US mortgage bank nationalisation – sign of deepening crisis
In the biggest banking bail-out in American history, mortgage companies ‘Fannie Mae’ and ‘Freddie Mac’ have been ‘nationalised’ by the US federal government.
This has transferred a staggering $5 trillion of mortgage debt from private to public hands. Nationalisation of Northern Rock in Britain involved taking over £100 billion of loans. This nationalisation in the US is 25 times bigger, and indicates how severe the global credit crunch has become.
The taking of these two mortgage giants – that provide over half of all US mortgages – under full government control, is the latest abrupt departure from trying to apply undiluted neo-liberal, free market ideology.
Desperate to tone down this ideological capitulation, rather than using the term ‘nationalisation’, the US Republican politicians are calling it “conservatorship”. But nationalisation it is.
In July, the US government announced an emergency rescue package for Fannie and Freddie, in which it pledged major financial support, but left them in private hands – effectively nationalising the losses but not the profits. Now, less than two months later, these mortgage groups were still on the verge of collapse, so more drastic action was taken.
Fannie (Federal National Mortgage Association) and Freddie (Federal Home Loan Mortgage Corporation) had run up $1.4 trillion in debts between them during the last 12 months alone, of which $14 billion was written off as unrecoverable in the same period. They had become financially unviable – virtually unable to borrow or raise more money.
Their complete collapse would cause turmoil in the US housing market and overall economy, but also in economies worldwide.
Almost $1 trillion of debt issued by the two companies is held overseas by foreign governments and companies; so their failure could have triggered a rapid flight of capital from the US and sharp fall in the dollar and dollar assets. Much of their debt was held by Asian banks, who had already started to get rid of this ‘investment’.
US government measures
As well as taking the two companies under its ownership and control, the US government has agreed to inject up to $100 billion into each of them, also to give them an unlimited liquidity facility and to separate/buy off some of their mortgages.
Existing shares in the companies are being allowed to trade, but their worth has been massively diluted and all dividend pay-outs have been suspended.
Nationalisation under staunchly pro-capitalist governments, like that in the US, is usually only resorted to when crucial wider interests for the capitalist class are at stake, as they are in this case. Usually it is after the private owners have milked huge personal profits from the companies concerned over a long period, and often have grossly mismanaged them, so that they have ended up failing abysmally.
Under public ownership, these firms are then run by wealthy individuals who are ideologically wedded to a system based on private ownership, the free market and capitalist management methods, rather than to one based on public ownership, economic planning and democracy.
Nationalisation is also treated as a temporary evil, with the intention that the enterprises are returned to private hands for exploitation as soon as they are up and running again.
This is already intended for Fannie and Freddie although it could take some time; commentators are predicting they will eventually be broken up into smaller pieces and placed back in the private sector or allowed to wither.
This will only be after they have been bailed out sufficiently using the money of American working and middle class people, and when private firms have stepped in to take some of the mortgage market vacated.
All this is far removed from how public ownership would work under a socialist government. Even applied to one company, it would be run democratically under workers’ control and management, and it would be permanent.
This would be a springboard to nationalising all the major companies – in Britain’s case the top 150 – that between them control the economy. Rather than being nationalised in the interests of the capitalist class, they would be nationalised in the interests of the majority in society – working people.
Compensation to the former owners (the shareholders) would only be paid on the basis of proven need.
At least now, with Fannie and Freddie, the US government has been forced to move away from the halfway houses of its rescue of Bear Stearns bank and previous intervention into Fannie and Freddie, when it nationalised the risk while leaving future profits in private hands.
This time it felt compelled to make sure that around 80% of the future profits and assets will go into the public purse, albeit only for the period before the companies are returned entirely to the private sector.
This bail-out is a huge injection of public funds by the US government, but it is not certain to have a significant effect on what is – as many capitalist economists are pointing out – a major, drawn-out economic crisis. The downward spiral in credit has worsened in recent weeks in the US, with global repercussions. The US housing market is in continuing crisis; about 9% of US mortgage holders are currently behind on their payments or face repossession. US house prices are falling at an annual rate of over 15% in major urban areas, putting many people in negative equity.
The US economy is also still suffering from falling stock prices, rising unemployment and high commodity prices. Weakening growth across all the industrialised economies means the US cannot export its way out of this situation, so is on the brink of further major problems. A synchronised slide is setting in, with the UK, Eurozone and Japan all predicted to experience recession this year.
Working-class people are already suffering from this economic backdrop, through wage restraint, price increases, unemployment and attacks on terms and conditions. It will not go unnoticed that the US and UK governments can find many billions of pounds or dollars to take over finance corporations when the bosses’ interests are at stake, but will not take significant measures to alleviate the plight of working-class and middle-class people. More and more people – especially young people – will be questioning this state of affairs, adding to the number who want to investigate socialist ideas.