Is the US headed towards a socialist government?

[Taem]

I read this interesting article today. Funny thing is, my wife and I were hypothesizing months ago that this would happen, that the US would end up buying all the banks. We took the scenario many years into the future and predicted eventually, there would end up being a one-world economy if the rest of the world kept going into a recession like the US is. The irony of the Christian bible does not escape me here, however I believe we are in control of our own destiny, for a number of reasons. Anyway, interesting article nonetheless.

U.S. wading deeper into banking industry
White House plan to create ‘bad bank’ would increase federal influence

By John W. Schoen
Senior producer
msnbc.com
updated 1 hour, 10 minutes ago


John W. Schoen
Senior producer
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The Federal Reserve has cut rates to zero and flooded the financial system with money. Congress has spent $350 billion — and committed another $350 billion — to shore up the battered banking industry. Banks have already booked roughly half a trillion in losses, and analysts say they could be looking at a half a trillion more.

Now the Obama administration is going back to the drawing board to craft a new plan to save the banking system, get credit flowing again and try to pull the economy out of a deepening recession. The new plan could be announced as early as next week.

In his confirmation hearing last week, Treasury Secretary Tim Geithner said the White House is working on a new bank rescue plan. He was short on details, but the massive scope of the problem has prompted talk that the administration may be planning to "nationalize" a large portion of the banking industry.

In its most extreme form, nationalization would mean that the government buys (or takes) all the shares of stock and takes over operations of the company, keeping the profits. Such state ownership is typically a form of socialism; major oil producing countries, for example, have set up state-owned companies to produce and sell oil, using the proceeds to pay for government services.

Nationalization is not unheard of in the United States. When railroads stopped providing intercity passenger service in the late 1960s, the government set up Amtrak to take over those routes. Some countries have state-owned airlines to provide service not available from for-profit carriers.

But that type of broad action is unlikely, analysts say. In fact, the government already has partially nationalized dozens of banks across the country by investing billions of dollars in return for preferred shares, giving the taxpayers a tiny ownership stake in each institution.

The new plan is likely to take the government deeper into the industry's affairs.

Why is the government so involved?

At the heart of the problem is trillions of dollars worth of “toxic assets” owned by big banks that continue to lose value as the recession deepens. As the value of these assets has plummeted, banks have had to cover the losses with capital they might otherwise be lending to business and consumers. That pullback in lending is one of the major causes of the current recession. Until banks can clean up their books and get back on a solid financial footing, it will be hard to get credit flowing again.

What are these "toxic assets"?

In the past, most bank assets were typically direct loans to businesses or consumers. Though those loans defaulted more frequently when times got tough, bankers set aside reserves and wrote off the loans that went bad.

The wave of lending during the past decade was backed by a surge in "securitized" loans that were bundled together, placed into a trust account and then sold off. The buyers were supposed to get paid back — with interest — as the underlying loans were paid off. The bankers who created these trusts believed they had dramatically reduced the risk of default, so banks carried far less in reserve to back up these investments. In some cases, the trusts weren’t even carried on the bank's books.

So why are they now “toxic”?

It turned out the bankers were wrong: The assets backed by loans like mortgages turned out to be much riskier than everyone thought. Some of those mortgages went to borrowers who couldn’t afford them. The computer models used to assess the risk of defaults didn’t include a recession as deep as the one we’re in. And investments backed by a mix of loans turned out to be so complicated that the bond rating agencies that originally blessed them as safe no longer vouch for them. So no one wants to buy them.

If no one wants them, then they’re worthless, right?

Not necessarily — and that question is at the center of the problem. Since they’re not being bought or sold, there’s no market price for them. But many of these investments are backed by loans that are still paying interest and principal to investors. Though mortgage defaults and foreclosures are up sharply, roughly 90 percent of people with mortgages are paying on time.

These mortgage-backed assets come with complex rules about which investors get paid first and which get hit with losses. Because you can’t know how many more mortgages will default, and some mortgages last for 30 years or more, it is extremely hard to predict what many of these assets will be worth in the future.

Wasn’t the Troubled Asset Relief Program supposed to buy up these toxic assets to get them off the banks hands?

That’s what members of Congress thought when they approved the $700 billion package nearly four months ago. The problem came when the Treasury tried to figure out how much to pay for those assets. Since these assets aren’t being traded any more, there’s no market to set a fair price.

Instead, the Treasury gave most of the first $350 billion directly to banks in exchange for stock that pays a fixed dividend. The hope was that taxpayers eventually would get the money back and banks would start lending again. But lending has actually fallen — in part because banks are using the money to offset more losses and in part because the recession has hurt demand for loans.

If the government has swapped cash for stock, doesn’t that mean they’ve already nationalized those banks?

So far the government has been mostly a passive investor, although it certainly can exert influence.

Typically, the government only steps in and takes complete control when a bank is insolvent — meaning its losses have wiped out all of its capital (or may do so soon.) The goal of the current effort is to help banks raise more capital, not take control of them.

Why not just have the government keep buying more stock?

One reason is that it chases away private investors, which is where everyone would prefer banks to raise fresh cash. But if banks have to issue new shares in exchange for government funding, that makes the old shares worth less. That’s one reason bank stocks are trading at such low levels: Investors are worried that if the government buys up too much new stock, their current shares will be worth less.

What else can the government do?

On idea that seems to be gaining ground is a so-called “good bank, bad bank” scenario that would involve creating a government-run “bad bank” to take over toxic assets until the market for these investments improves, which could take years.

Under that plan, the government would take over the worst banks, strip out the bad assets and then sell the remaining “good” bank back to investors, putting it back on a sound financial footing. The major drawback is that existing bank shareholders would get wiped out.

Or the "bad bank" could simply take over the bad assets in exchange for "good" assets like Treasury securities that banks could apply to their capital base. The Federal Reserve has had some success using this model to revive the market for company-issued debt called commercial paper.

The "bad bank" plan has something of a precedent: In the late 1980s, when the savings and loan industry collapsed, the government set up the Resolution Trust Corp. which took over failed S&Ls and sold off their assets. The process cost about $150 billion in today’s dollars, which seems like a bargain solution compared to the current mess.

How much would that cost this time around?

It depends on how you choose to define “troubled assets,” but the $700 billion TARP program would represent only a down payment. A recent report from Goldman Sachs estimates that including assets backed by mortgages, credit card debt, car loans and commercial real estate, the total could run to $5 trillion.

No one in Congress is talking about spending that much money, but the plan could include government guarantees for investors who eventually buy up those assets.

After the very limited success of the TARP plan, the White House seems to be convinced that half measures aren’t good enough. Geithner underscored that point in his testimony last week.

"If our policy response is tentative and incrementalist," he said, "if we do not demonstrate by our actions a clear and consistent commitment to do what is necessary to solve the problem, then we risk greater damage to living standards, to the economy's productive potential and to the fabric of our financial system.”

The harder question may be figuring out which banks to “clean up” and which banks won’t make it no matter what the government does. That uncertainty has also beaten down bank stocks and forced banks to conserve their cash.

Until the full scope of the plan is worked out — and bankers convinced the government is serious about following through with it — that uncertainty will hang over the banking industry and the credit markets, delaying the prospects for an economic recovery.

[Jester]

No.

-Jester

[kandrathe]

You mean more than they already have? Yes.

The federal government already controls the health care industry through its policies in its major programs (Medicare, Medicaid, Prescription drugs). Obama's plans will put government in more control.

The federal government already controls education, and I believe the mandates from DC will become more evident over the next 4 years.

The federal government controls, regulates and mandates transportation, including aviation, rail, trucking, and shipping. Evidence of how little power exists in the transportation sector can be seen in nationalization of rail, and the federal response to the air traffic controllers strike. Major airline union strikes are usually hammered upon by political solutions, rather than market solutions.

Manufacturing in the USA has been decimated by countless "free trade" agreements that allow for importation of cheaper goods displacing American labor. We've had a spirited exchange on how, for example, China and India have prospered at the US and Europe's expense. Meanwhile, labor laws, trade marks, and the environmental laws are so unbalanced and unfairly weighted against the US and Europe as well.

State, federal, and local government is the largest employer in many states, and the federal government (even excluding the postal service) is the largest employer in the USA. This means that the taxes of those workers who are not working for the government support those who do, as well as all the other expenses incurred by governments.

Lately, we've seen something entirely new. Socialism for the rich. Banking and other industry bailouts in the trillions of dollars, and government brokered deals between monoliths of industry.

The federal government also owns 624 million acres of land in the US, or 27 percent of the country's land. The largest private land owner is Ted Turner, who owns a modest 1.8 million acres.

So, how do you want to define socialist?

[Taem]

You mean more than they already have?

. . .

So, how do you want to define socialist?

Fair enough:

socialism Definition

so·cial·ism (sō′s̸həl iz′əm)

noun

1. any of various theories or systems of the ownership and operation of the means of production and distribution by society or the community rather than by private individuals, with all members of society or the community sharing in the work and the products
2.
1. a political movement for establishing such a system
2. the doctrines, methods, etc. of the Socialist parties
3. the stage of society, in Marxist doctrine, coming between the capitalist stage and the communist stage, in which private ownership of the means of production and distribution has been eliminated

I made bold the area of importance here. Here's what I see: a government controlled health insurance coming very soon, as the demands for this are high and the costs to keep treating the uninsured insurmountable in this day and age. A government controlling all the private banking, where the money goes and comes, who gets it, and who does not. A government with the Homeland Security arm-reach capable of taking anyone they deem a "threat" and locking them away for life. A government whom I heard wants to reenact the Fairness Doctrine to censor our media, what we see hear and read. I don't know anymore kandrathe, you tell me what type of country we're living in, because its sure looking less and less like a Democracy to me.

More to the point, I'm merely voicing my opinion on the few things I've seen and read about that make my mind go "humm", but I trust there are people in power who see the same things happening and won't let it get too far towards complete government control. I'm not trying to sound like an alarmist (Jester), just speaking my mind over the scenario my wife and I mentioned to one another months ago, one that I see slowly entering the realm of plausibility when before it was just, "hummm."

[Jester]

I don't know anymore kandrathe, you tell me what type of country we're living in, because its sure looking less and less like a Democracy to me.

You're wondering if your country is turning socialist, and you're asking Kandrathe to tell you? How surprising is that answer likely to be?

-Jester

[ShadowHM]

Now you have me scratching my head...

You do know that democracy and socialism can actually go together? Democracy is a system of decision making and socialism is a system of distribution of the goods and services.

I am extremely curious now as to just what the journey was that seems to make most Americans think that capitalism and democracy must go hand in hand.

Oh, and if you really only wanted to consult kandrathe, there is always that handy little private message function here. ;)

[Delc]

I don't know anymore kandrathe, you tell me what type of country we're living in, because its sure looking less and less like a Democracy to me.

We're about as much of a Democracy as we have ever been (not very imo). We are moving away from Capitalism though, but thats been a long slow move for the last ~100 years.

[kandrathe]

You're wondering if your country is turning socialist, and you're asking Kandrathe to tell you? How surprising is that answer likely to be?

lol. Hey Jester, how good a President do you think Obama will be? :)

Here is an interesting tidbit to digest. Here in Minnesota our state is facing a 5 billion dollar budget shortfall due to reduced incomes. The governor has outlined trimming the budget by a mere 1 billion (2% reduction in spending), with the remainder (4 billion) coming from the federal bailout bill (or in other words, we borrowed some more from China). So, rather than do the responsible thing and trim back needless spending (like snow making machines, golf course club house improvements, and bike trails) we comfortably reel back some spending increases on the backs of the America's children.

Thanks China for bank rolling our wretched excess! Because, if anything, Minnesota needs snow making machines.

[Swiss Mercenary]

Bike trails are needless spending?

What next? Fruit fly research?

[kandrathe]

Now you have me scratching my head...

You do know that democracy and socialism can actually go together? Democracy is a system of decision making and socialism is a system of distribution of the goods and services.

I am extremely curious now as to just what the journey was that seems to make most Americans think that capitalism and democracy must go hand in hand.

:) I'm sure the Union of North American States will be a socialist democracy.

Anyone got a spare Amero?

[Skandranon]

A government whom I heard wants to reenact the Fairness Doctrine to censor our media, what we see hear and read.

I just had to jump in here.

http://yglesias.thinkprogress.org/archives...rness_scare.php

Of this, you need not be afraid.

[Vandiablo]

Bike trails are needless spending?

What next? Fruit fly research?

Haven't we had this discussion before??

I keep looking at the year on the date stamps, and, yes, 2009.

I seem to recall the example of bike trails as an example of beneficial govt spending that k doesn't like. Too lazy to find it, tho.

-V

[eppie]

Now you have me scratching my head...

You do know that democracy and socialism can actually go together? Democracy is a system of decision making and socialism is a system of distribution of the goods and services.

I am extremely curious now as to just what the journey was that seems to make most Americans think that capitalism and democracy must go hand in hand.

Oh, and if you really only wanted to consult kandrathe, there is always that handy little private message function here. ;)

I agree here. I don't want to start a europe vs USA brawl here, but in my opinions many americans are so 'scared' of socialism that they don't stop and ask themselves if they really know what it is (I don't mean you kandrathe, i know you know what it is).

Like Shadow says, socialism is not an oposite of democracy. Sweden, where I am living now, is a kind of conservative socialist country, but at the same time very capitalistic. It is one of the richest countries in the world, there are smaller differences between rich and poor, and the standard of living is very high. Well that is a price you pay for excellent almost free child and healthcare I guess.

Anyway, pure capitalism leads to overproduction and leads to overvalueing. Take the banking crisis. It was the banks full right to try and profit from the fact that people think that buying a house would make them rich so had no problem taking out a big loan which wass difficult to pay of. (this is what you also call a pyramid scheme) If no bailouts were done the (western) world economy could have gone down the draines.

Yes this might sound strange from one of the more leftish lurkers, but the goverments helping out the banks wass a good thing, I think.
If however the fundamentals of capitalism will not change (I mean how it is implemented) this will happen again. Exactly because overproduction is inherent to capitalism; it doesn't matter if you produce something useful, it matters if you produce something that you can sell.

This has seemed to work for so many years looking from the perspective of somebody that lives in a rich country, that it is hard to figure out that pure capitalism will have to be abandoned. In a world with more people getting a higher standard of living (China, India) and more people in general we simply cannot maintain our lifestyle.

And before skipping directly to communism I think socialism is a good middle road. And no I don't mean like china, I mean like Sweden for example. I don't have to share my car with my neighbour, I have property, I have a TV with many channels, I can choose between 100 different kinds of softdrinks and we have McDonalds. Another great idea would be not to call it socialism......in order not to scare people of.:)


Also I think (I hope) that the crisis can turn out ot be a good thing. We hopefully can start building a more sustainable industry......and so this crisis hasn't come one day too late.

[Jester]

Hey Jester, how good a President do you think Obama will be?

Overrated, probably. But, then, he has an easy act to follow.

-Jester

[kandrathe]

I'm not trying to sound like an alarmist (Jester), just speaking my mind over the scenario my wife and I mentioned to one another months ago, one that I see slowly entering the realm of plausibility when before it was just, "hummm."

Check out the Consumer Products Safety Improvement Act.

[kandrathe]

Haven't we had this discussion before??

I keep looking at the year on the date stamps, and, yes, 2009.

I seem to recall the example of bike trails as an example of beneficial govt spending that k doesn't like. Too lazy to find it, tho.

Look, I agree bike trails are beneficial if placed in urban environment which might encourage more bike commuters. But, these bike trails are in wilderness and recreational. I'm comparing the "need to haves", versus the "nice to haves". In my opinion, government should not deficit spend for the "nice to haves", and should try intently not to deficit spend for the "need to haves".

[Jester]

Check out the Consumer Products Safety Improvement Act.

Hoo boy. If even Forbes magazine is opposing government regulation, look out! Engels is lurking just around the next corner!

-Jester

[kandrathe]

Hoo boy. If even Forbes magazine is opposing government regulation, look out! Engels is lurking just around the next corner!

This is what is wrong with the US government. Because of a few incidents with products manufactured in China, US manufacturers (and even little old grandma's making macramé scarves) become saddled with a very stringent product testing regime or face jail time. The products, and their manufacturers that inspired the legislation are not even subject to the law. Because of the open ended language, anyone who makes or sells things (including me) that might be used by children will need to go through stringent 3rd party product testing (ala Underwriters Laboratories). This will destroy many cottage industries in the US, and will result in many 2nd hand stores dumping all their children's goods into landfills. It seems that Congress can't trust people's common sense, or the tort system anymore. They must impose felony convictions, lengthy jail time and a $100K fine on anyone who ignores the CPSIA. What's that smell? It's certainly not the sweet smell of freedom.

[Jester]

This is what is wrong with the US government. Because of a few incidents with products manufactured in China, US manufacturers (and even little old grandma's making macramé scarves) become saddled with a very stringent product testing regime or face jail time. The products, and their manufacturers that inspired the legislation are not even subject to the law. Because of the open ended language, anyone who makes or sells things (including me) that might be used by children will need to go through stringent 3rd party product testing (ala Underwriters Laboratories). This will destroy many cottage industries in the US, and will result in many 2nd hand stores dumping all their children's goods into landfills. It seems that Congress can't trust people's common sense, or the tort system anymore. They must impose felony convictions, lengthy jail time and a $100K fine on anyone who ignores the CPSIA. What's that smell? It's certainly not the sweet smell of freedom.

Give me a ring when the jackboots show up on your doorstep for your arts and crafts. I think this guy is hypothesizing pretty big for something that's going to end up being pretty small.

-Jester

[kandrathe]

Give me a ring when the jackboots show up on your doorstep for your arts and crafts. I think this guy is hypothesizing pretty big for something that's going to end up being pretty small.

-Jester

Orly? First, I won't break the law, so I won't worry about getting caught. Second, the jack booted thugs already are on the march to a library near you.

ALA Urges Congress To Correct Law That Inadvertently Targets Libraries, Publishers -- CPSC ruling requires children’s books to be removed for safety testing.

Lifted from Etsy, where this is getting quite a bit of concern.

To the Avid Reader:
Due to the new law, all children's books will be pulled from library and school shelves, as there is no exemption for them. That’s okay though, there's always television. Our children don’t need to learn the love of reading after all.
Article from the American Library Association http://www.wo.ala.org/districtdispatch/?p=1322

To the Lover of All Things Handmade:
"Due to the new law, you will now be given a cotton ball and an instruction manual so you can make it yourself since that blanket you originally had your eye on for $50 will now cost you around $1,000 after it's passed testing. It won't even be the one-of-a-kind blanket you were hoping for. Items are destroyed in the testing process making one-of-a-kind items virtually impossible. So that gorgeous hand-knit hat you bought your child this past winter won’t be available next winter.

To the Environmentalist:
Due to the new law, all items in non-compliance will now be dumped into our already overflowing landfills. Imagine not just products from the small business owners, but the Big Box Stores as well. You can't sell it so you must toss it. Or be potentially sued for selling it. You can't even give them away. If you are caught, it is still a violation.

To the Second-Hand Shopper:
Due to the new law, you will now need to spend $20 for that brand new pair of jeans for your 2-year old, rather than shop at the Goodwill for second hand. Many resale shops are eliminating children's items all together to avoid future lawsuits.

To the Entrepreneur:
Due to this new law, you will be forced to adhere to strict testing of your unique products or discontinue to make and/or sell them. Small businesses will be likely to be unable to afford the cost of testing and be forced to close up shop. Due to the current economic state, you'll have to hope for the best when it comes to finding a new job in Corporate America.

To the Antique Toy Collector:
Due to the new law, you'd better start buying now because it's all going to private collection and will no longer be available to purchase. “Because the new rules apply retroactively, toys and clothes already on the shelf will have to be thrown out if they aren't certified as safe.” http://online.wsj.com/article/SB123189645948879745.html

To the American Economy:
Already struggling under an economy that hasn’t been this weak in decades, the American economy will be hit harder with the inevitable loss of jobs and revenues from suppliers, small businesses and consumers. The required testing is far too costly and restrictive for small businesses or individuals to undertake.

To the Worldwide Economy:
Due to this new law, many foreign manufacturers have already pulled out of the US market. You can imagine the impact of this on their businesses.