Bernie Madoff and the Federal Government

By now, people all across America has heard of the curious, perplexing, and devastating story about the Bernie Madoff scheme that lost money for many investors that had been giving Mr. Madoff their trust with their funds. They were intrigued by Mr. Madoff’s advertisement that he could provide ten percent returns on their investments. Many high-profile people sought to invest in these terms only to find that Mr. Madoff was merely putting on a front.

Mr. Madoff did not have the money behind the investments to give back to his clients. If they had all cashed out at once even a year ago, he would not have had enough money. Sure, he was sending them statements on their earnings, but it was simply a piece of paper. When the bottom of the housing market dropped out this past fall, Mr. Madoff’s clients wanted to cash out and take back their money. There was one little problem: he did not have it and he had been lying to his clients for years that he did have it. Now Mr. Madoff is awaiting trial.

The federal government is now taking quite an investment from the taxpayers and from foreign nations buying American bonds. The American Recovery and Reinvestment Act, after calculating the interest that goes along with the spending in the bill itself, will cost approximately $1.3 trillion. Under the Bush Administration, the federal budget transitioned from running a surplus to running a deficit where the government was spending between three and four percent of its GDP in red figures. In other words, if one were to make $10 a day, it would be comparable to spending $10.30 to $10.40 per day. It does not sound like a big deal in that context, but take it to what the 2008 figures were: $2.9 trillion in spending versus $2.5 trillion in revenue. That is about $400 billion in deficit for just that one year.

Under President Obama’s new proposed budget and after the new American Recovery and Reinvestment Act of 2009 has been signed into law, federal deficit spending will increase to about 13 percent of the American GDP. This does not include the new idea of federal assistance in refinancing sub prime mortgages to protect homeowners from foreclosure. Going back to the $10 per day example: that would be like spending $11.30 per day and running $1.30 in the red every single day.

So the federal government is somehow going to convince Americans to continue to give Uncle Sam more money and convince other nations such as China to buy American bonds to help bankroll these new programs with the guarantee that Americans and foreign investors will see a return in their investments.

Does this not sound a little too similar to the Bernie Madoff story? Is this not like a poker player trying to bluff a pair of sixes to appear as four of a kind? The current administration and Congress will try to sell this as a temporary deficit that promises to yield returns that will increase the GDP and cure the federal deficit.

Will the federal government have a sealed indictment if they have to turn to its clients and say they do not have the money to return the investment?