US nationalisation of mortgage firms defeats absolute capitalism

The United States government’s decision to takeover Freddie Mac and Fannie Mae, the country’s two largest mortgage firms, may have surprised financial experts but it demonstrates that capitalism in its entirety may not absolutely hold.

The takeover brings to life the decades-old argument on whether the government should intervene in private business in a free-market economy. While free-market economists argue that economies can flourish on the law of supply and demand, mixed-market economists believe that the government can intervene in the market when necessary.

The decision by the Bush administration last week to take over the two mortgage firms further strengthens the latter argument. It demonstrates the need for government intervention in the face of a looming calamity even if such a decision is against the central tenets of capitalism.

Years ago, few people would have rightfully predicted a government takeover in the world’s model of capitalism but the decision clearly demonstrates that even hardcore capitalists are ready to bend the rules if need be.

While such government takeovers are always unpopular with shareholders and company proprietors, it saves the country’s face in face in a looming economic catastrophe. Following the announcement that the federal government would receive purchase rights for up to 80 per cent of the companies’ shares at less than $1 a share, the two stocks fell by an average of 22 per cent to just above $1.

The New York Times quoted Henry M. Paulson Jr, the US Treasury secretary, saying the bail out was a rescue plan to prevent further turmoil in the financial markets. “This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement,” he said.

However, the Ugandan government is often times reluctant to intervene in the private sector arguing the economy is liberalised and that such a move defeats the central tenets of free-market economy.

The government for instance folded its arms and watched the country’s most-promising financial institutions collapse. Bank of Uganda, the regulator of the financial sector, in 1999 closed Cooperative Bank and Greenland Bank, some of the budding indigenous banks at that time, for insolvency and bankruptcy.

However, the Freddie Mac and Fannie Mae takeover shows that all is not lost even when the company is in red.

Unfortunately it was not the case for Ugandans. The banks’ problems came at a time when the government was aggressively divesting its interests in state corporations and was reluctant to takeover a private companies but was more inclined to the donor-friendly route – to close the banks. The country’s financial sector consequently sunk into deep doldrums from which we are beginning to recover.

The government could for instance have reversed the destiny of the financial market with a sound turnaround strategy of Greenland and Cooperative Bank and later sold the banks after they turned profitable. The government in return could have reaped benefits after selling the institutions to a strategic investor or through listing on the stock exchange, giving back to citizens what it had taken as seen in the success story of Stanbic Bank.

Such government interventionist measures can further be extended to protect consumers in times of scarcity when traders resort to arbitrary price increments. The Competitions Bill currently gathering dust in the pigeon hole of the Minister of Trade is precisely what the country needs to address the gaps. In the U.S., the anti-competitions serves the same purpose.
While free-market economists argue should stay out of business of the private sector, the U.S. government takeover of Freddie Mac and Fannie Mae show that in under special circumstances government intervention is necessary. It is template from which we can draw lessons.