Have We Always Been Financial Facists?

Have we ever been anything but financial fascists? Let's have a look.

We might hear the F-word or the S-word in a lot more places these days, but not in our politics. Call someone a "fascist" or a "socialist," and most thinking people will regard you as a kook with an axe to grind. But actually, in our "mixed economy" we've got quite a bit of both elements.

"National Socialism" In A Mixed Economy

Social Security is a flatly socialist, government-operated savings institution. The military-industrial complex is fascist. Big Agriculture is mostly fascist with some freedom around the edges. Big Healthcare is Yugoslavia. Everyone knows it's going to be completely nationalized; the only question is whether it'll be on a fascist model or a socialist one. In both systems, the government exercises managerial control, either de facto or de jure, as the Latin buffs would put it.

In a socialist system, the formal ownership of an enterprise, hence disposition of output and dividends, including reinvestment, is directly a government decision. In a fascist system, the structure of private ownership is left in place, but government socializes risks and has a great deal to say about management. The private "ownership" might be nominal, as with Germany's Krupp steel works by 1944, or not, as with Archer Daniels Midland, the agribusiness giant that, along with Monsanto and Cargill, pretty much dictates American agricultural policy.

In the Fannie and Freddy bailouts, these organizations will be placed in government "receivership." The details are yet to be sketched in, but I expect a period of close government control, followed by a loosening. Once the organizations return to profitability, the government will let them loose on us once again. Fascist, if you ask me. If it were a socialist model, the government would claw back the big bonuses from yesteryear under threat of prosecution, take permanent ownership, and defend the resulting monopoly with a return to interest rate controls and all the rest.

It would be like, say, the city streets, the Hoover Dam, or Seattle City Light, our municipally-owned power distributor. I lean to the Left, so if we're going to have government control of the mortgage business I want it to be socialistic rather than fascistic. But I'm also a free-market Democrat, so I do want to ask whether it's appropriate to nationalize that business to begin with.

Is Mortgage Finance A Utility?

In my view, the only assets that should be on the list for government control are those that economists would call "natural monopolies," meaning facilities whose duplication would cause more harm than good.

Streets are a prime example. This or that gated community aside, do you really want a private company having control of the streets to the point of physical ownership? Notwithstanding this or that private tollroad in Texas or California -- projects that I am deeply skeptical of, by the way -- I think streets belong in government hands. They are a public utility, and you can only have one network of streets.

Electric distribution grids are another. You only get one of those in an area. One way or the other, these grids are under socialist management, as in Seattle, or fascist management -- in private hands, closely regulated by government -- as in most other places. Frankly, after seeing what happened with Enron, I'd lean toward more socialism in that realm.

And then there is the telecommunications grid. Anyone who's ever gotten up close and personal with the companies that own and operate our telephone, cable, and wireless access facilites, and their feeder and transport links, knows that it's often hard to tell where the companies end and where various government entities begin.

I have no wish to bore you with 100 pages on this subject, so let's call telecom another Yugoslavia: Mostly fascist with a pinch of freedom around the edges, owing to most of the system being comprised of natural monopolies or dupolies. The only reason it works better than health care is that the telecom grid is essentially one big computer, and the economies of silicon chips and fiber transmission cover a multitude of management sins. Let the growth of traffic slow down or stop, or technology improvement hit a wall, and we'll all find out just how brilliant these people are not.

But what about mortgage finance? Is there really only one way to skin that cat?

Here's A Thought: Maybe Debt Finance Has Been A Fascist System For A Long Time!

In my other essay on this topic, "We Are All Fascists Now," I greeted the government bailout of Fannie Mae and Freddy Mac as the rise of financial fascism. However, if you examine the background of these entities, there has always been an implicit government guarantee for their bonds. Could it be that this was never anything more than an example of badly managed fascism, now gone awry?

As I mentioned in that essay, you could argue that the U.S. financial system instituted a major fascist element, called the Federal Reserve, nearly a century ago, and that the searing experience of the Great Depression of the 1930s, and the desire not to repeat it, ensured financial fascism's continuation.

To the average citizen, the wild gyrations of the stock market seem about as free as markets get. Notwithstanding the mechanisms of regulation around the edges, there's a lot of truth in that impression. However, equity finance has always been the tail of the dog. When it comes to the world of debt and lending, government has always been a huge, and some would say dominant, player.

Heads You Win, Tails We Lose

I'm not going to launch into an Internet history of the financial system in great detail, but suffice to say that the supply of credit has been government controlled since the Fed was formed in 1913. Most U.S. interest rates were directly set by the government for roughly 35 years between World War II and the late 1970s. There was a lot of socialism involved; in many and sundry ways, government prevented wild risk taking, and attenuated the rewards available to those who worked in finance.

For reasons I explained in an essay here last fall, the floating of interest rates since the late 1970s led to the formation of a hybrid system. Private entities were given ever-greater freedom to make big gambles, while taxpayers continued to assume the risk if those gambles failed. Socialism gave way to fascism; if the cost of socialism is inefficiency and stagnation, the cost of fascism is moral hazard and insider trading.

So, here we are, soon to be left with the detrius of a fascist meltdown. The government will now impose discipline, but perhaps it's all for show. Once the "receivers" (of risk) go away, we'll be right back where we started, with private entities free to take enormous gambles with our money -- claims on our labor -- secure in the knowledge that they will reap the rewards and we will rescue them from their failure, because we have no choice.