The US of SA ? the United States of Socialist America ?

FY 2007-08 has seen the build-up of the worst Financial crisis in the United States that has been in the making for many years now. The recent chronology of big global banks / investment banks / financial institutions going bust is only a stark reminder of the pent-up frailties of a frothy economic system. The developments in the Financial institutions and the subsequent closure of large global organisations threatens to push the United States into a recessionary phase quite similar to the Great Depression in 1930s.

In order to avoid the predicament witnessed by the United States in the 1930s, the Federal Reserve Bank of America, decided to bailout these large global financial institutions amounting close to $700 bn of taxpayers' money .... and still counting.

The aggressive attitude and high risk-appetite among players like Lehman Brothers, Merrill Lynch, Bear Stearns led to the pile-up of Mortgage MBS within the financial system. This was a deck of cards waiting to fall. A big portion of these billion dollar losses is the Sub-Prime mortgage which was securitised, owned and sold to investors across the globe in the form of credit derivatives.

So, does the bailout appear ethical and correct ?
Who is being bailed-out by the Fed ?
Is the Fed bailing out these companies (and their leadership) who faltered on gauging risk and marking-it-to-market when the domestic interest rates were rising OR the foreign investors (other financial institutions across the globe) who bought this paper ?
Why is the American Tax payer's money being used to subsidise the loss of institutions / individuals who ran amok and thought they were too big to fail ?
Has the concept of Free Market been compromised in the very nation that anchored this idea for decades so successfully ?
Has the US turned socialist by Nationalising it's ailing Capitalistic private corporations which threatened to go bust ?

There are two faces to Socialist Policies of State:

(1) The benevolent face of Socialism is based on the basic tenet of Social welfare. The State is responsible for equitable wealth redistribution and equitable
welfare of the subjects. The State owns everything while there is no private property / enterprise. By this ideal philosophy, there can be no economic disparity. At the same time, nothing belongs to the individual - thus throttling private entrepreneurship & innovation.

(2) The other facet of Socialism is the sterner version of the above principles as it existed in Communist nations of the past which were primarily oppressive in nature. The Subjects of the State simply had to work for the Head of the State as everything was under it's control. Basic principles of Natural Justice and Human Rights were curtailed as the citizens (if you will) were mere appendages of State machinery to generate revenues which did not eventually come back to the grass-roots as welfare - a gross violation of the basic tenet of Socialism - Economic Equity !

With the acts of Federal Reserve Bank to bring under it's umbrella such tottering global institutions, the biggest initiative towards Nationalisation of these private institutions has already taken place. There has never been such an initiative to Nationalise, of the order of approx $ 1 trillion in the history of any economy !

Social Welfare, eh?

The average tax burden owing to the $700 bn bailout of these organisations is said to be of the order of $6,500 per American household.

Who is being protected ? Subjects of the State ? Is this move to protect the rich shareholders ?

Well, with the Nationalisation of these large institutions, the government has taken close to 80% of the shareholder equity at zero cost. There is not much of a shareholder value left after such a transaction as the share price becomes negligible. So, this cannot be helping the rich shareholders !

Really speaking, the impact of this financial crisis could have had a serious recessionary fallout, if it was not for the bail-out from the Fed Reserve.

Consider this :

• The Sub-prime crisis caused billions of dollars worth of assets in banks, now being valued in pennies.
• Many investors into these MBS based credit derivatives were Pension Funds and Long-Term investment fund-houses which handle the Retirals and Pensions of millions of American Homes.
• The American Insurance Group (AIG) was the largest Insurance Company which provided Insurance Coverage and Annuities to millions of American households.
• Had the Banks been allowed to go belly-up, millions of tax-payers would have lost their life's savings / earnings in addition to Insurance / Medical coverage. Instead, Nationalised Banks such as Bank of America had a role to play in the buy-outs of ailing banks.
• With the current credit-squeeze, had the Fed not intervened, investor confidence would have hit a bottom. Investor funds wouldn't exist had their savings been wiped out ! The domestic market would have spiraled downwards in the absence of any liquidity / transactions. Small investors who wouldn't want to be stuck for too long in range-bound stocks would have cashed-out on their investments in NASDAQ, NYSE etc... The markets would have crashed sending negative global cues - the world over. The Dollar would have depreciated against major global currencies - increasing the Import burden on the exchequer. The scenario would have been worse than the Great Depression which lasted between 1929 - 1933 and the average American would have had the scariest Halloween imaginable !

What the Fed has done is to save these innocent tax-payers of their life's savings - the primary mandate of any government - Socialist or Capitalist. The Nationalisation of several financial institutions is a way to resuscitate and breathe new life into an ailing system. Subsequently, they would be eventually re-privatised with stricter regulatory norms after the crisis has been tided over ...

The Fed has performed the most Socialist of acts that any Capitalist nation could have ever performed to protect the interests of it's citizens - whose interest are paramount !

Should this bailout be 'No Strings Attached' ? What happens to the Baddies ?

Why was the country pushed into such a predicament in the first place ? Don't blame it on the Fed Governor - Alan or Ben for hiking interest rates. They were merely exercising monetary policy to control inflation by squeezing credit-offtake.

The real baddies were the leaders of these global giants who continued pouring billions into Sub Prime paper which was not worth the paper it was printed on ! The avaricious risk appetite saw some of these giants with billions of dollars worth of sub prime paper on their assets. Have they been bailed out as well ??

These Investment Banks continued to pay their top executives bonuses despite the erosion of share prices causing losses to the innocent shareholders. The "Golden Parachute" clause had become notorious.

Home Depot had to pay $210m to sever contractual ties with its chief executive. Pfizer had to rid itself of its boss, with a payoff of $200m despite shareholder -value erosion !

The hottest debate in Washington today is about excessive remuneration of top executives without the vote of shareholders on corporate pay ! Should this measure be taken, top executives would factor in shareholder value when making their decisions rather then flat bonuses / incentives irrespective of the erosion caused to shareholder value !