How Socialized Is The Financial System?

The concept of nationalization has been tossed around pretty loosely over the past few weeks. Usually it’s been discussed in the context of some sort of scheme to take over some of the failing big banks and reconstitute them for eventual return to private ownership. Not even the left of center authors that I’ve read have put forth the idea in the more radical sense of a government takeover in perpetuity. No one has dared to discuss truly socializing the banking sector.

But in fact, the Obama administration has announced plans to do just that with a not so small chunk of the financial services sector. In the budget proposal that the administration presented yesterday is a plan for the government to end its support of private lenders who make student loans. In its stead, the government would assume the role of lender. Maybe not socialization in the sense of expropriating an existing business but the end result is the same. The government becomes the sole purveyor of student loans thanks to its cost of capital advantage.

By any measure the mortgage finance market in the U.S. has been socialized. The government owns 79.9% of both and the two are completely dependent on federal largess for their operations. With the addition of the student loan sector to the government’s portfolio a significant portion of the country’s financial system can now be fairly described as socialized.

The ultimate fate of GM and Chrysler is yet to be determined but assuming that the government chooses not to force the two into bankruptcy there is certainly the possibility of a larger federal participation in the auto finance business. The government has already made a fairly substantial commitment to GMAC and it is not difficult to envision more involvement as government tries to move consumers towards purchases of “green” automotive products.

The Fed through the TALF plans to fill the hole left by the collapse of the shadow banking sector. The program is billed as stop gap but its discontinuance is entirely dependent upon the reemergence of private buyers for securitized paper. That may or may not happen and if it does not then some more permanent solution will have to be devised. Here again, it is not unimaginable that government might not take a permanent role.

If you start to connect the dots here, you can se’s e that the federal government has become a big player in the financial markets and one that is not there just for the short run. Contrary to the protestations about wanting the financial system to remain in private hands, the Obama administration is beginning to demonstrate by concrete actions that they are not at all afraid of running significant pieces of that system.

We do seem to have moved very swiftly towards a mixed financial economy with significant government control of some key components and at least the prospect of further tilting towards a semi-socialist regime. Surprisingly all of this happened without any honest debate or a shot being fired.

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