The Smartest Government Is Not Very Smart

On Monday President Obama made a speech about "smart government," saying he was going to make the government "smarter, quicker and more responsive" by urging the cabinet to adopt all the latest new technology, or something like that.  The speech has rightly come in for a lot of ridicule.   See, for example, Jonah Goldberg at Town Hall here, or an IBD editorial here, or William McGurn in the New York Post here.

The fact is that it is not within the possibilities of government to be smart the way that markets are smart.   McGurn has it pretty close: 

[T]he problem with government is not that it lacks smart people. The problem with government is that it doesn’t have the incentives to get the best out of smart people — and never will.

Good point, but actually it's a lot worse than that.  On this subject, if you have never read the classic essay I, Pencil by the economist Leonard Read, you really should.  It's not long.  

Read's thesis is often stated as "nobody knows how to make a pencil."  And if you think about it, you will realize that, as seemingly simple as is a pencil, you have no idea how to make one from scratch, and neither does anybody else - even the people in the pencil business.  Imagine yourself in a hunter-gatherer society, and someone hands you a basic number 2 pencil and asks you to make another one.  If you are the smartest person in the world, and have your whole lifetime to try, you will barely have begun what you need to accomplish.  For starters, you need to learn how to make iron, and then axes and saws, to chop down and carve up trees.  (Try chopping down a tree some time with a stone ax.  After about a week of backbreaking work, with luck you have one large log.  Now, how are you going to cut it up into lots of little cylindrical pre-pencils using your stone tools?)  The fact is, the smartest person in the world will die a long, long time before figuring out how to make a pencil.  And what incentive is going to cause a next generation to continue the work?

Now, please, consider the problem of making a computer.  The fact is that no amount of mere "smartness" can accomplish the job.  Even collaboration among hundreds or thousands of "smart" people won't get anywhere.  The only way that these jobs get done is through thousands upon thousands of sequential inventions incentivized through the miracle of market exchange.

But our President thinks he can successfully reconfigure the use of energy, and the entire healthcare industry, because he is "smart" and he has a bunch of "smart" people working for him.   Well, the job of producing the best energy or the best healthcare for a $15 trillion economy is a lot harder than making a pencil.  What I can't get over is the hubris of their thinking that they can outdo in a short period of time what millions of people sharing information through markets have been able to do.

So how's the "smart" government doing?  It's just a question of which ridiculous illustration you want to pick.  Jonah Goldberg picks this one: 

Marvin Horne [is]a farmer who owes the federal government $650,000 in fines. Why?  He failed to comply with the Department of Agriculture's national raisin reserve program, created by the Truman administration, which even liberal Supreme Court Justice Elena Kagan dubbed "just the world's most outdated law." The program stockpiles raisins in case of an emergency. Such emergencies -- if they ever existed -- ceased being a problem after World War II. It's no surprise, alas, that government programs are as hard to fire as the employees working for them.

Well, that's a pretty good example, but really not hard to top.  One of my favorites is the so-called "Strategic Petroleum Reserve."  Here's the idea:  pump lots of oil out of the ground at great expense, ship it a long way at great expense, and then pump it back into the ground at great expense.  And presto, you have a "Strategic Petroleum Reserve."  Now, why would it not have sufficed to just buy the rights to an undeveloped oil field and leave the oil in place?  Because, dear man, we are way, way too "smart" for that!  

But of course I'm talking about small, small beer.  The current big money is in Obamacare.  Hubris on steroids!  At her new website, Megan McArdle has three posts on the ongoing unraveling of Obamacare, here, here and here.  I just can't get over the idea that "smart" people believe that all imperfections in an area covering some 18% of the economy, over $2.5 trillion per year, can be fixed a some "smart" people coming up with a 1000 page law and some other "smart" people coming up with many more thousands of pages of regulations, that no one can really ever read or understand, trying to micro-manage everyone's behavior.         

Yes, It Does Matter If The New York City Comptroller Is An Odious Human Being

So serial sexter Anthony Weiner is in the race for mayor of New York, and it gradually develops that, despite past conduct that would seemingly be completely disqualifying,  he is actually a credible candidate against a field of people who seem to have no idea what the job of mayor is about.  If Weiner's conduct is not disqualifying, then I guess nothing is.  On Sunday, Eliot Spitzer joined the race for New York City Comptroller.

The problem with Spitzer is that his sexual escapades are far and away the least significant instances of his disqualifying conduct.  The New York Times and the Wall Street Journal both ran editorials on Monday reviewing some of the Spitzer history, and John Podhoretz weighed in today in the New York Post.  It's good to be reminded of this stuff. 

The Times editorial at first seems scathing, until you read the others and realize that as usual the Times has missed most everything important.  Here is the key section of the Times editorial:

Desperately needed reforms were thwarted, opportunities lost — and it was more than a sexual scandal that made Mr. Spitzer’s truncated governorship an exceptional debacle in a capital city that is debacle central. It was that he saw himself as a “steamroller” instead of a leader, that he stoked alienation and resentment in his allies as well as his adversaries, the opposite of what a competent politician should do.

And then there's this howler: 

This was the man who built a solid record and shiny reputation as a hard-charging attorney general.

So you need to turn to the Journal to be reminded of how truly awful this man was, and it didn't begin when he became governor.  Starting with his time as AG, the Journal reminds us that Spitzer:

• Held a press conference announcing that he was going to indict AIG and its CEO Maurice Greenberg, then never did it but used the threat to force Greenberg out of the company.  After Greenberg's departure AIG risk management went off the rails, leading to massive losses in the mortgage derivative markets, a government bailout, and loss of more than $100 billion of shareholder value.  In my view, there is nothing unfair in blaming Spitzer for that debacle.
  
• When John Whitehead (former Goldman Sachs CEO and senior State Department official) published an op-ed standing up for Greenberg, Spitzer called Whitehead and said "I will be coming after you.  You will pay the price.  This is only the beginning and you will pay dearly for what you have done."
  
• Spitzer brought a case against former NYSE head Dick Grasso seeking return of Grasso's lump sum pension payout of $138 million.  The case ended in complete victory for Grasso in the courts and a debacle for the NYAG.
  
• Spitzer forced a management decapitation at Marsh & McLennan that again led to massive loss of shareholder value.  He also began a criminal prosecution against senior insurance brokerage executives at Marsh.  After a 10 month trial, the executives were acquitted on all but one charge.  Then, well after sentencing, it came to light that the NY AG's office had withheld some 700,000 documents from production, which the judge found would have been "invaluable" to the defense.  These disclosures led to vacation of all the convictions.
  

I guess that's what the New York Times refers to as a "solid record and shiny reputation as a hard-charging attorney general."  And even the Journal leaves out Spitzer's shake-downs of the investment banking industry for the supposed sin of having securities analysis and investment banking under one roof.  And then we get to the worst one of all, when Spitzer was governor, using the state police to gather dirt on political opponents.  Really, this guy could not be topped. 

But, you ask, the office Spitzer is now running for is New York City Comptroller.  This is not a prosecutorial position, nor an executive position.  Maybe it doesn't matter if Spitzer is an odious human being? 

It does matter.  The main jobs of the Comptroller are two: (1) sole trustee of the five pension funds for City workers, and (2) conducting audits of the City's mayoral agencies.  Here are a couple of examples of what an ambitious, self-aggrandizing bad guy with those responsibilities can do.

The five City pension funds have assets in the range of $100+ billion.   They are very large shareholders in many publicly traded companies.  Now let's say that the stock of some publicly traded company drops suddenly.  Many plaintiffs' law firms will promptly bring complaints alleging that there has been a fraud.  Under the securities laws, the right to be the "lead plaintiff" in these cases goes to the shareholder who owns the largest number of shares bought during the class period.  The "lead plaintiff" then picks a law firm to be "lead counsel" and that firm gets the lion's share of the legal fees.  Some of these cases generate legal fees in the tens of millions of dollars, sometimes even over $100 million. 

The New York State pension funds are known for regularly claiming their position as "lead plaintiff," and the City pension funds have also played in this sandbox to some degree.  Why do they do it?  Because the plaintiffs' law firms make huge amounts of money off these cases, are deeply indebted to the government functionaries who can cause big pension funds to select them, and are thus fantastic sources of political contributions.  Alan Hevesi (former New York State Comptroller recently released from jail) perfected this game (although Hevesi went to jail for yet something else).  Also, great opportunity for headlines when a big case settles.  "SPITZER WINS $100 MILLION SETTLEMENT FOR PENSION FUNDS!!!!!!"

Well, you say, they are just vindicating their rights as shareholders and getting payments to which they are entitled.  What's wrong with that?  The answer is that nobody pays attention to the fact that the same pension funds are almost inevitably also on the paying ends of these settlements.   Here's how it works.  Suppose a class action alleges that because of wrongful disclosures all shareholders of Citigroup who bought stock during 2012 have been defrauded.  The NYC pension funds turn out to be the entity that bought the most Citigroup shares during 2012, and they become lead plaintiff.  But they also bought lots of shares in 2011, 2010, 2009, 2008 and on back.  They are entirely likely to own many more shares of Citigroup bought outside the class period than in it.  Now Citigroup settles the case by putting up some hundreds of millions of dollars.  As shareholders who bought outside the class period and still own that stock, the pension funds are on the paying end of this.

Do the NYC pension funds receive more than they pay in such a settlement?  To figure that out, you need all the dates and amounts of stock that they bought and sold and what they still own.  Of course they don't disclose that information to the public, so nobody but them can tell.  Given that legal fees and expenses take at least around 25% of the settlements, and that the dates of stock purchases are substantially random, I find it hard to believe that the funds can be net gainers in most of these settlements.  I have never seen anyone make an actual calculation, and the information to do so is hidden.  This is a great area for big corruption.  No one is on to it.  Yes, this is a huge reason why a self-aggrandizing guy who recognizes no personal limits should not be New York City Comptroller.

And how about the audit function?  That gives a self-aggrandizing guy endless opportunities to get in the news and upstage the mayor.  Sometimes it's justified.  Would Comptroller Spitzer confine himself to issues of actual merit?  No chance. 

What Is The Left's Game Plan For Chicago?

In a post last November, I characterized Chicago as one of America's "basket case" cities.  OK, it's not nearly as bad as Cleveland or Detroit, and the tourist areas in the Loop and the North Side are in good shape.  But in places where very few tourists go there is an unfolding disaster on the South Side, not unlike Detroit, with population emptying out and large vacant areas.  Chicago's population per the census went from a peak of 3,620,962 in 1950 to 2,695,598 in 2010, a loss of over 25% in those 60 years.  In the 10 years from 2000 to 2010 Chicago continued to shrink, losing about 200,000, or around 7% of then remaining population.  This is not a minor problem.

How did it get this way?  Illinois is a high tax state, but not in the league of New York and California.  (The Illinois Policy Institute puts Illinois in the top third of states for tax level.)  But Illinois' and Chicago's special problem is public worker pensions.  Not only do Illinois and Chicago have some of the most generous pension promises to their public workers, but they have systematically under-funded them, either by just skipping supposedly required annual payments, or even more crazy, by issuing bonds and then contributing the bonds as a supposed "asset" to the pension plans.  Why any business making a location decision would choose Chicago over, say, Indiana or Wisconsin, is something of a mystery, but then few make that mistake.   (Hey, I live in Manhattan, so there are a lot of mysteries out there!)

Here's an article from the New York Times last September describing the funding crisis of the Chicago teacher pensions.  At the time, Chicago had just come off a teachers' strike, where the mayor, Rahm Emanuel, had tried and failed to get some pension concessions, like increased teacher contributions to their own pensions.  The issue got postponed to the 2013 session of the state legislature, which then adjourned a few weeks ago without addressing it.  So here are a few key quotes from the Times article:

 The pension fund is about to hit a wall. . . .

“There’s a huge crisis,” said Laurence Msall, president of the Civic Federation, a nonpartisan research organization in Chicago that works on fiscal issues. “The problem does not get easier by waiting. The problem gets bigger, and starts to become an insurmountable obstacle.” . . .

[T]he State Legislature granted the Chicago school district a break from its pension contributions, starting in 1995. Since then, the city has never contributed the required amount; for many years it put in nothing. All the while, the teachers’ benefits kept building up.

And of course, Mayor Emanuel has now announced that some 54 schools are going to close permanently over the summer and not reopen with the new school year.  Well, the population has shrunk by 25% since most of the schools were built. 

Anyway, I know my solutions to these kinds of problems, which are that the government has to get some financial discipline, stop making promises it can't meet, and shrink; and if it can't, then Chicago is doomed to decline gradually and then faster in a death spiral until it disappears, like Detroit basically has. 

But you already knew my solutions.  What you want to know is, what does the Left propose?  And the good news is, The Nation -- the perfect place to turn to get the Official Position of the Official Left -- has a long article in the soon-to-come-out July 22 issue (available online) on this very subject.  The author is a guy named Rick Perlstein.  The title is "Chicago Rising!" -- yes, the exclamation point is theirs.

And as far as I can tell, the answer is:  PROTEST!!!! 

The progressive tribes have been gathering in Chicago with force, efficiency, creativity, trust and solidarity, building a bona fide, citywide protest culture. And it’s working.

Can't say I can figure out what he means when he says "It's working."  Exactly how is "protest" supposed to reverse the decline of the city and convince somebody who doesn't have to be there to show up and voluntarily pay tens of billions of dollars for the underfunded pensions?

And here's the best part:  the organization that Perlstein identifies as leading the protest movement is none other than -- The Teachers Union!  You really can't make this up.   Perlstein describes various marches led by the Teachers Union and its leader Karen Lewis, not only protesting the school closings but also those amorphous bogey-men of "austerity" and "privatization."

And while the radicalized CTU under the leadership of Karen Lewis has deservedly received much of the credit, the teachers union is just the current tip of the spear in a long and potentially transformative movement.

Well, I can understand the game plan of the Teachers Union.  They need the city to stay around just long enough for them to extract the last dime out of it, and at that point they got theirs and they don't really care if there is any city left.  But how do they manage to distract and confuse ordinary citizens into not noticing the pension disaster and thinking the unions have the city's best interests at heart?  If they can succeed at that, you really have to congratulate them.  And Perlstein and the Nation - what's your excuse?

There are basically two approaches for a government to deal with these situations.  Call them the Detroit approach and the Switzerland approach.  Go for it, Chicago! 

The "Austerity" Wars, Continued

Sometimes it's like the field of public debate is a house of mirrors at the amusement park, where everything is so distorted that it becomes impossible to make any sense at all out of it.  In current public debate, nothing is so distorted as the debate over the form of government fiscal policy called "austerity." 

I start from a simple proposition that is obvious to anyone who follows basic economic statistics:  Among countries that more or less respect property rights, the smaller the government sector as a percent of GDP the more successful the economy, and the larger the government sector as a percent of GDP the less successful the economy.  Thus the very most successful economies are those with government sector less than 35% of GDP (Switzerland, Hong Kong, Singapore).  Countries with bloated government sectors that are able to shrink them noticeably see dramatic improvement in economic performance (Sweden, Latvia, the UK under Thatcher).  Countries that allow government spending to get above 50% of GDP see stagnation and shrinkage if not crisis (Greece, Italy, France).  Within the U.S., low tax low spend states (Texas, Florida) consistently outperform high tax high spend states (New York, Illinois, California).  There is nothing really complicated about this.   

But now we have legions of government dependents and sycophants in academia and the media who are literally desperate to stop the idea that any penny of government spending anywhere may ever be cut. And thus we have the "austerity" scam, where modest (if any) spending cuts are mixed with big tax increases, economic performance worsens, and the result is shrilly claimed to be evidence against spending cuts.    

The Austerity Wars have reached a new level of hysteria over the last month.  I last visited this subject on June 4, where I quoted from a June 2 article in the Financial Times by Larry Summers where he claimed that "rapid deficit reduction" would lead to decline in "output and jobs," and a "weaker economy," that would cause "our children" to end up with "more debt and less capacity to bear the burden it imposes."  To Larry, it's just obvious that less government spending causes more debt.   Is there anyone in the world with more credentials and less actual competence? 

On the same June 4 the Senate Budget Committee held a hearing on "The Fiscal and Economic Effects of Austerity," and called Summers to testify.  (Presumably his Financial Times article was the precursor to that testimony.)  The Republicans called Salim Furth of the Heritage Foundation.  Furth made the obvious argument that the countries that had implemented "austerity" had actually raised taxes more than they had cut spending, and that the tax increases are what had hurt their economies.  Here is a link to the Senate hearing.

Furth's testimony seems to have set off a firestorm.  Committee member Sheldon Whitehouse of Rhode Island (one of the Senate's truly dim bulbs) promptly read a statement from an aide that "I am concerned your testimony to the committee has been meretricious."  There was an immediate ad hominem piling on from the usual left-wing pundits.  For example, there was Krugman of the New York Times  ("One does wonder . . . whether Heritage may at this point be destroying its own usefulness."), and Steve Benen of the Maddow Blog  ("[A]s Heritage transitions from its traditional role as think tank to its new role as an activist group, and the intellectual infrastructure on the right deteriorates, GOP lawmakers no long [sic] have such a resource.").   Their main complaint?  Alleged discrepancies between Furth's numbers and OECD numbers that he had used as a starting point.  The difference is technical and not worth getting into.

The big point here is that all government-produced numbers are cooked to make cuts in government spending look like dollar-for-dollar decline in GDP.  That accounting is universal, fake and fraudulent.  I have previously discussed it, for example, here .  The government numbers need huge corrections for the fact that government spending is inefficient and wasteful and does not add nearly dollar-for-dollar to GDP.   Similarly a dollar of government spending cut does not cut GDP by anything close to a dollar.

Furth has gamely responded to his many critics, for example here.   Rea Hederman of Heritage weighed in on June 13 to support him, in a post that included this line:

There is a long record of empirical research showing that spending cuts are less damaging to the economy than tax increases and that the benefits of spending cuts often exceed the costs.

Spending cuts are "less damaging"??????  "The benefits of spending cuts often exceed the costs"??????  These statements can only be made in a world where everyone buys into the fraudulent idea that government spending counts at the same value as private spending in GDP.  The fact is that inefficient government spending is hugely damaging to an economy, and cutting it is hugely beneficial, and the governments are cooking the numbers to hide that fact and to prevent any cuts.  Really, the conservative think tanks need to wake up to this one.  Is everyone in the world but me getting taken in?

Here is an even more recent study from Matthew Melchiorre of CEI on June 26.  It has detailed numbers based on data from Eurostat on economic performance of the 26 EU countries starting from the date that each country announced that it was instituting some form of "austerity."  He puts the countries in nine categories based on whether government spending increased, decreased or stayed the same, and whether taxation increased, decreased or stayed the same.  Result:  the countries did best where both government spending and taxation decreased (Bulgaria, Ireland, Latvia, Lithuania).  Surprise!!!!!  

And yet in the Melchiorre study, the gap in average 6 year GDP growth rate between the best performing category (spending decreased, taxes decreased) and the category of spending increased and taxes increased, is only 1.19% growth per year (2.65% for decreased/decreased and 1.46% for increased/increased).  Why so little?  Yes, Melchiorre is also using the fake government GDP numbers where even government spending that forces doubling energy prices by subsidizing inefficient energy is counted as dollar-for-dollar increase in GDP.   In any real accounting the difference between good policy (cutting government spending) and bad (increasing government spending) would be easily triple as much.  Come on guys!

Manhattan Contrarian Updates

Time to check in on what has happened in some of the big news stories since my recent posts on these subjects. 

The Contest For The Eliot Spitzer "Worst Prosecutorial Shakedown" Award 

In a post on June 25, I nominated two candidates for the 2013 Eliot Spitzer "Worst Prosecutorial Shakedown" prize:  One was Eric Schneiderman, current New York AG, who had just been characterized by Charles Gasparino in the New York Post as heading "possibly the most politicized law enforcement outfit in the country," for his continuation of the Maurice Greenberg case long after any utility had gone out of it.  The other was Benjamin Lawsky of the New York Department of Financial Services, who had just hit up Bank of Tokyo Mitsubishi UFJ for a $250 million payment somehow related to alleged dealings involving Iran occurring some six and more years ago, a subject seemingly totally outside Mr. Lawsky's legitimate jurisdiction (although a great subject for the generation of headlines).  Well, Lawsky immediately set out to put some daylight between himself and Schneiderman in the race for the award.  He wants that coveted Spitzer Prize all for himself!

On June 30 the Wall Street Journal reported that an investigation by Lawsky's office of three foreign reinsurance companies has uncovered evidence that one of them, based in Europe, allegedly insured a shipment of alumina from Iran to Germany on a date not specified.  Now there's a core function for the New York insurance regulator to be getting into!  Based on uncovering that transaction, Lawsky, according to the Journal, has now sent letters to some twenty domestic and foreign reinsurers demanding to know everything about their insurance relationships involving Iran.   The basis for the inquiry is stated to be a Federal (not New York) law tightening the regulation of dealings with Iran, and taking effect on July 1, 2013.  Lawsky's letters went out on June 25, even though the (Federal) law whose violation is being investigated only took effect on July 1.  No way is Lawsky going to let those pesky Federal prosecutors get ahead of him and steal his headlines on this one!

All I can say to Schneiderman is, you'd better get moving if you don't want to see the Spitzer Prize slip away from you this year.

 The Obamacare IQ Test For The Under 30 Crowd

In posts on May 6 and May 14, I set forth what seem to me to be the obvious reasons why young healthy people with few assets should not let themselves get tricked in the Obamacare scam of getting them to pay for health care of others.  On July 2 the editors of Investors Business Daily picked up on my theme with an editorial titled "ObamaCare's Success Depends On The Young Being Stupid."  IBD succinctly describes the nub of the problem:

The problem is that ObamaCare depends on getting the young and healthy to sign up so it can subsidize premiums for the sick. Otherwise, the insurance pool will get sicker and more expensive, causing a premium "death spiral."

And then the key question: 

How long will it take for the young to figure this out, and tell all their Twitter pals how to game the Obama-Care system?

The answer is, not long at all.  It's remarkable how few people are yet on to this issue.  It's like there's just some willful blindness, a desperate need to believe that the world can be perfected by thousands of pages of law and regulations telling people what to do. 

Some Push Back Against The New York Pro Bono Reporting Requirements 

In a post on May 3 I reported on the new pro bono reporting requirements that had just been adopted by the state court system, and I criticized those rules as a beginning step toward mandatory pro bono.  I also quoted the sniveling support immediately expressed for the new rule by the President of the Association of the Bar of the City of New York, Carey Dunne of Davis Polk, before even having had the opportunity to consult with his membership.  He had little to worry about -- you can always be sure that the City Bar membership is in favor of any coercion, so long as the big firm partners can comply by either counting what they are already doing or assigning the work to associates.    

Well, in a move that has surprised me, the State Bar has now come out against the requirement, and also has criticized Lippman for promulgating the rule without any consultation with the State Bar.  For those unfamiliar with the ins and outs of our local bar associations, the City Bar is the home of the Manhattan elite of the legal community, while the State Bar includes the suburbs, upstate, Long Island, and lots of small firms and solo practitioners.  On June 26 the New York Law Journal reported that substantial opposition had been expressed at the meeting then occurring of the State Bar House of Delegates.  That was promptly followed by a letter expressing opposition to the requirement.  There may yet be some hope!

Meanwhile back at the City Bar, their Pro Bono and Legal Services Committee took some time to consider the actual text of the new rule, and discovered to their horror that it may not be so easy for big firm partners to meet the new 50 hours per year standard of pro bono service by just continuing to do what they are already doing.  Thus a letter from them to Lippman on May 24 containing this gem:  

The Committee enthusiastically supports the adoption of the pro bono reporting requirement and views it as having tremendous potential for increasing the amount of pro bono legal services provided to deserving and underserved individuals and nonprofit organizations.  However, we are troubled that the laudable goal of encouraging an increase in pro bono work through the reporting requirement has been jeopardized by fashioning the Rule in such a way that only pro bono service defined as "unpaid pro bono legal services to the underserved and to the poor" is included, importantly excluding legal services provided to nonprofit organizations that offer non-legal assistance to poor people or communities.

Translation:  You mean that my service on the board of the soup kitchen isn't going to count?????  Well, you people made the dirty decision to go along with this guy, and now you may have to live with the consequences.

Here at the Manhattan Contrarian we realize that the best service we can do for the poor is to advocate for the shrinkage of the government and the lessening of handouts and giveaways that trap people in poverty.  That's this blog!  Plenty more than 50 hours per year going into that. 

Annals Of Government Self-Promotion, Big Bank Edition

What was the main cause of the financial crisis that hit in 2008/9?  You've probably noticed that there are two main narratives.  In one, the government caused a huge bubble in housing and other asset prices through imprudent guaranties and secondary market purchases by their agents, mainly Fannie and Freddie.  And in the other narrative, greedy bankers caused the bubble by some combination of predatory lending, toxic derivative products, and shady trading.   

Well, one of those narratives would imply that the solution is to shrink government involvement in the financial sector, and the other would suggest that the solution would be yet more government involvement and regulation.   

And thus we have the exceedingly strange phenomenon of the government at the same time propping up the big banks and also requiring the same big banks over and over again to enter into huge monetary settlements as supposed compensation for the wrongdoing that led to the crisis.   The money just goes around in a big circle.  In fact, the way I see it far more money goes from the government to the big banks than the other way around.  But the money going from the government to the big banks is largely invisible and hard to quantify.  The money coming back is in the form of highly publicized settlements that gives the government the chance to support its narrative that the banks are guilty and the government must grow.

First, today's news.  Citigroup has settled with Fannie and Freddie for some $968 million, covering claims by the mortgage twins that their losses in the financial crisis were caused by Citi.  Frankly, I find it rich that Fannie and Freddie would even have the nerve to assert such claims, given their own history of setting almost all the terms of the lax bubble credit markets.  But the fact is, the case was never real.  Of course Citi would have to settle for some huge number, because it completely owes its existence and continuance to political favor from Washington.  So these claims were never going to be tested in court.

This latest settlement is of course a small part of the public penance and atonement that the big banks have been forced to undergo.   Bank of America settled similar claims from Fannie and Freddie for $2.8 billion just last January.  And how about the $25 billion settlement between and among five big banks (Ally, BofA, Citi, JPMC and Wells Fargo), 49 state AGs and the Federal government (HUD and Justice Departments) for supposed wrongful activities in enforcing under-water mortgages?  That was in January 2012.  And then those same banks and another five turned around in January 2013 and settled so-called "robosigning" claims again, this time by the Office of Comptroller of the Currency, for $8.5 billion.  Then there was Citi's settlement of $158 million with the FHA over allegedly providing false information in support of the issuance of guaranties.  That was February 2012.   Here's a list from the Daily Beast of some ten settlements of $50 million and up (only two are under $100 million) entered into between JPMC and various Federal agencies in just the two years from April 2011 to March 2013.  The article helpfully points out that even after all these settlements there are still eight federal agencies currently conducting ongoing investigations of that bank, so there should be many more settlements coming.  I could go on, but you get the point.  The Daily Beast quotes an estimate of $16 billion for the legal costs of just JPMC since 2009.

Well, where do they even get all this money?  The simple answer is, the government gives it to them through the back door.  First, the massive bond buying programs by the Fed (QE 1, 2, 3, . . . .) have driven the banks' cost of funds basically to zero for years, with spreads between what banks pay on deposits (nothing) and what they earn on loans (something) at record levels.  And then there's "too big to fail" in Dodd-Frank, a huge giveaway to the banks in that category, who get several notches of benefit in their cost of funds.  Between those two, it's billions and billions of dollars, but there's no way to quantify it specifically. 

Here's the take on this situation from the Daily Beast (Nina Strochlic, May 8, 2013): 

Screw over customers, botch foreclosures, run afoul of important regulations, and violate some important rules—and the worst you’ll have to do is pay some fines or settlements. It’s a cost of doing business, even for America’s most highly regarded banks.

Sorry Nina, but I think you're getting taken in.  Not that I'm going to stand up for everything every big bank has done; I'm sure that there's plenty to criticize.  But $33+ billion for flaws in mortgage foreclosure?  In the old days, if you botched the paperwork on a mortgage foreclosure, the worst that would happen to you would be that you had to start that one over.  And that's just one piece.  The banks are subject now to thousands upon thousands of pages of regulations.  There is no possible way to comply perfectly.  Basically, any Federal agency that wants its name in the paper can pick one of the big banks and go out and get at least a few hundred million.  Sorry, but this is a very sick game of government aggrandizement with funds provided by the taxpayers through the backdoor.