There is another option in relation to Freddie Mac and Fannie Mae. Rather than making the taxpayer liable for debts the debts of the government-sponsored enterprises, it would be more sensible to effect a smooth, prepackaged reorganisation plan. This could be done quite simply and would strengthen the GSEs’ ability to meet their congressionally mandated purpose of supporting liquidity in the secondary mortgage market.

The core of the GSEs’ mission is to purchase mortgages from mortgage originators, charge a guarantee fee to issuers to protect their ability to stand behind these loans, and securitise these mortgage-backed securities with assurances to MBS holders they would receive 100 per cent of their anticipated returns. To this end the GSEs have guaranteed $3,500bn in mortgage-backed securities These securities are backed by real housing assets and there is little question that, assuming they are well serviced, there will be relatively little loss over a longer period.

As part of a prepackaged reorganisation the government could explicitly assure MBS investors they will receive all of their guaranteed interest payments. Instead of giving ineffective management a line of credit, Treasury could provide the GSEs’ regulator with a line of credit used to assure timely payments on these obligations. This is the tool that Treasury provides the Federal Deposit Insurance Corporation with to sort out failed banks. Over time that line will be repaid by the running-off of the portfolios, active servicing of mortgages and through payment of claims by private mortgage insurers who guaranteed first losses on GSE mortgages. Because these debts are core to the GSEs’ social mission and real assets back these debts, this would be an appropriate resolution.

The next step would create approximately $150bn in new equity capital and enable to GSEs, without governmental support, to achieve more fully their chartered mission.

Over the past decade the GSEs have increasingly used their portfolios to speculate in aircraft leasing, manufactured housing, interest-only mortgages and other securities they are specifically prohibited from buying as part of their mission. In recent years, through these portfolios they funded nearly 50 per cent of the riskier private label Alt-A mortgage market, invested in aircraft lease securities, manufactured housing and other assets that leveraged them into trouble. To achieve this speculative, hedge fund-like growth they issued almost $1,500bn of senior corporate debt. By their investments, debt buyers supported speculation in non-mission-related activities and did so with a clear understanding they were funding non-mission-related activities. They also knew GSE debt was explicitly not an obligation of the US taxpayer and that was repeated constantly by the government and the companies.

In exchange for their current debt, these holders should receive 90 cents on the dollar of new, long-dated, senior debt in the companies and 10 cents of new subordinated debt. The companies would then have enough capital to support their core, chartered mission and could increase the social returns and financial returns of investors in their core mission. This approach would send a very strong signal, from the government, that investors fully consider the risks of bad asset allocation. It would almost certainly strengthen the dollar. Though it would cause pain for equity and subordinated debt investors, those investors received the majority of returns over the past several years and, in our great system, they are supposed to be subordinated.

There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.

Instead the dishonest, spineless socialist policy makers in successive Democratic and Republican admininstrations have systematically tried to hide both the subsidies and size and distribution of the incremental fiscal burden associated with the provision of these subsidies, behind an endless array of opaque arrangements and institutions. Off-balance-sheet vehicles and off-budget financing were the bread and butter of the US federal government long before they became popular in Wall Street and the City of London.

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So let’s call a spade a bloody shovel: nationalise Freddie Mac and Fannie May. They should never have been privatised in the first place. Cost the exercise. Increase taxes or cut other public spending to finance the exercise. But stop pretending. Stop lying about the financial viability of institutions designed to hand out subsidies to favoured constituencies. These GSEs were designed to make losses. They are expected to make losses. If they don’t make losses they are not serving their political purpose.

So I call on Secretary Paulson, Chairman Bernanke and Director Lockhart to drop the market-friendly fig-leaf. Be a socialist and proud of it. Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA. Granted, the US version of socialism is imperfect thus far. The federal authorities have mainly intervened to socialise the losses in the financial sector while allowing the profits to continue to be drained off into selected private pockets. But that is bound to be an oversight. It surely cannot be the intention of such committed Marxists to target taxpayer-funded largesse solely at the very rich and at a few favoured, electorally sensitive constituencies. Fannie and Freddie are, or will be, safe in the hands of comrades Paulson, Bernanke and Lockhart.

First, America’s political leaders must recognise that, unless recent improvements in the country’s trade balance can be sustained and accelerated, and domestic savings rise sharply, the US will remain heavily dependent on foreign capital in the form of purchases of government or corporate bonds, stocks and direct investment. US policymakers will need to find ways to increase domestic savings, shrink the federal deficit, reduce the heavy reliance of American consumers on credit and curb oil imports. Without these measures, massive amounts of foreign capital will be needed for years to come. This is not a matter of politics, but of arithmetic. In such circumstances, the US must remain attractive to foreign capital or suffer adverse consequences. Sound finances, enabling the US to borrow on reasonable terms, will remain an important factor in national strength. Frequent financial crises, large trade imbalances, a series of outsized budget deficits and failure to put Social Security and Medicare on a more sound financial footing could undermine investor confidence. That would discourage overseas investments and the willingness of central banks to hold dollar reserves, causing a plunge in US financial markets and the dollar, thereby jeopardising America’s growth.

Second, with foreign competition intensifying, robust growth taking place in many parts of the world and large numbers of US jobs and corporate profits dependent on expanding exports, the US needs to boost its own competitiveness and further open foreign markets for its goods and services.

A robust response requires vastly improved training and education, especially in mathematics, engineering, physics and science. More than ever this must benefit minorities and immigrants, the fastest-growing portion of the US workforce. Critical also is acceleration of government and private-sector investment in research and development to create competitive new jobs, products and industries. This is especially true in energy, where a variety of new sources and new technologies are urgently needed: such measures can produce increased employment opportunities, reduce oil dependence and the attendant massive outflows of funds, and sharply curb greenhouse gas emissions. The financial system and tax code must encourage greater domestic savings and investment, and channel funds to the most productive sectors.