The Price of Nationalization

Article excerpt

The share prices of Fannie Mae and Freddie Mac saw a substantial rebound last week as rumors spread of possible nationalization of these two mortgage giants. Together, Fannie and Freddie hold or guarantee $5.2 trillion, or about half of all American residential mortgages. A substantial portion of these is in or near default.

As a policy, nationalization threatens the fundamental concept of free-market capitalism upon which America thrived and rose to become the dominant world financial powerhouse and economic engine.

Fannie and Freddie were established by government. Through an implied government guarantee, they were given favored access to cheap financing. Furthermore, they were, as their massive lobbying payments confirm, close to government. Some would say they were too close. As such, they were encouraged by politicians to take on mortgages of increasingly doubtful viability.

The result is that Fannie Mae and Freddie Mac now are failing. Should they, the fear is they will drag the whole mortgage market down with them, doing untold economic and political damage.

Apparently, the government is considering a salvage plan of nationalization.

Nationalization is one of several methods by which government can take over private property, including expropriation and compulsory purchase. Unlike compulsory purchase, nationalization usually has a political motive and is far-ranging, often giving government control of whole industries in key sectors of the economy.

But it's a cornerstone of communism and socialism. It seeks to redistribute wealth on a "more equitable" basis, according to "need" rather than effective "work."

Sometimes nationalization is used to rescue companies or even industries that are failing but which are deemed essential for the national economy.

A free-enterprise Republican administration clearly has no natural or ideological wish to grasp economic power through nationalization. Indeed, the opposite is the case. However, as a child of 20th-century politicians, nationalization is sold as a cure- all when no economic free-market alternative presents itself.

In the case of Fannie and Freddie, the picture is bleak as financing costs increase and mortgage defaults and residential foreclosure sales rise to historic levels. The only alternative appears to be nationalization or some form of government interference, even if only on an interim basis.

Nationalization initially appears to work. But, long term, it destroys the vital element of competition. …