Is nationalisation becoming sexy again? Not quite, yet. But given the subprime housing tumult that has been walloping the U.S. economy over the past 12 months, one can easily be forgiven for doing a double-take on a Republican Treasury Secretary, Hank Paulson (which traditionally rely on conservative policies that support small government) contemplating the nationalisation of Fannie Mae and Freddy Mac.
In normal times such a view would be regarded as blasphemous. It would be the equivalent of an UMNO politician spewing racist rhetoric in the presence of a Malaysian Deputy Prime Minister ... sorry! Bad analogy since the latter did happen. The Economist reports that, Politically, laissez-faire is seductive. Congress, which has feasted on the lobbying largesse of Fannie and Freddie for decades, has a vested interest in the status quo.
The article continues on, By allowing the Treasury to make loans to, or invest in, the companies, Congress made explicit what had always been tacitly understood: that it stood four-square behind the two agencies, even though they have private shareholders and managers paid like Wall Street barons. That is capitalism at its worst: it means shareholders and executives reap the profits, but the taxpayer bears the losses. It is also risky. Between them, the firms have more than $200 billion of debt to roll over in the next month, and the markets are queasy. The collapse of just one bond auction could send shock waves around the world.
This view is not unique. Brookings Institution has expressed similar views, that during the good times Fannie Mae and Freddie Mac has benefited shareholders and management. But now that they are ailing from poor business and financial judgment, the government is being forced to bail-out their mistakes.
The article goes on to say, All of which argues in favour of the bazooka option, nationalisation, as the only one that is fair to the taxpayer. Once the two firms’ capital sinks below a certain threshold (which could easily happen with a nudge from Mr Paulson), receivership—as a prelude to nationalisation—is allowed by law. In a stroke, that would lower the twins’ funding costs and, hence, mortgage rates, and show commitment to the stability of the mortgage market. It would, of course, technically add huge liabilities to the government’s balance sheet; but these would be offset by mortgage assets that are almost as large.
Nationalisation need not be the end of the story. The giants’ assets should be liquidated over time, or the entities broken up and privatised. The companies’ size and strange structure carry a big cost for American finance. Backed by cheap government funding, their bosses have speculated with the gusto of hedge-fund managers—and lost, time and again. The two Leviathans have squeezed private firms into the riskiest ends of the mortgage market, such as subprime lending. They have not brought sharply lower mortgage rates to America. Europe, where mortgage markets are fully private, is no worse-off. Read Fire the bazooka at The Economist.
Sound familiar? This self-same view could have applied to MAS's bail-out in the recent past. This view has been expressed in a previous blog entry Malakoff, IPP and Privatisation: Learning from Fannie and Freddie.
The irony should not escape us. The U.S., the most capitalistic and business-minded industrial economy in the world, is now forced to consider nationalising Fannie and Freddy. Nationalisation is the traditional province of socialist governments. In the U.S., the Democrats are the left-leaners, more into socialist-type policies. But, not the Republicans. This shows just how critical institutions like Fannie and Freddy can be.
Just how many Malaysian entities are of the magnitude of Fannie and Freddy and, have the same cataclysmic impact on the Malaysian economy if they fail? And, when they do, won't the bail-out come from taxpayers' money?
Rather than wait for some financial explosion to happen, it is necessary for the government to start reviewing the privatisation projects, not just the ones in the pipeline, like the 2nd Penang Bridge, but, also existing ones. It's cool to nationalise. Just watch what Hank Paulson is going to do with Fannie and Freddy.
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