Friday 20 Jul 2018 | 18:35 | SYDNEY
Friday 20 Jul 2018 | 18:35 | SYDNEY

Fannie and Freddie bailout shows government is back


Mark Thirlwell

8 September 2008 11:10

Does Sunday’s announcement by US Treasury Secretary Hank Paulson that the US government is to take control of Fannie Mae and Freddie Mac mark another watershed for the world economy?

In a series of recent presentations and seminars I have been making the case that we are now experiencing a period of profound change in the international economic environment. These changes include a broad rethink about the role of markets and regulation, and one conclusion I have been offering is that a key element of this transition is the return to a greater role for government in economic matters.

Part of this trend is a powerful side-effect of the Great Convergence, as a result of which, a much greater share of world output is now accounted for by countries that accord a relatively larger role to government in the operation of their economies (China is an obvious example). This, in turn, helps inject government back into economic issues in the rest of the world as well: see, for example, the way in which the growth in state-controlled foreign investment is prompting a regulatory response in the developed world, including in Australia.

A second force pushing the world in this direction has been the current financial crisis. One outcome of the ongoing financial turmoil will be tougher and more intrusive regulation of the so-called shadow banking system. But another – and more surprising – development has been an increase in government control of financial institutions themselves. 

Thus the injection of capital by Sovereign Wealth Funds into faltering Wall Street Banks in late 2007 was described by some observers as a form of 'cross-border nationalisation'. Government intervention of a more traditional kind then came with the British government’s decision to nationalise Northern Rock in February 2008 – the first British nationalisation in a generation. And now we have Sunday’s announcement by Paulson of what could turn out to be the world’s biggest financial bailout.  So yes, government is back.

Photo by Flickr user duboff, used under a Creative Commons license.