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Another step toward socialism and the public doesn't blink an eye

Written by Vincent Gioia

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vincent.jpgOctober 16, 2008
By Vincent Gioia

Recently I posed the question to economic experts - why the government had to take an equity position in the banks instead of merely lending them the money; none of the experts gave me an answer, nor has anyone else. Now I ask anyone to answer and explain if they can whether there is any reason to do this other than to begin the socializing of America?


In true socialist fashion the government with tax payer's money now nationalizes a huge segment of our economy. In this country this is being called "taking a position" in the banks; in Europe, more familiar with the practice, it's called "nationalizing." This is not right. If we want the government to assist the banks in some way, it shouldn't be by driving us further toward socialism.

Do we really want to socialize our financial system; because that's what we are doing as the government forces the banks to sell a portion of their stockholders ownership to a bureaucracy not only unskilled in bank management but eager to exert control over banking practices?

We all now know what destruction the government can cause as seen in the reason for our current financial crisis in the first place. Think back to the late 1970s when we had a booming economy, massive economic development and national pride until the worst President that the United States that has ever had: Jimmy Carter, took over. Carter got Congress to pass the Community Redevelopment Act that was meant to promote minority home ownership.

Bill Clinton then used this law from the first days he was in office so that he could declare how he was the champion of the poor and of minorities and how it was he who was able to provide them with "affordable housing." Do you know what "affordable housing" is? Someone once wrote "affordable housing is when people who can't afford it buy a house and you and I pay for it."

Clinton put the force of the government behind his plan so as to "encourage" lenders to "help" the "less fortunate" to obtain "affordable housing." What really happened is that Clinton resurrected the Community Redevelopment Act and made it clear to lenders that they had to make "affordable loans "available" to basically to any minority who wanted one. Lenders did not want to turn anyone down because if they did they would be subjected to the full brunt of the US government penal code as enforced by the relevant agencies.

If a bank didn't comply it could be investigated for anything from "unfair" loan practices to racism and discrimination. The Administration was in a position to levy hefty fines and other penalties on those who did not share the Administration's enthusiasm for such high risk lending. Threatening lawsuits, Clinton's Federal Reserve demanded that banks treat welfare payments and unemployment benefits as valid income sources to qualify for a mortgage.

Now that the government will have an ownership interest in the banks, and likely membership in their Boards of Directors, it will be a simple matter to dictate how the banks should do business and what they shall or shall not do as the exercise management of the banking operation. Furthermore, as an owner, the government has access to all personal information of depositors and anyone doing business with the bank. Imagine what mischief a socialist administration could do with that; consider how successful the Clinton administration was with only 600 personal FBI files?

So this is how socialism comes; not with force of arms, but in the silence of the public acquiescing to nationalization where American citizens are told to hand over the private property of investors to virtual government control. I wonder what would have happened if the banks had said "thanks, but no thanks?" Yet we hear not one peep from "conservative" economists? Where are the op-ed writers condemning this practice? Who is defending the free market system; just a few of us bloggers and some talk show hosts?

The US Government is spending as much as $250 billion to buy direct ownership in banks and other financial institutions under a so-called emergency plan which President Bush insisted today was "not intended to take over the free market but to preserve it". What nonsense! Even Treasury Secretary, the former Goldman Sachs CEO Hank Paulson, was the first to admit. "Government owning a stake in any private US company is objectionable to most Americans", but the government at his recommendation is doing it anyway.

The $250 billion will come from a $700 billion bailout package already agreed by Congress after negotiations led by Paulson. The initial plan for the bailout had been for the money to be used to purchase "toxic" sub-prime mortgage debt from lenders to allow them to clear up their balance sheets, but this was not good enough to exert government control over banking so the equity purchase scheme was created.

The government is said to be buying "non-voting preferred shares in the qualifying financial institutions, with stakes in each institution limited to $25 billion". But not generally reported is that the government will receive 5% for five years and 9% after that, in exchange for the "investment" forced on the banks. In addition, the government will have the right to purchase the banks' common (voting) shares.

The nine major banks which include the countries' largest will participate now but most all other banks are expected to be in the program as well. Most of the nine banks didn't need capital from the government but were nonetheless pressured by Treasury Secretary Paulson to participate. Eventually all U.S. banks, saving and loan associations and holding companies, and other financial institutions will be required to join the program. Interestingly the initial plan advanced by Paulson was sold to legislators and the public as a mechanism to buy distressed mortgage-related securities to clean up bank balance sheets but now the focus on government ownership. Paulson originally was expected to use $125 billion to "invest" in nine banks but now Paulson has also set aside another $125 billion to invest in hundreds, perhaps thousands, of other banks through November. Incidentally, one of the nine banks, Morgan Stanley, is using their $9 billion "lifeline" to pick up smaller rivals; is this what was intended by the so-called "bailout?"

Once the government gets its foot in the door you can be sure they won't be mere bystanders. Consider how the government exerts control over the states buy giving them money for education, highway construction and all sorts of programs accepted by greedy state governments

When President Bush announced the plan he said that it was "not intended to take over the free market but to preserve it." Sure, then why buy into the banks when the purpose is to, in the words of Paulson, "give the banks money to stabilize the financial system and loosen the tight credit market." Wouldn't it have been just as effective to loan the banks the money?

After the government gets away with this it won't stop at banks. What other industries will be called into Paulsen's office and given the choice of "doing what's right for the national economy" or...what? Anything is possible.

If Bush can do this, what would a socialist like Barack Obama do in the name of this emergency, especially if he is joined with a Democrat controlled congress and senate?

One shudders to contemplate it.

Vincent Gioia is a retired patent attorney living in Palm Desert, California. His articles may be read at www.vincentgioia.com and he may be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it. .

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