Sunday, September 28, 2008

The Real Alternative Part 1

On September 21st, 2008 Treasury Secretary Henry Paulson said on Meet the Press that while he hated putting the taxpayers in the position of bailing out the financial markets (which as of this posting appears will indeed happen) it was “far better than the alternative.” To say that our choices are limited just to either a bail-out or doing nothing is simply not true. Replacing capitalism with an economic democracy based largely on worker-owned cooperatives and supported with a system of social investment is the true alternative.

Advocating such a massive undertaking as replacing capitalism with an economic democracy leads to the question of how such a conversion might take place. David Schweickart in his landmark book, After Capitalism, describes four possible steps that could be taken. (Note: In my opinion all of these steps would likely require constitutional amendments.)

  • First, Congress could pass a law that would outlaw the payment of either dividends or interest to individuals or institutions.
  • The second step for Congress would be to declare that the authority for all businesses that employ more than a set number of employees would be with the employees of those same firms.
  • Congress could then establish a flat-rate capital asset tax on those newly created cooperative enterprises so as to fund the social investment system.
  • The forth step would be to nationalize all of the banks, cancel all loan interest obligations, and have these banks begin dispensing the revenues from the capital asset tax with the goal of ensuring full employment and profitability of the cooperative enterprises.

Schweickart also correctly points out in his book that while this four step plan sounds easy there would be serious problems implementing it. Aside from the massive opposition that we would face from the capitalists there is an ethical challenge for there are many people who are not capitalists, mostly middle-class families, who do own some shares of stocks and financial notes. While some securities are owned by individuals many people are invested indirectly through pensions, mutual funds, trusts, or small estates. In addition to these non-capitalist shareholders there are many non-profits, such as religious and civic organizations, that are heavily invested in the financial markets. Eliminating investment proceeds could cause serious hardships for many of these middle-class families and non-profits.

In part 2 of this series I will explore possible answers to these problems. Stay tuned.

Monday, September 15, 2008

Freddie and Fannie Sitting in a Tree…

As the media has reported the mortgage giants, Freddie Mac and Fannie Mae, were recently placed in conservatorship by the Federal Government. First, what are Freddie Mac and Fannie Mae?

According to Wikipedia:

The Federal Home Loan Mortgage Corporation (FHLMC) (NYSE: FRE), commonly known as Freddie Mac, is a privately-owned and run government sponsored enterprise (GSE) of the United States federal government. It is a stockholder-owned corporation, authorized to make loans and loan guarantees.

The Federal National Mortgage Association (FNMA) (NYSE: FNM), commonly known as Fannie Mae, is a publicly owned government sponsored enterprise (GSE). It is a stockholder-owned corporation authorized to make loans and loan guarantees.

Both enterprises play a major role in the US housing market. According to Wiki, “As of 2008, Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac) own or guarantee about half of the U.S.'s $12 trillion mortgage market.”

Now that the Federal government is managing these enterprises how should it proceed? There are several good options:

State Agency: One good option is to convert them both into government agencies. By doing so, the government can insure that everyone has access to good, affordable housing.

Worker Cooperatives: Rather than make these enterprises government agencies another good possibility is to give them to the workers of those agencies in the form of worker-owned cooperatives. These co-ops could be chartered as non-profits with mandates to insure quality housing for everyone.

There is a difference between how the government should proceed and how it will. The problem is that the federal government is highly unlikely to keep them as state agencies and is certainly not going to make give them back to the workers.