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Last week fund manager Jim Rogers had harsh words for the federal government’s takeover of mortgage giants Fannie Mae and Freddie Mac. He called it "socialism for the rich" and added, "it’s just bailing out financial institutions." The result, in his view: "America is more communist than China is right now." (The September 10 interview can be viewed at www.cnbc.com.) The rhetoric may seem heated, but it flows more or less logically from one of the subprime meltdown’s most widely used mantras. That is, government bailouts “socialize the risks while privatizing the profits.” This is the charge critics level against the administration’s record with Bear Stearns, Fannie Mae, and Freddie Mac.
Socializing the risks and privatizing the profits. It seems only a small step from this widely shared perception to Rogers’ charge that the recent bailouts have created "socialism for the rich." But what’s this about a capitalistic China? Isn’t it still a communist country? As the Olympics telecasts showed, it’s getting harder to tell as time goes by. On a visit to China last December, David Brooks wrote a New York Times op-ed piece titled "The Dictatorship of Talent." What he observed there was a kind of Confucian capitalism that values hierarchy and merit, where merit means talent, as measured by competitive examinations. The winners in the exam system then qualify for the best university spots and eventually ascend to the apex of the society as members of the Communist Party. Instead of ideology, these days the Party offers a platform for careerist networking. In other words, Party membership has become the shortest path to material success in a capitalist world economy. As Brooks put it, "Imagine the Harvard Alumni Association with an army." In any case, fund manager Rogers had another complaint about the takeover of Fannie and Freddie—and it takes us back 40 years to the origins of the problem. As Rogers puts it, "This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents. I’m not sure why I or anybody else should be paying for this." 
Ironically, Fannie Mae was originally taken private to make the national debt look smaller. Created in the Depression as a government agency, Fannie was privatized at the height of the Vietnam War, when budget deficits were increasing the national debt. President Lyndon Johnson wanted to finesse the problem by getting Fannie’s debt off the federal government’s books. This joined Fannie’s initial goal of promoting home ownership to the potentially conflicting goal of making money for Fannie’s stockholders. Two years later, in 1970, Freddie Mac was created as a second private company to give Fannie Mae some competition. Fannie and Freddie were as much about making money for their shareholders as about increasing home ownership. And they had the benefit of de facto government sponsorship. Armed with that advantage, Fannie and Freddie set out to maximize profits by steadily increasing their scale of operations, partly by using borrowed money. As a result by the end of 2007, the twin giants had taken on a combined debt of $1.5 trillion. Another line of business both pursued was to issue mortgage guarantees of $3.5 trillion. This meant that they would be liable for making good on mortgages (including subprime mortgages) that went sour. Between their debt and their mortgage guarantees, the twins’ total liabilities reached $5 trillion. By comparison, the part of the national debt held by the public was $4.4 trillion at the end of 2007. This was the value of the publicly held Treasury securities issued to finance the nation’s federal budget deficits over the years. (Another $4.8 trillion in Treasury securities was held by the Fed and in trust funds for Social Security and Medicare, for a total national debt of $9.2 trillion at the end of 2007.) The $4.4 trillion figure may be what Rogers means when he talks about doubling the national debt “in one weekend.” With the takeover, the federal government has now put its full faith and credit behind Fannie and Freddie’s liabilities. The debt in the hands of the public, $4.4 trillion, has now been joined by an obligation to make good on another $5 trillion. Rogers may be unhappy about this turn of events, but China’s government applauded it. Why? Like the U.S. Treasury, Fannie and Freddie had borrowed increasingly large amounts from China and other foreign governments. Now such lenders can rest assured that the loans are still good. And, as the current Economist magazine observes, now Americans can begin to come to terms with how it feels to be a debtor nation, answerable in times like these to its creditors.
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