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The UK Telegraph's headline said it all: "Financial crisis: We're all socialists now, comrade."
Are we in a post-Milton Friedman era? The "no government intervention" vs. "something else" debate has ended for now. The Democrats and Republicans always debated in the theoretical area well to the economic right of the European interventionist model. In other words, we have been far more laissez faire than they.
But to the retirees, employees, and consumers. Who cares about the theories? Keynes, Friedman, laissez faire, monetarism, stateism... . We have no time for theories now.
“The goal is to get the engine of capitalism going as productively as possible,” said Nancy Koehn, a historian at the Harvard Business School. “Ideology is a luxury good in times of crisis.”
We don't know how this will shake out long term, but the hyper-capitalists gave a big thumbs up to the prospect and reality of government ownership of banks. The Dow's rise of 936 points or 11% is the largest single day gain since the 1930's.
“It is profound, and it is something of a shift back to the state,” said Adam S. Posen, an economist at the Peterson Institute for International Economics. “But is this a recasting of capitalism? I think what we’ll see is that the government acts as a silent partner and gets out as soon as it can.”
But we won't hear Paulson call it nationalization.
Elsewhere, government bank-investment programs are routinely called nationalization programs. But that is not likely in the United States, where nationalization is a word to avoid, given the aversion to anything that hints of socialism.
The U.S. has nationalized industry before.
In 1917, the government seized the railroads to make sure goods, armaments and troops moved smoothly in the interests of national defense during World War I. After the war ended, bondholders and stockholders were compensated and railways were returned to private ownership in 1920.
During World War II, Washington seized dozens of companies, including railroads, coal mines and, briefly, the Montgomery Ward department store chain.
And Reagan did it too.
In banking, the government took an 80 percent stake in the Continental Illinois Bank and Trust in 1984. Continental Illinois failed in part because of bad oil-patch loans in Oklahoma and Texas. As the nation’s seventh-largest bank, Continental Illinois was deemed “too big to fail” by federal regulators, who feared wider turmoil in the financial markets.
The protest of "moral hazard" and let the big guys fail seems to have gone by the wayside, so says Floyd Norris.
Do you remember moral hazard? Fear of that was a justification for letting Lehman Brothers fail. That decision — which now appears to be one of the worst financial decisions ever made by the United States government — led to an intensification of the crisis and to the decision to guarantee almost everything in sight.
UPDATE: These are the banks up for partial nationalization. Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. -- including the soon-to-be acquired Merrill Lynch -- Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp.
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