Public Ownership -- But No Public Control
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
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
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
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.
Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor, and director of Essential Action.