State capitalism on the instalment plan
With the financial meltdown accelerating in the wake of the US bailout, and the recognition that many more failing banks will have to be nationalized, the British government is moving to get ahead of the game by offering equity injections across the board. But already this seems inadequate. Now that the taboo on nationalization has been broken, wouldn’t it make better sense to for the UK (and others) to nationalize the whole sector? With full control, governments could then ensure the resumption of interbank lending at least among their own banks. This would provide a feasible basis for co-operative moves to re-establish international markets.
For this week at least, such an idea is beyond the range of political acceptability. But it’s striking to look back a month and realise that in that period the US government has become the main mortgage lender, the guarantor of the short term money market, the effective owner of the world’s largest insurance company, the potential future owner of much of the banking sector and now the purchaser of last resort for commercial paper. Since the reluctance of banks to buy commercial paper must reflect a significant probability of default, it seems inevitable that some of this commercial paper will end up being converted into claims on the assets of defaulting issuers, extending the scope of nationalisation beyond the finance sector and into business in general.
This kind of instalment-plan nationalisation seems to offer the worst of all worlds. At some point, a more systematic approach will have to be adopted, and given the rate at which markets are plummeting, the sooner that point comes the better. This isn’t the return of socialism, but it certainly looks like the end of the kind of financial capitalism that has prevailed for the last few decades.