see to it that all stakeholders, which now include taxpayers, are fully represented. The Federal Reserve is already taking a step in this direction by announcing it will appoint three trustees to oversee the government’s stake in AIG.

The new boards could reconfigure executive compensation formulas and overall bank policies to discourage reckless lending and investing practices. Restructuring subprime mortgages to help homeowners avoid foreclosure and lending to prudent renewable energy projects should be their new priorities.

Government investment in banks may not solve all the ills of capitalism, but if done right it could mean that something good comes out of the current mess.

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