From the January 2010 issue of Research Magazine • Subscribe!

Government Promises

Of equal importance to the government's fiscal mismanagement is its regulatory failure. The economic crisis we are experiencing is no fluke, but the predictable result of our government's too-big-to-fail policy for financial institutions. Nicole Gelinas, whose brilliant new book After the Fall is excerpted in this issue, traces the roots of our current financial woes to the Reagan Administration's decision to bail out Continental Illinois in 1984. Since that time, we have had regular financial crises every half-decade or so and each new failure of our big financial institutions is costlier to society and the economy.

It needn't be this way. During the Great Depression, the Roosevelt Administration put into place a set of rules to prevent the failure of financial institutions from affecting regular folks like bank depositors. Another way Roosevelt balanced the needs of risk taking and consumer protection was through margin requirements on stock trades. Market exuberance will still create bubbles, but they aren't allowed to get as out of control as they had in the Roaring Twenties.

This wisdom was lost in recent decades. The government has actively encouraged the same wild speculation in the housing market that brought the country down in the 1929 stock market crash by allowing the purchase of homes with no money down. Similarly, the government has failed to set reasonable borrowing limits on big firms like AIG, which made billions of dollars of promises in newfangled credit instruments without having to put money down.

Yet the cost of too-big-to-fail keeps going up. Without the massive resources of the United States government, our situation today would be no better than Iceland's. But if we fail to fix our broken regulatory system, or cease our reckless fiscal indiscipline, how can we survive the next big crisis? Like the impoverished, aging and swindled Indians in the Cobell case, we may all be trading our trust fund IOUs for a lousy $1,000 government concession, if that.

Gil Weinreich
Editor
gweinreich@researchmag.com

Last month, the Obama Administration agreed to a $3.4 billion settlement in what Attorney General Eric Holder called "the largest case of fiscal mismanagement on behalf of citizens in U.S. history." The case of Cobell v. Kempthorne involved unpaid royalties on oil, gas and other leases on Indian tribal land that claimants believed totaled tens of billions of dollars. The royalties should have been paid to the Indians all along in the course of the government's 122-year administration of the trust. Victims of the government swindle agreed to settle because their numbers were dwindling every day as 13 years of legal wrangling have taken their toll on an aging population. Compensation per victim is expected to be in the neighborhood of a measly $1,000.

With respect to Attorney General Holder, his own and predecessor administrations have been hard at work creating an even more extreme case of fiscal mismanagement, also involving trust funds. Unlike the trusts that financial advisors administer in the private sector, the Social Security and Medicare trusts contain no real marketable assets or securities, just IOUs whose viability decreases with each new trillion dollars of red ink.

Of equal importance to the government's fiscal mismanagement is its regulatory failure. The economic crisis we are experiencing is no fluke, but the predictable result of our government's too-big-to-fail policy for financial institutions. Nicole Gelinas, whose brilliant new book After the Fall is excerpted in this issue, traces the roots of our current financial woes to the Reagan Administration's decision to bail out Continental Illinois in 1984. Since that time, we have had regular financial crises every half-decade or so and each new failure of our big financial institutions is costlier to society and the economy.

It needn't be this way. During the Great Depression, the Roosevelt Administration put into place a set of rules to prevent the failure of financial institutions from affecting regular folks like bank depositors. Another way Roosevelt balanced the needs of risk taking and consumer protection was through margin requirements on stock trades. Market exuberance will still create bubbles, but they aren't allowed to get as out of control as they had in the Roaring Twenties.

This wisdom was lost in recent decades. The government has actively encouraged the same wild speculation in the housing market that brought the country down in the 1929 stock market crash by allowing the purchase of homes with no money down. Similarly, the government has failed to set reasonable borrowing limits on big firms like AIG, which made billions of dollars of promises in newfangled credit instruments without having to put money down.

Yet the cost of too-big-to-fail keeps going up. Without the massive resources of the United States government, our situation today would be no better than Iceland's. But if we fail to fix our broken regulatory system, or cease our reckless fiscal indiscipline, how can we survive the next big crisis? Like the impoverished, aging and swindled Indians in the Cobell case, we may all be trading our trust fund IOUs for a lousy $1,000 government concession, if that.

Gil Weinreich
Editor
gweinreich@researchmag.com

Last month, the Obama Administration agreed to a $3.4 billion settlement in what Attorney General Eric Holder called "the largest case of fiscal mismanagement on behalf of citizens in U.S. history." The case of Cobell v. Kempthorne involved unpaid royalties on oil, gas and other leases on Indian tribal land that claimants believed totaled tens of billions of dollars. The royalties should have been paid to the Indians all along in the course of the government's 122-year administration of the trust. Victims of the government swindle agreed to settle because their numbers were dwindling every day as 13 years of legal wrangling have taken their toll on an aging population. Compensation per victim is expected to be in the neighborhood of a measly $1,000.

With respect to Attorney General Holder, his own and predecessor administrations have been hard at work creating an even more extreme case of fiscal mismanagement, also involving trust funds. Unlike the trusts that financial advisors administer in the private sector, the Social Security and Medicare trusts contain no real marketable assets or securities, just IOUs whose viability decreases with each new trillion dollars of red ink.

Of equal importance to the government's fiscal mismanagement is its regulatory failure. The economic crisis we are experiencing is no fluke, but the predictable result of our government's too-big-to-fail policy for financial institutions. Nicole Gelinas, whose brilliant new book After the Fall is excerpted in this issue, traces the roots of our current financial woes to the Reagan Administration's decision to bail out Continental Illinois in 1984. Since that time, we have had regular financial crises every half-decade or so and each new failure of our big financial institutions is costlier to society and the economy.

It needn't be this way. During the Great Depression, the Roosevelt Administration put into place a set of rules to prevent the failure of financial institutions from affecting regular folks like bank depositors. Another way Roosevelt balanced the needs of risk taking and consumer protection was through margin requirements on stock trades. Market exuberance will still create bubbles, but they aren't allowed to get as out of control as they had in the Roaring Twenties.

This wisdom was lost in recent decades. The government has actively encouraged the same wild speculation in the housing market that brought the country down in the 1929 stock market crash by allowing the purchase of homes with no money down. Similarly, the government has failed to set reasonable borrowing limits on big firms like AIG, which made billions of dollars of promises in newfangled credit instruments without having to put money down.

Yet the cost of too-big-to-fail keeps going up. Without the massive resources of the United States government, our situation today would be no better than Iceland's. But if we fail to fix our broken regulatory system, or cease our reckless fiscal indiscipline, how can we survive the next big crisis? Like the impoverished, aging and swindled Indians in the Cobell case, we may all be trading our trust fund IOUs for a lousy $1,000 government concession, if that.

Gil Weinreich
Editor
gweinreich@researchmag.com

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