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Government Rescues and Socialized Capitalism

In our story Monday about the government’s rescue plan for Fannie Mae and Freddie Mac, we raised the question of why, once again, no conditions were required from the institution being rescued. Like Bear Stearns, both of the mortgage giants weren’t asked for anything in return for gaining access to possibly billions of dollars and loans and investments from the federal government.

President Bush denied in Tuesday’s press conference that help for the two companies amounted to a bailout, but some see the government’s actions as just that.

Economist and former Clinton administration Labor secretary Robert Reich calls the government’s actions “socialized capitalism,” consisting of private gains and public losses. How do you weigh that against the need to help investment banks that are too big to fail? Reich has some ideas in his post:

Here’s a modest proposal: When taxpayers insure a giant entity against loss — as we now are with Freddie, Fannie, and Wall Street investment banks — those entities must agree that: (1) for the duration of the bailout, their top executives cannot receive total annual compensation higher than that received by the President of the United States, and 2) the government gets five percent of their current valuation as shares of stock (roughly representing the benefit to their shareholders of the federal insurance) — so that if and when the entities become profitable again, taxpayers are compensated for the risk they’ve taken on.

Reich isn’t the only one with some second thoughts after Monday’s frenzied actions. For the next investment bank that seems on the edge of disaster, don’t be surprised to see the government attach a few conditions. After a few of these bailouts, the feds unfortunately are getting some experience at this.

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