Editorial

Public Ownership, Public Control

In October, following the lead of Great Britain, the United States government announced that it would buy $250 billion in new shares in banks (a so-called “equity injection”). This is aimed at boosting confidence in the banks and giving them new capital to loan. The new equity will potentially enable them to loan roughly 10 times more than would the U.S. Treasury Department’s initial plan to buy up troubled assets.

This move was widely characterized as a “partial nationalization” of U.S. banks. But it is a strange kind of “partial nationalization,” if it should be called that at all. Although the government will take an ownership stake in the banks, it won’t exercise control commensurate with that ownership stake.

That must change.

Treasury Secretary Henry Paulson effectively compelled the leading U.S. banks to accept participation in the program. Under the terms of the deal, the U.S. government will buy preferred shares in the banks, which will pay a 5 percent dividend for the first three years, and 9 percent thereafter. The government also obtains warrants, giving it the right to purchase shares in the future, if the banks’ share prices increase.

But the Treasury proposal specifies that the government shares in the banks will be non-voting. And the deal imposes only the most minimal requirements on participating banks.

In keeping with the terms of the $700 billion bailout legislation, under which the bank share purchase plan is being carried out, the Treasury Department has announced guidelines for executive compensation for participating banks. These are laughable. The most important rule prohibits incentive compensation arrangements that “encourage unnecessary and excessive risks that threaten the value of the financial institution.” Does the public need to throw $250 billion at the banks to persuade executives not to adopt incentive schemes that threaten their own institutions?

The banks are bleeding hundreds of billions of dollars — with more to come — but under terms of the “partial nationalization,” they can continue to pay dividends (though they can’t raise them). In other words, the banks can take some of the bailout rescue money and pay it out to shareholders, rather than use it for new loans or to repair their balance sheets.

The “partial nationalization” does not obligate the banks to make new loans with the money they are getting. And, it quickly became apparent they had no intention of doing so. It is natural and reasonable for banks to be conservative about making new loans in a recession. But the public interest is to encourage at least some additional lending, and to counteract the banks’ tendency to overreact to hard times.

The “partial nationalization” also does not obligate the banks to renegotiate mortgage terms with borrowers — the vital step needed to stem the mortgage meltdown that is driving the global economic recession.

“The government’s role will be limited and temporary,” President Bush said in announcing the “partial nationalization,” plus other very important moves to expand the federal government’s insurance and lending roles. “These measures are not intended to take over the free market, but to preserve it.”

But it makes no sense to talk about the free market in such circumstances.

Direct government investment in large financial and other corporations must be accompanied by assertion of government authority to make the rescued firms serve public interest objectives.

It’s time to think very broadly about how this power should be used.

In the case of the banks, the top priority is to force a renegotiation with borrowers of unsustainable mortgages. They should also be prohibited from dangerous speculative investments. And, they should be prohibited from charging usurious rates on credit cards. But new obligations and standards should extend beyond these kinds of measures. The banks should be prohibited from lending for ecologically or socially harmful projects. And, with due regard for prudential standards, they should be required to bias their loans in favor of projects with environmental and social benefits.

The auto industry is lining up after the banks for a bailout — and others are likely to follow. The government should require the automakers to retool and invest in fuel efficient, hybrid and electric cars. There should be both very specific investment requirements and specific output requirements, so that cars meet certain pre-established standards. These measures should be accompanied by regulatory changes that force all auto manufacturers to meet similar standards, going far beyond existing fuel efficiency requirements.

General principles should also be formulated for the companies that become wards of the state. Atop the list: They should be prohibited from trying to influence the political process, especially on matters directly concerning their business.

After all, if the people of the United States are going to spend trillions of dollars to rescue the avatars of corporate capitalism, they should at least be able to purchase a more robust democracy and a more democratic economy in the process.