in other words... nationalization

Thomas Lord

Fri Dec 19 09:22:38 -0800 2008

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Bush gave an interview the other day in which one quip made Slate as the "Bushism of the day". It went "I've abandoned free market principles in order to save the free market system."

In the same interview he also came as close as he could to flat out saying that out of respect for the office of the presidency he was stepping in to keep the auto firms on life support so that the next administration would have an "at bat". In my opinion, you can see in the conditions on these loans that there was some coordination with the next administration.

The conditions amount to nationalization:

Give us senior claims on your assets, access to your books, and control of your purse strings. The recipients are no longer privately owned companies in any normal sense of the word.

We therefore, now, have a centrally planned domestic auto industry only not quite yet with anyone in charge or any central plan.

The former investment banking industry is in much the same condition: Senior claims on assets and profits and, although the government doesn't get voting shares, the government can pretty much lean on the remaining firms at will and tell them what to do.

There is, embedded in both deals a "plausible promise" of the government letting go the reins as soon as it can - of divesting and letting whatever remains go its merry way. It's unclear how realistic this promise is in the case of the banks is since there's so little sunshine illuminating the books of those firms, the books of the fed, or the treasury. We aren't getting that info. For example, Bloomberg's FOIA attempt to find out about the black-box trillions in fed loans is being fought. So there are active efforts to make sure we don't get that info and, to me, that undermines the "plausible promise" of a quick divestment.

"The borrower serves the lender," the saying goes. With something like $3T in new debt to the banks, the fed and/or treasury can lean on those firms just like the car companies. They are nationalized.

Historically, we're somewhat famously at a cross-roads where the nation desperately needs job stimulus, infrastructure work, R&D investment, new forms of energy production, and a wealth of industries around the small scale of that -- lifestyle changes, so to speak.

That's a very dangerous combination:

To address current needs, we need massive amounts of capital formation (colloquially: "raising money for new big projects").

Almost every one of the big projects we now need is high risk, financially speaking. Even if we imagine some banal, no-brainer, what-could-possibly-go-wrong thing like Zogger's notion of working on improved insulation -- it' an easy concept but for an effort to get from 0 to a scale large enough to be meaningful is fraught with risk. Who in the room, for example, is competent enough about the insulation industry to figure out how to order up that quantity of insulation in the first place? Who in the room is competent enough to pick insulation products that won't cause more problems than they fix? So there is a lot of risk there.

In a well-functioning free-market system that risk would be handled by competitive investments. Not "competitive bidding" but competing investments as capitalists pool funds and place their bets on which management teams have the best odds of developing the needed expertise.

Only now: the stock market isn't going to be hosting winning IPOs real soon, the VC market is very stingy as all the capitalists are scrambling to park their money in (effectively) cash, and the investment banks are... well, they're gone.

That means that most of the capital formation for the needed new industries is left to the government. That means: central planning.

If you don't believe that that's bad, look again at Technocrat for the past N months. The impulse of a well-intentioned central planning mindset tends towards fascism. Let's put the homeless in camps. Let's plan the diets of the poor. Let's flood the Salton Sea - that kind of thing. There's a tendency for bright, well-intentioned, scientifically and engineering-oriented people to oversimplify, to underestimate how such big plays impact real lives, and to be willing to decree, given the chance, "I've weighed the options and this is what we're doing. End of argument."

It gets worse.

There's not even especially great promise of privately competing against this. How hard do you suppose it is, for example, for some schlub with a bright idea to raise even $0.25M to get something off the ground? Or, what about big money, especially foreign money: having seen shareholders and even some bond holders take a bath as firms are nationalized, how popular do you suppose will be any US investment not backed by the full faith and credit of the federal government?

I'm not saying things were astronomically better in the years leading up to this: they weren't. The economy we were experiencing wasn't centrally planned per se but it was de facto governed by the conversations in a closed society of capitalists. The Davos crowd, the Aspen crowd, and similar. For a long time they've had a very tribal society so that even competing capitalists agree who is in and who is out. Their world-view and, collectively, their investment plans reflect what's sold to them by a few celebrity science and business technicians who gain admittance. So, we already had a climate in which capital formation was horribly biased and skewed based on crazy flavor-of-the-week thinking by a small group of people.

With these latest moves, though, that sphere of influence is shrinking and its taking up the armory of the federal government.

It'll be interesting to see if we come out of this, somehow, not looking like the Soviet Union and yet also managing to spark all the new kinds of investment so desperately needed.

-t

in other words... nationalization

Matt T

Fri Dec 19 14:32:03 -0800 2008

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Yep, the major financial institutions are being nationalized, so they won't fail of course; we just can't have poorly run businesses failing for some reason. Then we get to have a President with a Federal Government plan for everything with a plan for everything domestic from roads to health insurance. I hear lots of mention to Federal purchase or backing of mortgages, but no word about undoing the recent restrictions on personal bankruptcy. On the other hand, credit card reform is starting, but not at the Congress or White House or WH Elect, but at the Federal Reserve, leaving less doubt about who really runs the economy. I could go on quite a bit about these things making me go WTF! lately, and making stupid Bushisms seem nice.

I think that you are correct with the USSR comparison, but less certain about it being Stalinism, more just the central planning stuff that never quite works. The people in CA know what they need and how they need it done, and the people in OK know what they need and how, but the two needs and required methods are not the same.

There has been a plutocracy for at least forty years in the USA, possibly since the creation of Federal Reserve; not in law but in how elections are won. Is there a new form of government for us shortly, maybe like what we see in Russia now? And how did the conspiracy theorists start to become so right?

Auto Industry Bailout

d47xeiwP

Fri Dec 19 10:18:03 -0800 2008

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It's interesting that Ford declined to participate in this plan.

Auto Industry Bailout

President4242

Fri Dec 19 11:00:34 -0800 2008

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They don't need it because they've already renegotiated with UAW.  The big subject is health care for pensioned (retired) workers, of which there are now 10 for every employed worker.