Famous investor and writer, Jim Rogers (Adventure Capitalist, Investment Biker, and Hot commodities), recently stated that America is “more communist than China right now,” but our variant of socialism is geared towards the rich. He was referring to the federal government’s decision to bail out beleaguered mortgage giants, Fannie Mae and Freddie Mac. Tagged onto earlier questionable Federal Reserve bailouts designed to stabilize the financial system, as well as longer-term protectionist policy and corporate subsidies, Mr. Rogers might just be onto something…

“You can see that this is welfare of the rich, it is socialism for the rich… it’s just bailing out financial institutions,” Rogers said.

“Bank stocks around the world are going through the roof, that’s ’cause they’ve all been bailed out. You don’t see the homeowners in Kansas going through the roof ’cause they’re not being bailed out,” he added.

In fact, homeowners in Kansas may be in even further trouble, since the federal takeover of the mortgage industry mandates that Fannie and Freddie will have to cut their portfolios 10% per year starting in 2010 until each are worth $250 billion. In addition to taking over the companies, the government intends to buy large amounts of their debt, transferring bad loans from their balance sheets to that of the American taxpayer. With far less mortgage capital reaching the housing market, it is unlikely prices will rebound anytime soon.

It’s easy to sensationalize things…it’s tempting, even! But the reality is that America is not more Communist than China. Each of the government bailouts this year had justification; not always 100% clear justification, but there was logic to it all. Troubles have been mounting in our economy since the third quarter of 2006: the housing market has nearly reached Great Depression lows (and in a much faster decline!), over 10 million Americans owe more on their homes than they are worth, banks are failing, investment banks are writing down hundreds of billions in bad securities, wages have been stagnant for a decade, commodities prices gone through the roof, and justifiable fears that the economy is on the verge of recession.

Amidst this tremendously ambiguous, scary backdrop, the Federal Reserve slashed interest rates in what looked like one market bailout after another, the government orchestrated a collateralized takeover of Bear Sterns mid-year, and they are now taking over 80% of Fannie Mae and Freddie Mac, along with off-loading some of their worst performing assets onto the shoulders of taxpayers.

The problem with Socialism is that the consequences of making bad decisions are obscured. When Socialism favors the poor then you can sit around all day doing nothing and get a paycheck. when it favors the rich you can make bad loans all day long without worrying about suffering the consequences of default. In order to make this country work in the long term, our government should promote strategies that force people to deal with reality. As far as the world of finance is concerned, we need to ensure that people pay for their own mistakes and that the overall infrastructure is strong enough to support itself without having a few incompetent market participants able to hold the entire system hostage.

Evolution works through creative destruction, as does the natural state of a free market.

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