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Byron Williams Headshot

Capitalism for the Poor, Socialism for the Wealthy

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Most Americans believe they possess a natural aversion to socialism. Charges of "socialized medicine" have derailed much-needed health care reforms for years.

After all, we are a capitalist society, we believe in personal responsibility, lifting ourselves by our bootstraps -- at least that is the stereotype we like to promote.

The version closer to reality is America offers capitalism to low-income individuals, but is more than willing to unleash its socialist impulses for the wealthy.

If we were truly a capitalist society Chrysler would not exist today, making cars that don't sell. It would have gone out of business decades ago. By passing the $1.5 billion "Chrysler Corporation Loan Guarantee Act of 1979," Congress allowed Chrysler to avoid bankruptcy, stay in business, and save jobs.

However one feels about the Chrysler bailout, it was not capitalism. But recent Wall Street financial fiascos may cause us to long for the return of the Chrysler K-car.

Congress is now on the verge of bailing out Fannie Mae and Freddie Mac, the government created but privately owned, profit-making housing finance companies responsible for nearly half of the U.S. mortgage market. Collectively, they own or guarantee an estimated $5 trillion of debt.

Fannie Mae was created in 1938, under President Roosevelt, at a time when millions of families could not become homeowners, or risked losing their homes, for lack of a consistent supply of mortgage funds across America.

In 1968, Fannie Mae was re-chartered by Congress as a shareholder-owned company, funded solely with private capital raised from investors on Wall Street and around the world.

Fannie and Freddie were able to borrow money at a discount based on the assumption that the government would stand behind their debts if need be. Their operations were regulated, limited by laws detailing what mortgages they could assume.

But as these institutions grew and profited, they became more powerful behaving more like a publicly traded company than regulated government entity. The executives of each institution were compensated like any other Fortune 500 CEO, pocketing huge salaries.

It was reported that Freddie Mac Chair, Richard Syron received more than $18 million in compensation last year, while Fannie Mae CEO Daniel Mudd received $13.4 million in 2007 while the company lost $2.1 billion and its shares fell 33 percent.

But with foreclosures soaring, Freddie and Fannie have sustained billions in losses, their shares have plummeted, there is also talk that bankruptcy in the future of these two institutions designed to maintain confidence in the lending markets. The American taxpayer is being asked to step in and save the day.

But Fannie and Freddie are different in that they are private when they want to be and public when they need to be.

As former Treasury Secretary, Lawrence Summers recently opined, "The illusion that the companies (Fannie and Freddie) were doing virtuous work made it impossible to build a political case for serious regulation."

He adds, "When there were social failures the companies always blamed their need to perform for the shareholders. When there were business failures it was always the result of their social obligations."

This leads Summers to conclude that the gains were being privatized and the losses socialized. This is great for the shareholder, but hardly in the best interest of the society as a whole.

With the lending markets already experiencing a lack of confidence, there is the anticipation that the home mortgage crisis will worsen. The problems created by the subprime lending are expected to bleed into the more traditional lending markets.

I believe the government must step in order to restore confidence. But there is bit of irony in its doing so.

Like Fannie and Freddie, the American economy is also a hybrid of private and public participation. We are hardly a socialist society, but we are not paragons of capitalisms.

The American taxpayer cannot continue to serve as the ultimate guarantor to otherwise unregulated companies. But we tend to be much more forgiving of the failures of Wall Street than those in need of public assistance.

To the poor we say: "Get a job!" To Wall Street we say: "How much do you need?"