Bailout Lessons from Blagojevich

Brian Doherty | December 9, 2008

Economist Steve Horwitz wonders how bailout supporters can remain sanguine in the face of things like the Blagojovich indictment:

I simply do not understand how those who are in favor of giving government all of these new powers because they sincerely believe that doing so will work out the way their blackboard designs intended can keep a straight face. What kind of cognitive dissonance must it take to believe that the people YOU are handing power over to are "not like" Ted Stevens or Rod Blagojevich? How deeply must one be in denial or engage in rationalization to believe that they are "different?" How blind must one be to think that trillions of dollars in bailout money won't go to the highest bidder (as the lobbyists line up on K Street...) in a process different only in its wink-and-a-nod courtesies than Blagojevich's auctioning off of a Senate seat?

For me, the key insight of public choice is the same insight that underlies Austrian economics: it is the institutional framework that is the key to understanding the choices people make and the unintended outcomes they produce. As I said to a class last week: "Governments can't act like businesses because businesses only act like businesses because they operate in the institutional environment of private property, monetary exchange, and competition." In the same way, getting politicians to stop selling off their power isn't a matter of ethics or psychology, rather it's about changing the rules of the game such that they do not have as much power to sell. Unfortunately, the current bailout mania is changing those rules in utterly the wrong direction.

Comments

classwarrior|12.9.08 @ 2:54PM|#

One could also argue that deregulation gives more power to the likes of Enron or AIG.

|12.9.08 @ 3:02PM|#

Why Obama's Next

I. FROM THE BLAGOJEVICH INDICTMENT

35. As described more fully in the following paragraphs, Mercy Hospital, which sought permission from the Planning Board to build a hospital in Illinois, received that permission through Rezko's exercise of his influence at the Planning Board after Rezko was promised that Mercy Hospital would make a substantial campaign contribution to ROD BLAGOJEVICH. Rezko later told a member of the Planning Board that Mercy Hospital received the permit because ROD BLAGOJEVICH wanted the organization to receive the permit.

36. Levine's criminal activities included his abuse of his position on the Planning Board to enrich both himself and Friends of Blagojevich. The Planning Board was a commission of the State of Illinois, established by statute, whose members were appointed by the Governor of the State of Illinois. At the relevant time period, the Planning Board consisted of nine individuals. State law required an entity seeking to build a hospital, medical office building, or other medical facility in Illinois to obtain a permit, known as a "Certificate of Need" ("CON"), from the Planning Board prior to beginning construction.

37. Levine, as well as Planning Board members Thomas Beck and Imad Almanaseer, testified under oath at the Rezko Trial.9 Beck testified that he asked Rezko to reappoint him to the Planning Board and that Beck thereafter followed Rezko's directions regarding which CON applications Rezko wanted approved. Beck testified that it was his job to communicate Rezko's interest in particular CONs to other members of the Planning Board, including Almanaseer, who were loyal to Rezko. Beck testified that he understood that Rezko spoke for the Blagojevich administration when Rezko spoke to Beck about particular CONs. Almanaseer testified that Beck instructed him that Rezko wanted Almanaseer to vote a particular way and that Almanaseer should follow Levine's lead in voting on CONs. Almanaseer testified that before certain Planning Board meetings, he received notecards from Beck indicating how to vote on certain CON applications. Beck testified he provided these notecards to Almanaseer and certain other members of the Planning Board to communicate Rezko's directions about certain CON applications.

38. During his testimony, Levine described a plan to manipulate the Planning Board to enrich himself and Friends of Blagojevich. The plan centered on an entity commonly known as Mercy Hospital ("Mercy") that was attempting to obtain a CON to build a new hospital in Illinois. Levine knew the contractor hired to help build the hospital. In approximately November 2003, on behalf of the contractor, Levine checked with Rezko to determine whether Rezko wanted Mercy to obtain its CON. Rezko informed Levine that Mercy was not going to receive its CON. According to Levine, he asked Rezko whether it would matter to Rezko if Mercy's construction contractor paid a bribe to Rezko and Levine and, in addition, made a contribution to ROD BLAGOJEVICH. Levine testified that Rezko indicated that such an arrangement would change his view on the Mercy CON.

39. Levine's testimony regarding Rezko's actions to change the Planning Board decision concerning Mercy's application for a CON based on contributions for ROD BLAGOJEVICH is confirmed by attorney Steven Loren. Loren testified at Rezko's criminal
trial and, before that, in the grand jury.11 According to Loren, in approximately December 2003, Levine informed Loren that Rezko was against the Mercy CON. According to Loren, Levine relayed to Loren a conversation between Rezko and Levine during which Levine asked Rezko whether a political contribution to ROD BLAGOJEVICH would make a difference for Mercy's CON, and Rezko responded to Levine that such a contribution might
make a difference.

40. Thereafter, and confirmed by the testimony of Levine, Beck, and Almanaseer, as well as recorded conversations, Rezko switched his directions to Beck and informed Beck that Mercy was to receive its CON. According to Almanaseer, although he previously had been told by Beck that Rezko did not want Mercy to receive its CON, he was later told that there had been a change and that Rezko now wanted Mercy to receive its CON.

41. Mercy received its CON as a result of a controversial and irregular vote at a public Planning Board meeting.12 The vote brought significant publicity to the Planning Board and ultimately led to the disbanding of the Planning Board. Almanaseer testified under oath in the grand jury that not long after the Planning Board vote on Mercy's CON he saw Rezko at a fundraiser. According to Almanaseer, he was still embarrassed about what had occurred at the Planning Board vote on Mercy's CON and Rezko's role in the vote. Almanaseer testified that he asked Rezko why Rezko had switched the vote on the Mercy CON. According to Almanaseer, Rezko stated: "The Governor wanted it to pass."

II. FROM EVELYN PRINGLE'S "CURTAIN TIME" ONLINE ARTICLES

Tony Rezko is a private citizen. Therefore, the evidence presented in the trial focused on his influence over officials in getting members appointed to the Boards. Prosecutors did not discuss how the legislation got passed that enabled the Planning Board to be set up in a way that allowed for the appointment of members to rig the votes to begin with.

That part of the scheme will likely be detailed in future indictments, probably starting with Blagojevich. Blagojevich signed the Illinois Health Facilities Planning Act with an effective date of June 27, 2003. However, before he could sign the act, a bill had to be passed by the Illinois House and Senate. As discussed fully in Curtain Time Part II, Obama was the inside guy in the senate who pushed through the legislation that resulted in the Act.

Obama was appointed chairman of the Senate Health and Human Services Committee. The minute the bill was introduced, it was referred to his committee for review. The sponsors of the bill also served on this committee with Obama. Within a month, Chairman Obama sent word to the full senate that the legislation should be passed.

On May 31, 2003, Senate Bill 1332 passed and specified that the "Board shall be appointed by the Governor, with the advice and consent of the Senate." The legislation reduced the number of members from 15 to 9, paving the way for the appointment of a five-bloc majority to rig the votes.

The corrupt members appointed included three doctors who contributed to Obama. Michel Malek gave Obama $10,000 on June 30, 2003 and donated $25,000 to Blagojevich on July 25, 2003. Malek also gave Obama another $500 in September 2003.

Fortunee Massuda donated $25,000 to Blagojevich on July 25, 2003, and gave a total of $2,000 to Obama on different dates. After he was appointed, Dr Imad Almanaseer contributed a total of $3,000 to Obama. Almanaseer did not give money to Blagojevich.

When the first pay-to-play scheme was put in play, and the application for approval of a new hospital was submitted, the Department of Human Services, along with four other Illinois agencies, sent recommendations that the project should be approved even though experts said the hospital was not needed.

During the trial, Rezko's attorney presented an email exchange to the jury that hinted at Obama's role in setting up the scheme. The exchange showed that Obama and seven other top Illinois politicians consulted on the legislation passed in 2003 and were involved in recommending the members for the board.

Matthew Pickering wrote the memo to Blagojevich's general counsel, Susan Lichtenstein, on behalf of David Wilhelm, a former chairman of the Democratic National Committee, who headed Blagojevich's 2002 campaign for governor.

Pickering said he and Wilhelm had "worked closely" over six months with state legislators. The memo recommended the appointees listed above and stated, "our attached recommendations reflect that involvement" with the political leaders.

The persons appointed to rig the votes, including those who contributed to Blagojevich and Obama, are cooperating in exchange for immunity or lighter prison sentences.

Feds shut down pay-to-play schemes

Only two pay-to-play schemes succeeded before the Feds swooped in and shut them all down. Blagojevich did not receive the $1.5 million from the Planning Board deal because the hospital was never built.

But Obama received $20,000 from the first kickback paid in the pension fund scheme and the straw donors used to funnel the $10,000 payments, Elie Maloof and Joseph Aramanda, also made $1,000 contributions to Obama's failed run for Congress in 2000.

In addition, Aramanda gave $500 to Obama's senate campaign on June 30, 2003. In the summer of 2005, Aramanda's son landed an intern position in Obama's Washington office.

Obama also received contributions for his senate campaign from the two persons appointed to rig the vote on the pension fund board. On June 30, 2003, Jack Carriglio contributed $1,000, and the other appointee, Anthony Abboud, donated $500 on June 30, 2003, $250 on March 5, 2004, and $1,000 on June 25, 2004.

The person chosen to funnel the kickback in a future scheme, Michael Winter, donated $3,000 to Obama on June 30, 2003.

All these people are also cooperating in exchange for immunity or lesser prison sentences but prosecutors pointed out during closing arguments that people who entered into agreements with the government are required to tell the truth or all deals are off.

!|12.9.08 @ 3:05PM|#

With great power, comes great responsibility.

kinnath|12.9.08 @ 3:07PM|#

One could also argue that deregulation gives more power to the likes of Enron or AIG.

The market took care of Enron and AIG.

Replacing a corrupt government requires armed rebellion.

|12.9.08 @ 3:09PM|#

But, Teh Obama is uncorruptible! It's the new dawn of public service!

Actually the problem is less that these people aren't the "right people", but that the system tends to inevitably push the "right people" aside, because the self-interest of those involved dictates using political patronage networks to enhance one's own power. Political Darwinism. The people who don't do it, don't survive. The people who do it the most, rise to the top.

The cool thing about the market is that it takes that self-interest and forces it into voluntary transactions. So people can only rise to the top by the consent of all the consumers who purchase their products. The CEOs in charge may not be any nicer than Nixon, but they can't just squash their enemies by passing a law against them. They have to drive them out of business through some mechanism involving consumer choice.

|12.9.08 @ 3:13PM|#

Mad props for an article pointing out something so bleedin' obvious its actually not one, but two of RC'z Iron Laws:

5. Any power used for you today will be used against you tomorrow.

6. Money and power will always find each other.

Mike Laursen|12.9.08 @ 3:20PM|#

Why Obama's Next

Summarize much?

Amber|12.9.08 @ 3:33PM|#

"Why Obama is next"..HAHAHAHAH

That is really funny that you've decided Obama is going to be indicted next. I guess you could have quoted the part..

"In a conversation with Harris on November 11, the charges state, Blagojevich said he knew that the President-elect wanted Senate Candidate 1 for the open seat but "they're not willing to give me anything except appreciation. [Expletive] them."

|12.9.08 @ 3:56PM|#

Well, Duh!

Paul|12.9.08 @ 6:48PM|#

But, but, getting the government involved in saving these enterprises increases freedom!

Blagojevich also was charged with illegally threatening to withhold state assistance to Tribune Co., the owner of the Chicago Tribune, in an attempt to strong-arm the newspaper into firing editorial writers who had criticized him.

Government assistance to newspapers? It increases freedom of speech by stopping media consolidation!

Lies that life is black n whit|12.10.08 @ 7:36AM|#

Corruption as we've not seen it. Love it, embrace it, make checks from it, don't deny it.

|12.10.08 @ 1:06PM|#

Unfortunately, nobody asked me or anyone I know if government power should be expanded in response to the crisis. The answer would be easy: To the extent government has power to sell, whether for money, votes, or house repairs, powerbrokers will sell. I give the powerbrokers credit for knowing exactly what they were doing when they increased the power supply.