Monday, September 8, 2008

Nationalisation and Bailout of Banks

It is interesting that government's who often profess a philosophical support for laissez faire capitalism, often end up doing the exact opposite. The Thatcher and Reagan governments both professed a support for laissez faire economics, yet both increased real government spending and government borrowing.

The Bush administration, presumably supports laissez faire capitalism, so it is something of an embarrassment for them to have to undertake the world's biggest financial bail out in history. The multi billion dollar rescue of Fannie Mae and Freddie Mac is effectively nationalising the US's biggest mortgage companies.

It is reminiscent of the UK's nationalisation of Northern Rock. For a long time government ministers tried to avoid the 'N' word; but like in America they were ultimately, left with no alternative.

The banks need to be nationalised because of an unprecedented rise in mortgage delinquencies (an American term for mortgage defaults) leaving investors nervous about whether they could survive.

In a way, the US government cannot contemplate allowing the two big mortgage lenders to go under. They are involved in over 50% of US mortgages and so are an indispensable part of the financial system.

However, the cost of the bailout is uncertain. Henry Paulson, the US treasury secretary admitted that . "In the end, the ultimate cost to the taxpayer will depend on the business results."

Basically, if the credit crunch lasts into 2010 and mortgage defaults continue to rise, the American taxpayer could be left with a very large bill for the financial bailout.

It is hoped that government nationalisation will reassure investors who know their loans will be secured by the government. However, the worst of the US housing market downturn is not over yet. Defaults in subprime mortgages are also spreading to prime mortgages, - especially mortgages based on adjustable rates. With house prices still falling, mortgage defaults also leave banks with significant losses.

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3 comments:

William Wallace said...

Interesting article. But could you explain what do you mean by "The banks need to be nationalised because of an unprecedented rise in mortgage delinquencies (an American term for mortgage defaults) leaving investors nervous about whether they could survive." Who could survive? The investors, or the banks.

And why is it okay for Curtis Mathes Corporation to go belly up, but not an airlines, or a car company, or a bank?

Tejvan Pettinger said...

see next blog post

Allmortgagebanks said...

I am happy for the government to bail out failing banks and their depositors on this condition : The high interest rates that these people received from unsound banks are retrospectively applied (say since 2000) to my cautious investments in low interest 'safe' securities.Otherwise they receive no penalty for their greed whilst I suffer for my 'good sense' (ha ha!) Alternatively all depositors should only be compensated on the basis of 'no interest earned'.