There are a number of somewhat incredible articles floating around about the grotesque insolvency of the state of Illinois. Many parts are appalling, but what leapt out at me most was the following:
The state’s last elected governor, Rod R. Blagojevich, is on trial for racketeering and extortion. But in 2003, he persuaded the legislature to let him float $10 billion in 30-year bonds and use the proceeds for two years of pension payments.
That gamble backfired and wound up costing the state many billions of dollars.
Now, lawyers are supposed to be good at suing people. Policemen are supposed to be good at punching jaywalkers. Bricklayers are supposed to be good at laying bricks. Schoolteachers are supposed to be good at … um … something, I’m sure.
But there’s no reason to expect any of them to be good at making multi-billion-dollar-bets with other people’s money. If one weren’t blinded by status quo bias, one might observe that a system that not only allows them to do so but encourages them to do so is, in some fundamental way, broken.
To his credit, even the President acknowledges this:
As you know, part of what led to this crisis was [states like Illinois] and others who were making huge and risky bets, using derivatives and other complicated financial instruments, in ways that defied accountability, or even common sense. In fact, many practices were so opaque, so confusing, so complex that the people inside the [legislatures] didn’t understand them, much less those who were charged with overseeing them. They weren’t fully aware of the massive bets that were being placed. That’s what led Warren Buffett to describe derivatives that were bought and sold with little oversight as “financial weapons of mass destruction.” That’s what he called them. And that’s why reform will rein in excess and help ensure that these kinds of transactions take place in the light of day.
What’s that? You say he was actually talking about private firms making bets with their own money? Well, in that case he ought to be even more critical of state legislatures doing the same thing. He is, isn’t he? I mean, it’s not like he was a member of the Illinois Senate when they took this multi-billion-dollar bet. He wasn’t, was he?