American Government Nationalizes Banks

American agencies abandon their market economy principles when it comes to preventing panic on Wall Street. Then taxpayers are taken for billions.

Always on Sunday. Almost exactly a year ago, U.S. Treasury Secretary Hank Paulson saved the New York investment bank Bear Stearns in a spectacular action undertaken over a weekend. Now the former CEO of Goldman Sachs struck, again on a weekend. Paulson announced that Fannie Mae and Freddie Mac, two financial houses that have their fingers in every second mortgage in the United States, would be nationalized.

The two cases have something besides timing in common. They show that American agencies aren’t averse to abandoning market economic principles when it comes to preventing panic on Wall Street. Then, billions of dollars are taken from taxpayers and losses caused by private enterprise are socialized. The Americans are thus hardly different from the Germans, as evidenced by WestLB and IKB and Co.*

Still, this case is different. The Bear Stearns bailout was done to prevent a domino effect in the financial world. With Fannie and Freddie, the banks made mistakes and, in the final analysis, others will have to pay for them.

Fannie and Freddie, on the other hand, didn’t come in to being because of some out-of-control casino capitalism. They’re more a failed creation of the American welfare state. They were intended to make home ownership possible for as many families as possible, even if they couldn’t afford to pay for them. Created and nurtured by politicians, the twins grew into monsters soon able to do away with any political and governmental control. Fannie Mae and Freddie Mac employed an army of lobbyists.

Now Hank Paulson has pulled the ripcord. That was the first step. It logically follows that the second step will be a hefty jolt. As paradoxical as it sounds when a private entity is nationalized, America could end up being an even more capitalistic country than it was before.

*Trans. note: Shorthand for “WestLB” and “IKB Banks”, both of which suffered losses in the sub-prime crisis. The government was forced to bail out IKB to the tune of 3.5 billion Euros, or about $5 biilion, and it is currently under investigation by German and European Union courts.