Opinion by Daniel Starling

A few years back, around the time of the so called “new economy,” when people made I.P.O.’s out of thin air and made millions, I often thought back to my economics 101 class at the University of Kansas. Then I considered myself a youthful and idealistic socialist, when I asked my ECON professor about the hot war between Soviet Communism and American Capitalism and why he preached tolerance for supply-side economics.

One day after class he explained to me that neither extreme—total Free Markets or total state control would work very well. Only a balanced economy that included “elements of both systems” could succeed, he said to my disappointment. I also recall in my gut thinking he was probably right, since he lived through a central state economy in the eastern bloc, and was now an economics teacher in the West.

Some twenty years later I believe he was right. He wasn’t a Milton Friedman, supply-side, free-trade-fanatic or a Stalinist-Maoist command-economy-believer but a pragmatist. The government had an obligation to perform functions that cannot be made profitable in the private sector (i.e. health care) and should allow the free market to operate within responsible constraints (regulations) that protect the flow of capital and the rights of the worker/consumer/investor.

It’s amazing just how rapidly all of this lax regulatory-New World Order-World Bank-I.M.F. nonsense collapsed to expose the gaping loopholes in our laws, outright frauds and a flawed free market ideology that allowed whole industries to go unregulated and to eventually bankrupt the largest financial institutions in the world.

Unfortunately most Americans have no idea the difference between the many ISM’s in economic thought. Most are more concerned with finding a job or health care for their family than having a debate about the societal implications of the too-big-to-fail theory of this brand of American corporate socialism.

Most are shocked and awed at how in a year’s time America went from the most irresponsible lasseiz-fare free market economy in the history of the world to the brink of national health care, bank nationalization and a second New Deal.

It’s slightly Rod Serling-esque to watch the President of the United States of America stand in front of the cameras and remind the whole world that we can’t ignore the realities of the business cycle. For all you folks who didn’t take an economics class, welcome to ECON 101-American style-school of hard knocks.

This week, the governments of both Germany and the United Kingdom announced new regulatory reforms on the previously unregulated hedge funds. These funds made millions on credit default swaps for years and eventually torpedoed some of the world’s largest corporations (i.e. A.I.G.).

“The financial crisis has challenged the intellectual assumptions on which previous regulatory approaches were largely built, and in particular the theory of rational and self-correcting markets,” said Lord Adair Turner, chairman of the Financial Services Authority (F.S.A.) of the U.K. in presenting his recommendations for “profound” changes in banking supervision, including large hedge funds.

The same day, the Federal Reserve Bank shocked the markets by reversing ideological course and buying up $700 billion in toxic mortgage backed securities and $300 billion in long-term Treasury bonds, duplicating efforts in the U.K. to thaw credit markets. Could nationalization of the banks be next, as happened in the U.K. and recently was floated by Sen. Christopher Dodd?

But how did this happen? When did this delusion of never-ending prosperity and continuous market expansion begin? Was it with Reagan’s supply-side, Bush I’s New World Order, Clinton’s Free-Trade-Deregulatory Zeal or Bush II’s complete and total lack of enforcement of existing laws that governed Wall Street?

When Chairman of the Federal Reserve Ben Bernanke testified before Congress last week and feigned anger about discovering that American International Group was “a hedge fund disguised as a insurance company,” I had to laugh. I didn’t know a majority of Americans approved a bailout of a giant hedge fund. I thought A.I.G. sold health insurance, and so did everybody else.

I am still amazed at watching this charade of politicians in Washington D.C. perform a “dog and pony show” on the American people with their righteous indignation over the bonuses to workers and executives of failed corporations like A.I.G., Citi-Group and Fannie Mae/Freddie Mac. Many of these professional politicians on both sides of the aisle received ten of thousands in campaign contributions from these same folks who negotiated retention bonuses from their employers.

Sen. Charles (Chuck) Schumer who accepted $112,000 in political contributions from A.I.G. employees over the last decade is now demanding punitive new taxes on the bonuses approved under the initial T.A.R.P legislation, drafted under the obviously incompetent Bush administration and approved by a brain-dead and economically ignorant Congress.

Sen. Christopher Dodd is quickly becoming the fall guy for the bonus scandal as the sordid details of how the bonuses were changed in conference committee to allow A.I.G. executives millions in retention bonuses after receiving $85 billion in government bailout money.

How dare anyone in Congress chastise the $1 salaried C.E.O. of A.I.G., Edward Libby, who patriotically is trying to stave off disaster—the company still owns $1.6 trillion dollars of credit-default swaps on its balance sheet—for the bad judgment of politicians likes Sen. Dodd, who said he allowed the bonus loophole at the behest of the Obama administration and took thousands of dollars in political contributions from A.I.G. employees.

Now, the knee-jerk, money-grubbing politicians are threatening to make the bailout a failure by failing to admit they made a mistake by allowing the bonuses to go forward.

In what has become a ritualistic, Washington D.C. parade for the cameras, the American people will be subjected to another ill-conceived piece of legislation to mollify the masses, by retroactively taxing their bonus compensation upwards of 75 percent. More bad precedent and more bad law that most likely is unconstitutional.

Yet where is the legislation to regulate the hedge funds, credit default, derivatives and mortgage-backed securities markets? The American taxpayer is actually paying off the bad bets of A.I.G. to hundreds of other companies around the world. That’s Economic stimulus corporate-style. That’s the real dog and pony show!

I believe some real indignation should be saved for the politicians who got hoodwinked into rescuing failed hedge funds. It seems that while everyone was busy running for election last year, politics and campaign contributions appear to have influenced the likes of Sen. Christopher Dodd to allow millions of executive compensation for those responsible for bankrupting these once giants of finance.

When asked directly on Thursday by a reporter about how he felt about the $100,000 in campaign contributions by A.I.G. employees to his own record breaking campaign fundraising, President Obama sidestepped the question and instead gave a vote of confidence to Treasury Secretary Tim Geithner.

Silence sometimes speaks louder than words.