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InsiderOnline Blog: December 2008

Government “Investment” and the Rule of Law

Columnist Jonathan Weil thinks Bernard Madoff’s ponzi scheme “wasn’t much different than the business models at some of the nation’s largest failed financial institutions”—the ones now rewarded with a chunk of the taxpayers’ wallets.

Back in May, four months before it collapsed, American International Group Inc. increased its dividend at the same time it unveiled plans to raise $12.5 billion in capital. Later, when its cash ran out, AIG got a government bailout, the size of which has expanded to about $150 billion.

Whether you call that a Ponzi scheme or something less sinister, AIG was paying old investors with money raised from new investors. The same could be said of many banks that blew through billions of dollars in freshly raised capital the past couple of years, continuing to pay large dividends even as their balance sheets quietly imploded.

In a December 4 speech, SEC commissioner Christopher Cox identified the problem:

When the government becomes both referee and player, the game changes rather dramatically for every other participant. Rules that might be rigorously applied to private-sector competitors will not necessarily be applied in the same way to the sovereign who makes the rules.

“Tyrone” has some related thoughts at Marginal Revolution:

What about that guy who set up the phony investment company? Can the Treasury make a new one of those, only bigger? He took money away from people and gave it to charities and the needy and the arts and higher education. That sounds like stimulus so why are we sending him to jail? Wasn’t he ahead of the curve?

Why don’t we increase the tax deduction for donations to any charity which manages to expand its spending on overhead or is the word infrastructure? For every dollar given, let the donor deduct more than a dollar from taxes. That’ll get the money out of the banks of those rich people and into the hands of real Americans. Still, it’s not as good as the phony guy who’s been doing this for twenty years. I guess we’re all trying to catch up to him. 

Posted on 12/18/08 04:05 PM by Alex Adrianson

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