Investor's Business Daily begins to sort how how "corruption stalks the stimulus." It is a theme I regularly explored in the run-up to the crash of financial markets in 2009; markets that sprung to life, benefiting primarily hedge funds and large investors not ordinary, common investors who are still reeling from the loss of portfolio values and the collapse of home prices.
At dinner last night on Christmas Eve, I was talking with an old friend, David Zweig, co-author of a just-published book, "Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions." I lamented how there is still no accountability for the latest crisis-- the worst since the Great Depression: no tough regulations preventing the looting of the Treasury by private business, no laws to curb the froth in real estate, derivatives and the outsized influence of hedge funds in speculation. David reminded me that the rating agencies and the accountants serving them and corporate clients are also still in place without consequence to their roles in the fraud, though they allowed their customers to cook the books at will. He also reminded me that until Enron collapsed, or only weeks before, its debt was triple A rated.
You might not like Obama's health care legislation, but the sound and the fury masks how the leaders of both political parties are complicit in allowing untold trillions in debt to paper over the financial crisis, without dedicating the resources and intelligence and law enforcement to keep track of your money. (Read the IDB article, below.) We can hope for better in 2010, but what we really need is to discard the malfeasance that helped the United States stumble through 2009.
How Corruption Stalks The Stimulus
On Wednesday December 23, 2009, 6:43 pm EST
Bailouts: Having spent more than $3 trillion on stimulus and bailouts so far, the government apparently can't be sure it's not being massively defrauded. So much for transparency and accountability.
During the transition early this year, President Obama vowed to "restore the American people's trust in their government by making government more open and transparent."
Yet, it's quite possible that this year's $787 billion American Recovery and Reinvestment Act -- also known as the "stimulus" -- will turn into the largest fraud in history, and we'll never know.
The reason: It's become impossible to verify why those who are getting the stimulus money are getting it.
A new report from the Treasury Department's Inspector General for Tax Administration counts 56 tax provisions in the bill having a potential cost of $325 billion. Of those, 20 are tax breaks for individuals and 36 are for businesses.
The problem, the Inspector General says, is the IRS can't verify taxpayer eligibility "for the majority of Recovery Act tax benefits and credits." For individual taxpayers, 13 of the 20 benefits and credits can't be verified; for businesses, it's 26 of 36.
If this doesn't sound like a problem, it is.
To suggest, as Treasury does, that the biggest chunk of the $325 billion in stimulus package tax breaks can't be adequately followed violates the pledges of openness and fairness made when the stimulus was passed last February.
As the government-stimulus-oversight Web site, recovery.gov, notes, last year's package "requires that taxpayer dollars spent under the Act be subject to unprecedented accountability."
We wouldn't call being unable to verify upwards of two-thirds of the $325 billion handed out as "unprecedented accountability." Sounds more like an invitation to fraud, all at the expense of the taxpayers.
As of Oct. 31 of this year, the Recovery Accountability and Transparency Board -- also known as the RAT Board -- and its 13 separate inspectors general had gotten 471 complaints of wrongdoing with stimulus funds. Of those, 86 triggered "active investigations," the recovery.gov Web site says, and 14 cases are being prosecuted.
No doubt, that's just a tiny chip from a very large iceberg. "To a great extent," the IRS says, "(we rely) on taxpayers' voluntary compliance with tax laws to accurately report income and claim only those tax benefits and credits to which they are entitled."
We shouldn't be surprised. Anytime you have the kind of money we're talking about here -- $787 billion just for stimulus -- it's always an inducement to fraud and criminality to take advantage of government ineptitude. The temptations are just too great.
Economists have a name for this: It's called rent-seeking behavior and has to do with how people find ingenious ways, both legal and illegal, to game the system and extract money from it.
Some rent-seeking is entirely legal, though it entails enormous unnecessary costs for taxpayers and the economy. For instance, a study out just this week notes that banks with the most political ties and clout were more likely to get bailout funds.
The study, by University of Michigan economists Ran Duchin and Denis Sosyura, finds that banks whose CEOs served on a regional Federal Reserve board were 31% more likely to get money from the TARP bailout than those that didn't. This is obvious rent-seeking.
At the end of September, an estimated 700 financial institutions had taken some $205 billion in TARP funds.
Part of rent-seeking is simply to influence the law before it's written. Another report, this one on lobbying in our nation's capital, shows the amount spent on lobbying in 2009 is headed for a record.
In 2008, lobbyists spent a record $3.3 billion trying to influence Congress and the president. This year, according to the Center for Responsive Politics, they will likely spend even more -- though there are 1,500 fewer lobbyists this year than last.
When you think of it, why shouldn't they spend more? There's far more at stake. As we noted, some $3 trillion has been committed to stimulus, bailouts and Fed money-printing. There's so much money on the table that everyone wants a piece of the action.
Yet perhaps something is being lost in this dash for cash.
Rent-seeking behavior and fraud already cost our economy hundreds of billions of dollars a year. We've added immeasurably to it.
Sadly, it's taken just eight months for us to go from being an honest nation of hardworking entrepreneurs and workers to one of rent-seekers looking for a fast buck from government. It's a kind of corruption at the very heart of our new stimulus and bailout culture.
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