The Rise of State-sponsored Capitalism
In global markets around the world, the free market is being challenged by the rise of ‘State Capitalism’ — a system in which the government, through direct investments and regulatory reforms to check the excesses of greed & volatility, becomes the leading economic actor. With the announcement last week of the results of the bank stress tests, the ‘nationalization‘ of U.S. banks, in some form, seems inevitable. Embrace the future: the financial capitol of the world has shifted from New York, to Washington, D.C. 
Is state capitalism the future of 21st-century capitalism..??
Ten of the nation’s largest financial institutions fell short of the capital requirement required by the stress test. Bank of America alone required an additional $34 Bn. These results also leaves the door open for bank regulators to dictate terms and conditions if they seek additional federal bailout dollars — including the possibility of the U,S, government becoming the largest commom equity shareholder. Of course, the bank industry oligarchs are scrambling madly to aviod the consequence of their self-inflcted reprobation. In the final analysis, the federal government is the only entity left standing in the ruins of the global economic crisis able to reign in the excesses of unregulated risk-taking and un-checked economic volatility. But State Capitalism is not new, and it’s most likely what 21st-century American-style capitalism will look like. In fact, it’s been around a while, and believe it or not, the U.S. has used it successfully in the past. for instance, think of well-known government sponsored enterprises (GSEs) that were, until recently, publicly traded corporations such as Fannie Mae and Freddie Mac; or subsidized private operations such as our national postal system or our national passenger rail system, Amtrak. Think also that all within the last century the U.S. government had a regulatory and ownership stake in the nation’s telecom, railroad and airline industry until “deregulation‘ — another term for ‘privatization‘ — of those industries occured. Interestingly, all of those industries are still closely tethered to government subsidization, err… I mean taxpayer funding.
But wait, it get’s more interesting. We in the U.S. are behind the curve. State capitalism, it turns out, is prolific elsewhere in the world — even among developed, free-market allies such as Britain, Japan, Germany among many others. Other nations such as China, Russia, Saudi Arabia, Venezuela — and probably eventually Cuba — haved used state-sponsored capitalism with great effect and economic success either currently, or in the past. For instance, Saudi Arabia’s state-owned oil company, the Arab-American Oil Company (Aramco); Russia’s Gazprom, Venezuela’s Getty Oil company, Britain’s BP (British Petroleum) and China’s Sinopec Oil) and China Mobil (telecom) all owe their present success and vialbility to the government’s stake in these private enterprises. Some of them, like BP and China Mobil are good performing, publicly traded stocks in recent years.
State Capitalism
With the Obama administration’s stake — taxpayer investments, if you will — in the Bank and Auto industry, what the current U.S. adminstration is doing, it seems to me, is to re-establish the U.S. as a global leader, rather than a follower, in the emergence of 21st-century capitalism. One of the ways the administration is trying to do this, under the not-so-able stewardship of U.S. Treasury Secretary Timothy Geithner, is the development of the Public Private Investment Partnership (PPIP) — an excellent example of state-sponsored capitalism. The program will provide $1 Tn in taxpayer dollars to hedge funds and Wall Street fund managers such as PIMCO, BlackRock, et al, to invest in the deeply discounted bank toxic assets; and in return the federal government splits the upside (return on investment) at some unspecified point in the future. Small investors will be able to puchase shares in these funds. Let’s hope it works; there’s a lot at stake. Similarly, much of the discussion, as well as the outcome of the London G-20 Summit last month centered on re-structuring the global financial architecture with a greater regulatory, as well as participatory role for central banks and national (ie, state) governments. Another prime example of the emergence of state capitalism in recent years have been the growth of Sovereign Wealth Funds (SWFs) — large pools of investment dollars controlled by the government or central banks that are invested in global capital markets. With the tremendous international capital flows that these funds can produce, some are concerned that intentional, harmful economic effects can be inflicted by unfriendly or politically-driven state actors. Current global market capitalization of SWFs are estimated at approximatley $4 Tn — approxiamtely one-eighth of total global market value.
The most recent issue of Foreign Affairs magazine has a terrific article by Ian Bremmer titled, The End of Free Markets. I consider it a ‘must read’ on the rise of state capitalism.
And the Council on Foreign Relations (CFR) has an excellent Soveregin Wealth Fund primer website here. Very informative. I highly recommend.
