The American Socialist Commonwealth (Part 2 of 2)

(This is the second installement of a 2 part piece, click here for part 1)

Former Hoover Institute Fellow Antony Sutton surmised that there were three species of socialism: Bolshevik socialism, state corporatist socialism, and welfare state socialism. All three shared one common premise – government involving itself in the planning and organization of the economy.

In Bolshevik socialism, the state owns all means of production: Farms, factories, mines, timberlands, and everything else that produces consumer or industrial goods. The decisions about what to produce come from a centralized committee dedicated to planning the economy. In this form of socialistic economy, we see things like the Soviet GOSPLAN, the organization tasked with writing the Five Year Plans. Another example would be Mao’s Great Leap Forward in the 1950‘s in China.

Despite the rhetoric that is occasionally employed, the United States has not shifted towards the Bolshevik model.

The welfare state socialist model is where the state decides to insert itself into a few specific parts of the economy, justifying its actions as necessary to alleviate poverty. This would include things like Medicare (healthcare for the elderly). The United States used to subscribe to this model, but now I think we have shifted away from it.

The state corporatist model could also be described as national socialism, but the Nazi regime has left that term too heavily tainted for use in current academic examinations of political economic models, so the model now has a new name. The most commonly cited example of this type is Mussolini’s corporatist state, but includes a wide array of variants, all sharing an economy which is heavily controlled.

The best example of this form in modern times is probably the “Social Market Economy” model shared by most of northern Europe, and probably the new economic model in China in the era after Deng Xiaoping. All forms require large government programs and generally the planning process will involve large special interest groups. Basically, big government, big labor, and big business sit down at a table and negotiate a general plan for the economy.

I put it to you, that the United States has slowly moved towards the state corporatist model for decades – a trend which has accelerated in the past few years and was thoroughly supported by career politicians of both parties, which I state because every time I talk about economic planning I am accused of mindlessly slandering liberals by comparing them to communists.

I also put it to you, that nothing in our economy better illustrates this shift than the residential mortgage market.

There isn’t a shred of capitalism in the American home mortgage industry. If you doubt me, let’s conduct a quick audit: The FHA was created in the 1930’s to offer insurance on mortgages written by the banks. If the mortgage defaults, the house is foreclosed upon, and the FHA pays the bank under the insurance contract. The house is then transferred to FHA’s parent organization: The Department of Housing and Urban Development.

Next came Fannie Mae. Also born in the 1930’s, Congress created it as a federally-chartered corporation with the task of buying mortgages from the banks. This would allow the banks to turn loans around faster than if they had to hold them for thirty years, thereby encouraging them to write more mortgages.

In the 1960’s, the government began to sell shares of Fannie Mae, and ultimately decided to “privatize” it, but doing so would look to monopolistic, so Congress also created Freddie Mac, with basically the same mission – buying mortgages. Both operated as Government Sponsored Enterprises – you could buy shares in them, but they had the special backing of the government. Both were enormous spenders on lobbyists, and huge contributors to political campaigns. Both parties were very enthusiastic about this arrangement.

Both of them got into trouble in 2008, and ended up back under direct government control. Nothing changed, though.

The banks still write the mortgages, but after that they only provide loan servicing support – I guess we should call this subcontractor socialism – and they have to follow the guidelines given to them by Fannie, Freddie, and the FHA (if you have faced foreclosure, and couldn’t get anywhere with your bank because of “investor guidelines,“ that means Fannie and Freddie). The banks received a benefit under this arrangement, however; by surrendering free market banking, they were able to earn enormous profits by writing far more mortgages than they could have in a free market situation.

They also have to abide by the Community Reinvestment Act, lest they be sued by “community organizations,” like the one Barack Obama worked for back in Chicago.

When the housing bubble burst, wave after wave of houses went into foreclosure, and ended up being transferred to Fannie, Freddie, and FHA’s parent department, HUD. The three of them combined now control huge portfolios of residential real estate. In some communities, HUD owns entire neighborhoods.

When you remember that the Federal Reserve’s cheap money was critical to the housing bubble and the bailouts it spawned, we have a perfect Ludwig von Mises Hat Trick: Economic liberty falls by the wayside as the FHA makes the rules, private property is becoming government property by means of FHA mortgage insurance, and sound currency was abandoned by our central bank to provide the cash necessary to fund the housing bubble.

After the crash, the FHA is still with us, and insuring more mortgages than ever before. Fannie and Freddie were bailed out along with the banks, and the community organizers are still pushing for fair housing.

The same thing happened with the auto industry. General Motors was bailed out, but it wasn’t just bailed out; the government and the United Auto Workers took ownership share in it. The glory of Public-Private partnership.

Ludwig von Mises spent most of his career trying to convince people of the folly of economic planning by government. He gave lectures, wrote books, and published articles on the virtues and capabilities of real economic freedom. Unfortunately, political expedience is the golden rule of our political leaders, and it is rarely expedient for a politician to really consider the ramifications of their actions.

(To read Part 1 click here)

 

About the Author

Mr. Waechter is an attorney and a recent graduate of Drake University.

 

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