It has taken only a few months but the much proclaimed slippery slope toward bank nationalization has mutated into an incrementalist certainty. This must be explained step by step.
Last fall when the crisis first erupted, the first step taken was for the federal government to become the insurer of the banking system by raising the amount covered by FDIC in bank accounts from $100,000 to $250,000. This served the purpose of preventing a run on the banks such as happened in the 1930s when everyone wanted to draw out their money at the same time.
The next step was for the government to become the lender to the banking industry by lending the more or less $800 billion to stabilize the liquidity of the banks and insurers like AIG.
At this juncture I need to insert that some discussion has arisen as to why a Republican administration would resort to this tactic which is usually the approach to solving a financial or economic crisis rather than its traditional route of letting the free market do the job. This will become the biggest criticism of G.W Bush’s legacy than anything else which transpired under his watch. The reason he did this, I assert, was purely to try to preserve his legacy somewhat because he did not want to be remembered as the second Herbert Hoover who did follow the free market stance after the Great Depression began.
Having made that digression I return to the point at hand. After January 20 – AKA Obama inauguration day – the federal policy toward handling the economic crisis and its “solution” drastically changed in essence and nature but on the surface the draconian shift went unnoticed by most – but make no doubt about it, the shift was deliberate and monstrous in its potential. What happened was that the new approach was changed away from lending the industry money (which we the taxpayers would eventually be repaid with interest, at least in theory) toward that of the federal government buying preferred stock in the effected companies. To the casual observer such a change evokes only a “so what?” response, but in reality what this policy does is reduce the emphasis on the government being a lender which will be reimbursed later on, and begin exchanging that posture to one of ownership of the company. The latest step is now for the federal government to become the buyer of common stock which firmly places the government in the position of an owner of the companies affected.
The final analysis of this paradigm shift in policy is that the pretense of monies loaned to the failing companies has disappeared because no money is being lent. But the money being put into the companies is in full effect a wholesale buyout by virtue of the government now becoming owners of majority shares of common stock in the companies.
The last thing I need to impart is more of a statement or rhetorical question. This is do we really want or is it a good idea for the federal government which has been the parent of so many colossal failures and boondoggles to go well beyond the role of regulator of the banking industry but to be the actually banking industry itself? People had better begin asking this question and consider what they want to do about it because it is no longer a theoretical exercise but fact.