Privatization and How It Works

The conservative mantra for decades has been "privatization, privatization." Today, Princeton economist Paul Krugman tells us how it really works (emphasis added):

The case against Fannie [Mae] and Freddie [Mac] begins with their peculiar status: although they’re private companies with stockholders and profits, they’re “government-sponsored enterprises” established by federal law, which means that they receive special privileges.

The most important of these privileges is implicit: it’s the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue.

This implicit guarantee means that profits are privatized but losses are socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose.

The only thing wrong with Krugman's description is that it's not "Washington" who picks up the tab for the lucky stockholders of Fannie Mae and Freddie Mac. It's you, me, and the rest of the taxpayers.

We're with Duncan Black on this one. He writes, "Both short and long term we might think that having such creatures exist to be mortgage backstops is a good idea. I probably agree with that. But there is no reason for them to be publicly traded companies."

Dept. of Amplification

Washington economist Dean Baker puts the issue more starkly:

We had to keep Fannie and Freddie in business, but we could have done this by putting conditions on the bailout. The government uses conditions all the time when it offers help to low and moderate income people. Unemployment insurance, TANF, food stamps, and even student loans come with all sorts of conditions.

It is only when it comes to giving money to extremely rich people that we find it impossible to impose conditions. Again, we could have told Fannie and Freddie that no executives will get more than $2 million a year in total compensation. We could have told their shareholders that they are out of luck, because that is what is supposed to happen when you invest in a bankrupt company.

Instead, we told the people who work as truck drivers, school teachers, and fire fighters that they will have to pay more in taxes to help some of the richest people in the country escape the consequences of their own stupidity.