Fooling Some of the People All of the Time

I recently finished reading hedge fund manager David Einhorn’s book “Fooling Some of the People All of the Time.”  Einhorn recounts his five year battle against American Capital Strategies, a company that systematically manipulated its financial statements to smooth earnings and make itself a Wall Street darling.  Despite Einhorn providing substantive evidence of the fraud to the Securities and Exchange Commission no investigation is even opened.  The company is eventually forced to acknowledge its manipulations when it declares bankruptcy during the financial crisis.  Einhorn’s book points out an interesting fact of human nature: if you repeat things often enough to a large enough group of people at least some of that group will believe it.  Right after I went on to read Bill Ackman’s “Confidence Game.”  Ackman fights the bond insurers who use mark to make believe accounting tricks in an attempt to prove they are solvent.  The consequences of the bond insurers insolvency would undermine investor confidence in the entire municipal market.  Indeed, in late 2008 in the municipal market was one of the hardest hit bond sectors.

The government has gotten into the “fooling some of the people all of the time” game with health care reform.  “We can cover more people, provide more services for those who already have coverage, and it will cost less.”  Most intelligent American’s recognized this as bullshit the moment it came out of B-Ball Barry’s mouth, but a lot of them didn’t care because it advanced their ideological agenda and they would have no problem raising taxes to pay for it later.  I have to give B-Ball Barry credit for one thing.  He was totally honest when he was running for office.  He told people exactly what he was going to do, they knew fundamentally they disagreed with him, but he offered “hope and change” so why not give the nice guy a chance?  I digress.

In order to fool some of the people all of the time, you have to have someone with authority and gravitas repeat your lie.  The biggest thing B-Ball Barry ran before the country was a "community organizer" whatever that menas.  So someone had to be co-opted.  Enter Paul Krugman.  It is arguable whether the Beard won the 2008 Nobel Prize in Economics for his contribution of academia or for his high-profile post as a partisan New York Times columnist.  Krugman has never really done any groundbreaking work.  But the Swedish voters love to stick it to America in any way possible.  When B-Ball Barry picked up the 2009 Peace Prize it was a jab in the eye for America's past hubristic sins.  In two years the Nobel went from the highest prestige award in the world to a joke.  But the award gave Krugman new ammunition.  He could say whatever he wanted, and people would believe him.  If enough people believed him his diatribe would gain a life of its own.  

Krugman was one of the most vocal supporters of health care reform.  He repeated the some of the people all of the time lie over, and over, and over again.  And how did he get away with it?  Bogus accounting.  For example, if you raise taxes in Y1 and start providing a service in Y4, you might make enough revenue in the first ten years to pay for the six years of the service.  So whats the take away.  If you manipulate your accounting, and repeat it often enough, a lot of people are bound to be fooled.  To use real accounting, that would show how insolvent the government truely is, would ruin the confidence game necessary to prop up the treasury market.  The government has every reason to perpetuate the lie.  They can't fund themselves if they don't.  We've seen this all before.  The people who were supposed to protect us were complicit then.  They are once again.  The end game will be no different.