- The Washington Times - Wednesday, March 4, 2009

Karl Marx believed that capitalism corrupted everything it touched - including governments that enabled it. Ironically, what happened recently to our economy was the result of the same dynamic - in the form of financial sector political influence on our government not to regulate the markets.

Recall that Marx had two kinds of disciples in what became the Soviet Union: Those who really believed in the economic purity of state ownership and a classless, socialistic society and those who gave it lip service, exploiting the system to gain personal advantage and wealth.

It wasn’t until 1985 and Mikhail Gorbachev that there was a modern-day believer of Marx in charge. Remember “Glasnost”? Gorby assumed that exposing the Soviet people to the decadent West would show them that Marxist Socialism was clearly the best way to go. Just the opposite happened: The inundation of the Soviet Union with the popular culture of Western capitalism caused massive rejection of the role of the state in the Soviet economy and led to the fragmentation of the union itself.

As the state-run economy was disassembled, the valuable parts of it were taken over by a new generation. However, these were mostly junior member thugs of the old Soviet apparatchik, coming primarily from the KGB spy agency. Enter Vladimir Putin and his band of thieves, who now - and personally - own most of the riches of Russia. So, corruption never really left the highest levels of government in Russia - and meantime, most ordinary people continue living in squalor.

Is there a lesson in this for us? In a strange way there is, and the recent collapse of many of the world’s “free” commercial markets makes the lesson easy to see.

In our country, of course, elected government from both political parties have preferred - at least traditionally - a “hands-off” policy with regard to the “elements of production” of our economy - whether it is the credit or equity markets, the banking system or the actual producers of goods and services. And, just as Marx understood, these sectors of the economy accumulate enormous power; however, because there is - again traditionally - very little official connection between the vast private economic sector and our government, the two parts did not, as Marx feared, combine to oppress the rights of the people.

However, as we have learned several times now, the economic power of the private sector, especially if unsupervised, is unable to prevent itself from exploiting whatever ways are found to take lots of easy money out of our economy in the short term, especially if our government allows it. And that is what happened.

Lots of fast, easy money, on an ever-widening scale has traditionally been the precursor for economic disaster in the United States. And, one way this happens is for personal compensation to be determined by measures that involve fundamental conflicts of interest. Sometimes these conflicts of interest arise to criminal behavior: For fraud (i.e., “Ponzi schemes”), insider trading and just plain old embezzlement. We have seen all kinds of it in recent months.

But most of the time, quick money schemes are simple unspoken conspiracies with built in - and mostly unregulated - conflicts of interest. And, so far at least, it looks as if we have had several such very large-scale scams in this category, most of which require new and informed government oversight.

The most notorious was practiced in the real-estate boom and bust. Like most seemingly complex financial matters (and like real estate booms and busts in the past) it was really very simple: No one in the real estate business-related sector made money unless the loan to buy the property - and the bigger the better - was approved. So, almost every loan was approved - not as a long-term investment vehicle, but as a quick, fee-generating money turn, peeling a fee or percentage off the top, then bundling it (actually burying it) to sell to banks, investment houses and institutional investors, many of which were buying it with our “good” 401(k) money.

In short, the loans were gotten rid of before they went bad, just as the participants in these scams knew they would. In effect, we had a huge real estate “Ponzi scheme.” And - in the end - we learned that even the executives at Fannie Mae and Freddie Mac (both quasi-government organizations called “government sponsored enterprises”) had their multimillion-dollar bonus packages tied to the totals of the (mostly bad) loans they acquired and “securitized” in the rotting real estate market. Talk about conflict of interest.

Now, the lesson from Marx: The government must “run” the economy - but not in the sense that puts it in the role of actually owning or managing business enterprises. These ventures have proven mostly incompatible with our free enterprise system, and, like the Russians learned, they are hugely inefficient and unresponsive to the market.

However, it must be the continuing responsibility of our government to - at least - police the quality and integrity of our financial markets, especially the banking and nonequity parts of it. And the failure to do this has been the collective failure of all our administrations - and all of our Congresses - at least since the 1980s.

Were they simply bought off by the business and financial sector lobbyists? Probably: For years, business and financial sector “political inaction” money has been rampant on the Hill, the presidential elective process and even within the executive branch: Witness the ludicrous executive compensation schemes at Fannie Mae and Freddie Mac. And, in the end, it was this basic failure of government supervision - with the same result as government corruption - that brought us down. Just as Marx warned it would.

Daniel Gallington is a senior fellow at the Potomac institute for policy studies in Arlington, Va.

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