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September 22, 2008


Socialism? Not even close. It's not socialism at all.

Socialism is defined as state ownership -- repeat, ownership -- of the means of production. The government is not buying anything. It is not purchasing shares -- i.e., not taking any ownership position -- in the failing Wall Street giants. The ownership of these entities will remain 100 percent in the hands of private shareholders.

Now, lest you think I am making a purely semantic point, let me make two meatier points that follow from the above:

1. If the bailout were truly socialism, the government would be in a much better position to fix the mess. What the government is doing is lending money to these Wall Street firms in exchange, it hopes (or at least the Democrats hope), for greater regulation and oversight. Fat chance. If the government actually owned these Wall Street firms, it could do what it wanted with them, with its only obligation, at least in principle, being to the owners of the government -- us. But as long as these firms' remain private, their first obligation will always be to their owners. As such, the firms will always find a way to skirt government oversight and regulation.

2. The matter becomes even more complicated if you ask yourself who owns these firms and who lends to them? Does the word "globalization" come to mind? The problem is that U.S. government regulation, to be effective, would have to be extended to these firms' foreign as well as American owners and lenders. To have any hope of doing this effectively, we will need some kind of international organization, like the World Trade Organization which sets rules for international trade, to regulate international finance. No such organization exists at this time.

Sorry, but socialism usually does benefit the rich and powerful; remember George Orwell's "Animal Farm." You may not like it, but it's capitalism that does the most for the rest of us.

As I've said before I'm no economist, but many of the people I read or listen to are economists whose judgment I trust.

Take Paul Krugman for example. He explicitly said that the bailout was government seizing control of the means of financial production. That's the way I read it, too.

The proposed plan calls for the government to actually take ownership of bad mortgages --to buy them-- and then resell them to investors, probably at a loss. It seems to me that the government thus fills the role of the Wall Street brokers and loan sharks who created the mess originally.

That seems to me a seizure of financial production.

Or perhaps it's merely another elaborate scheme to provide taxpayer-backed welfare to Wall Street millionaires.

Steve Buckstein, you're confusing authoritarian oligarchies with democratic socialism.

Economics 101:

If you buy a share, a stock, of General Motors, you are a (part) owner of GM. If you buys a product, e.g., a car, from GM, you are a customer.

If the federal government purchases a share, a stock, in an investment firm, it is a (part) owner. If it simply buys one of its products -- e.g., a mortgage collateralized loan -- it is a customer.

Buying the firms' products, not its stock, is what Paulsen is proposing to do.

Krugman needs to re-take Econ 101.

From today's New York Times:

"In some cases, the government would receive an equity stake in companies that seek aid, allowing taxpayers to profit should the rescue plan work and the private firms flourish in the months and years ahead."

There's your Economics 101.

I'm glad that's part of the revised plan, if it is, and it's what becomes law. But it wasn't part of the original Paulsen plan about which you and Krugman were were kvetching and about which I was commenting.

Turns out that Paulsen and company are, indeed, resorting to a little bit of socialism.

The revised bailout law -- the one that passed unlike the one that failed -- does, indeed, have a provision for government purchasing shares in -- i.e., taking an ownership position in -- investment banks. And just yesterday, Paulson indicated that he intended to utilize this provision of the law.

Previously, Paulson was going to inject money into the banking system by simply buying the mortgage-backed securities that have become worthless. This is still the centerpiece of the bailout plan, but, now, buying shares will also be part of it.

Still, the government will, at best, be a small, minority owner of the Wall Sreet investment banks, so I remain doubtful that this "ownership" will provide government increased leverage over these firms.

What is needed are laws that make it a criminal offense for the bank that sold you your mortgage to sell that mortgage to anyone else without your permission. That way, your bank can't transfer the risk inherent in any loan to another bank and your bank might actually look a bit more carefully at the credit-worthiness of its mortgage applicants.

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