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In their attempts to halt credit deflation, the government and the Fed are unleashing a torrent of corruption, inefficiency, misuse of funds, and fraud. If a bank is too big to fail and the government and/or the Fed make sure that it survives, despite the past mis-behaviors of its officers, then they invite those officers to misuse the funds that they infuse.

Any transfer of money (or funds) from stockholders and lenders to corporate officials is accompanied by methods of controlling the behavior of those officials. Transfers of money from taxpayers to governments also necessitate methods of control. Without such methods, officials, bureaucrats, and politicians have an incentive to engage in a range of behaviors that harm the interests of those who are supplying the funds. The control methods include audits, reporting requirements, boards of directors, independent committees, governance methods, arms-length dealings, ethical training, laws concerning fiduciaries, laws against fraud and malfeasance, freedom of obtaining information, and so on. All of these methods also require effective enforcement if they are to do their job.

Much of this control goes on without much publicity, until a highly-publicized breakdown occurs such as in the case of the Madoff fraud. But there cannot be well-functioning markets or well-functioning governance, corporate or non-corporate, private or public, business or non-business, without an extensive set of methods to control the behavior of agents who are entrusted with the money of principals.

Even before the recent bailouts, the federal government and the Fed were supplying enormous amounts of money to a variety of persons. It is common knowledge that their controls over the use of these funds are not anywhere near what they should be. The main reason for this is that these institutions are themselves poorly controlled by their constituencies who are forced to accommodate them. Taxpayers are forced to pay taxes, no matter how badly the funds are used. All of us are forced to accept dollars as legal tender.

The instances of government waste are well-known. The frauds committed against the Medicare program are large and numerous, but these are facilitated by the poor controls that we have over government and its poor controls over the funds that it extracts from us. The gross over-charging by defense contractors is constantly documented. In a war like that in Iraq, the entire war with its insanely high costs is an example of non-existent control of funds by those paying the bills. The entire war is a fraud in that public officials misrepresent its costs and benefits in order to gain public approval for their misuse of the public’s money. These and more like them are examples of what happens when there are poor controls over the use of money that has been transferred from agents to principals. Bernard Madoff is now famous for having catapulted himself into the ranks of a large-scale fraud that rivals what occurs constantly between government and taxpayers and then, again, between government and its contractors.

The last year has seen government and the Fed ramp up their relatively uncontrolled dispersion of money to new heights. In an extraordinarily brief period of time and acting in great haste, we have seen a $700 billion bailout program passed by Congress along with the nationalization of such huge failures as Fannie Mae and Freddie Mac. We have seen the Fed expand its loans in all sorts of directions, including a private insurance company, foreign central banks, commercial paper, and any number of insolvent U.S. banks. We have seen the U.S. government make any number of new and expanded financial commitments and guarantees that can explode its solvency at any time and lead to very high costs to society.

Once again, the government and the Fed are committing massive frauds. They are intentionally deceiving the public about the necessity and benefits of these expenditures. A great deal of money is being transferred to persons who should be absorbing losses that they are responsible for.

At the same time, we have not seen anywhere near sufficient controls instituted over the uses of these funds. If we did have such controls, the federal government would be electing directors to bank boards across the country. The socialization of finance would come out into the open. Over time, as these funds begin to be misused by those who are receiving them, because the control mechanisms put in by the government are so weak, we can expect to see a gradual tightening of control which will bring the government control more and more into the open. We can also expect a greater politicization of the process.

If proper controls were in place, the Fed would not be releasing funds wholesale and at preferential rates to entire classes of borrowers. It would be carefully negotiating loans with controls over their use with individual borrowers. We have not seen even an accounting for the Fed’s loans. The Fed refuses to reveal information about the nature of its loans.

The government never controls the uses of its money in a way that is acceptable to taxpayers. Its controls are always weaker than even private sector controls, and private sector controls have many problems as it is. But now that the government is bailing out banks and businesses, the problems get even worse. To the extent that the government attempts to control those who receive its funds, it socializes the economy more than ever. The bigger the bailouts are, either the waste due to lack of control rises steeply, or else, if controls are put in place, the socialization of business with all its inefficiencies rises steeply. The public loses in either case.

We have always had these same issues of control of money and socialization before us. The Medicare program wastes huge amounts of money by its poor insurance structure. This represents a failure in control of how taxpayers’ funds are spent. On the other hand, to the extent that Medicare attempts to control how the funds are spent, it tells hospitals, doctors, and patients what they must do. We encounter the same dilemma as in the bailouts and the Fed loans. We are damned if they do not control, for that creates incentives for fraud, waste, misuse of money, and inefficiencies. But we are damned if they do control, for that brings even greater socialization with all of its attendant evils.

The more money that the government spends on bailouts, the more that it maintains already corrupt and inefficient institutions in place. It provides them with greater incentives to laxity, misuse of funds, and even frauds.

Public works spending will be no different. The housing and construction lobbies are powerful. They find many allies in city, education, and state lobbies. The National Association of Realtors, the National Association of Homebuilders, and the Mortgage Bankers Association are powerful. They are sometimes joined by the National Education Association that fears losses of local property tax revenues. They are joined at times by the National League of Cities, the National Conference of State Legislatures, the Council of State Governments, and the National Association of Counties. Does the unorganized public stand a chance against these organized groups?

Public works spending is public fraud. One only need note that there is just as little accountability of the funds spent as with the Fed’s loans. The politicians intend to deceive the public and misrepresent the benefits and costs of public works projects. Graft and kickbacks are present through campaign contributions and gifts. These are the kinds of factors that signal that public works spending is actually a fraud.

The politicians wave job creation numbers before the press, knowing full well that the process is a fraud. Biden is now claiming how carefully projects will be selected. This is totally unbelievable. It is rhetoric to gain support. The money will be dissipated on bike paths, costly earthquake resistant building improvements, devices to save energy that cost more than they return, increases in Medicaid, modernization of classrooms that do not improve education in the slightest, and all manner of environmental fads. Much of the public knows this, but the government uses its media platform to defuse any dissent while it extols the virtues of its actions. This deception is at the heart of the fraud.

When it comes to government and money, we are between two rocks and a hard place. The government’s uses of forced exactions (taxes) are not controlled by the principals (the taxpayers.) In the next stage, which is when government spends the money, it fails to control the uses. Waste, improvidence, and inefficiency are government hallmarks. Earmarking funds for favored interest groups is standard operating procedure, and that induces these groups to laxity, corruption, misuse of funds, and fraud. But when the government attempts to control its use of funds by controlling the behavior of its recipients, then heavy-handed and inefficient socialism and fascism rear their ugly heads.

The largest frauds in our society are the frauds of government. The largest frauds in our society are the frauds of elected leaders. They constantly betray the public trust, a term that has largely disappeared from their lips. Bailouts, Fed loans, and public works projects spread the poison more widely, inducing even more private sector laxity, inefficiency, kickbacks, payoffs, and corporate and business malfeasance. This will not diminish until those who supply the money control the uses of that money.

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