New Article on Nationalization of the U.S. Financial Industry Published

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In "Nationalizing the Financial Industry" writer Walter Donway reviews the major government reactions to the financial crisis and assesses the premises that lay behind much government action.

The largest sector of American enterprise, the sector at the heart of capitalism because it is at the heart of investment, the valuation of companies, and the exchange of commodities and money worldwide, is being nationalized—rapidly, massively, and perhaps irreversibly. Wall Street—the worldwide historic icon of capitalism—is far along the road to government control and de facto ownership. So writes Walter Donway in a newly published article "Nationalizing the Financial Industry."

Donway analyzes how we arrived at this crossroads and predicts, based on past patterns of government intervention, what the outcome may be.

Donway provides an assessment of the roots of the 2008 financial crisis and the actions following it, including these observations of the "dramatic phase of the nationalization":

--The initial crisis was driven in large part by huge credit expansion driven by the Fed—and exacerbated in real estate, in particular, by two government-created agencies, “Fannie Mae” and “Freddie Mac”—which pushed the industry into over-drive, and, at the same time, disabled all the usual restraints such as rising interest rates, increasing risk-aversion, and lack of additional capital for investment.

--In Summer 2008, as the huge real-estate bubble, and all the financial instruments based on it—many packaging or “securitizing” increasingly shoddy mortgages—began to burst, sheer panic seized the markets. The Treasury and Fed made truly unprecedented investments of taxpayer money in financial firms—a “rescue” for which many (but not all) financial executives pleaded. Congress became panicked—as the markets plunged seemingly endlessly—and approved hundreds of billions of dollars for the financial industry.

Donway goes on to describe what he terms "creeping, then galloping nationalization":

--As the current deep recession has dragged on, the Fed has announced that it would keep short-term interest rates effectively at zero for years—until 2014 was the latest decision. And it has moved to use its powers to influence long-term rates, as well.

--Government, always big in the bond markets, has become increasingly dominant. In order to borrow, government always has sold its short-term and long-term debt—now trillions of dollars. Furthermore, during the recession, the Treasury and Fed became purchasers of private debt, spending hundreds of billions of dollars buying “distressed” mortgage-backed securities and other types of debt with which banks, brokers, and insurance companies were stuck. As a result, the American government became the owner of this otherwise unmarketable debt.

--The Fed flooded the banking system with money, including by means of pure money creation, the banks responded by purchasing government bonds. In other words, the terrified banks used the Fed’s money to buy government debt.

--The Fed has made the entire U.S. stock market (and, as a side effect, stock markets worldwide) dependent on its policies.

--Expectations are that, as the economy continues to weaken, and the November Presidential election nears, the Fed will re-launch full-scale “quantitative easing.”

Donway also contends that the Dodd-Frank legislation makes the next crisis not less likely but virtually inevitable. And he uses the term "political-financial complex" to summarize the problem: "Wall Street, and the financial sector nationwide, can benefit—to the tune of billions of dollars in profits—from their “partnership” with government.

"This is “crony capitalism” and must be exposed as such," Donway concludes.

Read the full article, "Nationalizing the Financial Industry."

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Aaron Day
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