Thursday, September 18, 2008

Nationalization: evil, yet good

I am not an economist, but this has been nagging at me. From today's New York Times

This episode started when the Treasury nationalized Fannie Mae and Freddie Mac on September 8. Their combined assets are over $5 trillion. These firms help guarantee most of the mortgages in the United States. The Treasury only got authority from Congress to take this action in July, and in seeking the authority had insisted that no intervention would be needed...The Treasury has replaced the management of both companies and will presumably oversee their operation.

--University of Chicago Economists Douglas W. Diamond and Anil Kashyap

The critical term here is "nationalization," which no one seems to be using. We like to lump all the cases together and refer to them as a "bailout." But even in the case of A.I.G., as explained by Diamond and Kashyap, "the Fed has the option to purchase up to 80 percent of the shares of A.I.G., is replacing A.I.G.'s management, and is nearly wiping out A.I.G.'s existing shareholders."

For anyone who has paid even passing attention to U.S.-Latin American relations in recent years, this development induces a double take. We have heard, in no uncertain terms and from the highest levels of the Bush administration, that nationalization is the worst possible solution to any problem. No matter what, it makes everything worse.

“Nationalization has a long and inglorious history of failure around the world" (Tony Snow)

Nationalization is "a well-worn path that history has shown doesn’t usually benefit the population" (State Department Spokesman Sean McCormack). Both quotes from 2007.

"Some see the nationalizing of economic sectors as the way of the future. But, they are really just returning to the failed policies of the 20th Century." (Secretary of Commerce Carlos Gutierrez, 2007).

"[T]he nationalization of businesses in Latin America is troubling...this kind of backward looking activity is contrary to our country's belief in the power of property rights and free enterprise." (Toe Tapping Senator Larry Craig, 2006).

There are a number of conclusions I can come to, but they're all pretty depressing, as they involved lying, double standards, and hypocrisy. Better just to go have a cocktail.


Anonymous,  2:37 PM  

A few comments:

1) The Feds had no choice with Fannie, Freddie, and AIG. It was either take them over or watch financial markets completely collapse. This is the best of a lot of bad options.

2) I'd say a difference is that (to use Venezuela as an example), the VZ government seeks to take over profitable enterprises to further enrich the state coffers. In the case of the US, the Feds are acting as the option of last resort. The Feds are not taking over AIG because they think that being in the insurance business is a great idea. They are doing it to avoid a deeper crisis.

As a taxpayer, I hope the US goverment has negotiated a great deal and makes lots of money on these transactions. As an American, I am happy to see the government step in to stem the bleeding, because I do not want to see our economy collapse. If the government loses money (a strong probability), it is still money well spent versus the alternative. This is what the government should be doing.

As to whether it is hypocrisy or not depends on whether you think the Feds chose to do this or HAD to do this.

Greg Weeks 2:41 PM  

That is the basic argument I figured I would get if such a question were asked of the administration. However, the administration has never qualified it in that way before. It is always "nationalization is *always* bad." Not "nationalization is acceptable in some circumstances."

Anonymous,  2:56 PM  

It's all about spin, my friend. Double standards are as old as government itself. But I am OK with that, since governments ALWAYS act in their own self interest.

Anonymous,  3:12 PM  

What would the IMF have the United States do?

Anonymous,  3:21 PM  


I think this particular "double-standard" is important because the U.S. has used its power in the IMF and the World Bank (among other tactics) to ensure that Latin America applies only one standard (the free market one) for the last three decades. This has been a contributing factor (not the only one) to Latin America's stagnating economic growth and increasing inequality for much of this period. Thus, with that global/historical context the U.S. blatantly violating its free market doctrine is especially relevant. It speaks to the degree that these market-based policies were promoted in order to serve U.S. based transnational capital/export interests and not because of some genuine belief in the sanctity and inherent efficiency of free markets.

One positive outcome of events such as this financial crisis is they help to clarify the differences between symbolism/rhetoric and actual concrete interests.



Greg Weeks 3:23 PM  

Indeed. The IMF does not exactly advocate nationalization as a response to economic crisis.

Anonymous,  3:34 PM  

There's no sanctity in Washington. We implore other governments to move to free markets because as the largest economy in the world, it is in our "concrete interest" to do so. Usually, that will also be in the best interest of other governments. Anyone who thinks the US government is promoting policy out of the kindness of the collective hearts of our lawmakers is kidding themselves. That's never going to change. Nor should it.

Greg Weeks 3:40 PM  

If you believe it is OK to knowingly hurt others for your own gain, then there is not much to debate here.

Anonymous,  7:32 PM  

Great post. Shows plainly the problem with generalizations and lack of nuisance. Well done.

Greg Weeks 7:48 PM  

We could all do with less nuisance.

Anonymous,  3:10 PM  

Thanks for raising the topic of this term. Down here in Argentina I end up watching more international media and noticed that both the BBC and Al Jazeera English used "nationalize" but I kept noticing the reluctance in the U.S. media to say that word.

Greg Weeks 3:18 PM  

I would love to see a media analysis about this topic. I did a quick Google search of "nationalize" on, and it is clear CNN is not using the term, except when referring to other countries.

Anonymous,  3:54 PM  

I don't agree. Nationalize implies that the government is taking over a company for further gain. A bailout is just that - bailing out a company because it is in the public interest to do so. The difference is very clear.

Greg Weeks 4:01 PM  

You may not agree, but you're wrong. From Merriam Webster:

Nationalize: "to invest control or ownership of in the national government."

I have never seen a definition with a normative angle like "gain" or "public good." Either the government controls something, or it doesn't.

Anonymous,  9:59 PM  

Fair enough, but let's get back to the core issue you disagree with the actions taken by the Feds this week AIG, Fannie, etc?

Anonymous,  10:30 PM  

We could all do with less nuisance.

Hee, hee. That too!!

Greg Weeks 6:07 AM  

I am not an economist, but right now I don't see any reason to disagree with it. But I do think we should call it what it is, and not pretend that a "bailout" is somehow a different animal.

Anonymous,  1:40 AM  

I am an 11th grade High School student doing a paper on Evo Morales.

Question: In the regards to the Bolivian people, was Morales' nationalization of the Natural Gas industry and the smelter industry good or bad? - as far as the public is concerned.

Anonymous,  6:22 PM  

Sharing with all positive intentions a new way of looking at nantionalization policies with all those interested in the dilemas post by nationalization/privatization discourse: it introduces new concepts, new analytical tools, and a new dimenssion to the old dichotomy discourse.

Muñoz, Lucio, 2010. Nationalization as Privatization in Reverse: Understanding the Nature of the Commons to Identify a Possible Point of Optimal Nationalization, Journal of Sustainability, Issue 3, Number 1, July 20, Rio Rancho, New Mexico USA.

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