For awhile people have been trying to name the Reagan-Bushes era by analogy to the Gilded Age, the Jazz Age, etc. Well recent events which have brought it to an abrupt end have revealed what it actually was: the Ponzi Age.

The real Ponzi Scheme now in the news is just a small example of the underlying story, which is based upon government encouraged private actions.

Here's a quick outline.

Ponzi Schemes require using the money from those who join later to pay back those who joined earlier along with the huge profits they were promised. It can continue as long as the new arrivals supply enough funds to keep those in the scheme happy. As time goes, on this number grows geometrically which is why it is also called a pyramid scheme, with those at the top (the original participants) being support by a bigger and bigger base.

In the US there was a shift in economic philosophy starting with Reagan. No longer was the ideal behavior one of tucking away money for the future, saving up enough for a down payment on a home, and depending upon a company run pension plan for one's old age.

Instead workers were encouraged (or forced) into becoming investors to supply the needs of their old age. Participation in the stock market used to be in the 10-15% range, but the creation of IRA's and 401K's has pushed this number to over 50%. This money flows into the financial sector every month and provides the fresh blood that a Ponzi scheme needs.

Along with the shift in savings allocation firms were encouraged (bribed by tax breaks) to shift their pension funds from bonds and other secure investments into the stock market and other risky activities. This added to the supply of fresh funds.

So much money has to go somewhere and since there are a limited number of stocks (and corporate bonds) issued there is competition to hold them. When there are many buyers and fewer sellers you get price inflation. This is exactly what happened. Over the past 40 years the stock market has risen to unprecedented heights, both as compared to earnings and as compared to yields from other investments. People were led to expect 15% or more returns on a steady basis, even though the long term average is more like 8%.

There is an old joke about two diamond dealers who keep selling the same stone back and forth to each other at ever higher prices, until one says he doesn't want to buy. Then the market collapses.

Much has been made of the huge rise in wealth inequality over this period, but the principle reason is because the wealthy have owned the type of investments that have seen the biggest rise up in price. If you own a million shares in a stock and it goes from $1 to $10 you are "worth" $9 million more. You housekeeper's IRA owns the same stock, but she only has $10 invested, she becomes $90 wealthier. Before the rise the wealth difference was $999,990, after 9,999,900 a huge increase in spread.

In the past decade or so the influx of money into the stock market from investors has slowed because many more people were already in the system. There was not the same rapid shift into these plans as before so the growth rate slowed. At this point the system was in danger of imploding. Fortunately for the financial sector, the shift to globalization occurred at the same time and the funds available expanded to include much of the rest of the world.

Now the financial markets had infusions of cash from China, Japan and elsewhere to buoy them up and the party continued for almost another decade. This has now, finally, slowed as well as these countries have started to need these funds for their own domestic purposes and as the yields and safety of their investments has become less secure.

The traditional economists have been thrown into a panic. First, their livelihood depends upon them promoting the virtues of Ponzi investing and, second, the "assets" which have been the basis of the wealth rise are shrinking. There is much talk about the dangers of deflation, but who does it really hurt? If you are a consumer and gasoline or TV's are cheaper in the future why should you complain? Even if you home is worth less, you still get to live in it and have the value that it provides. When you buy a new car it immediately goes down in value, but you continue to pay off the loan because you are still getting the same utility out of it as when it was first purchased.

There is also the argument that consumers will stop buying because they will be better off waiting since prices will be lower in the future. But modern electronics gets cheaper all the time and people buy it anyway even knowing that a better deal will be available later. There is a worth to having the use of a purchase now and not in the future that outweighs this type of calculation for many items. In addition necessities like food and clothing can't be put off, one has to eat and one can't walk around naked.

So the assets which are deflating are those held by the wealthy and these are the ones which they are really worried about going down. To go back to our millionaire and the housekeeper if things go back to the way they were originally she loses $90 and he loses $9 million. Who is worried?

Let's have a little honesty here, the aim of government and the economists who they employ is to preserve the Ponzi generated wealth by re-inflating the balloon as quickly as possible, but where is the fresh money supposed to come from? The average worker is already participating at a level which can't change much and foreign investors are moving elsewhere. So governments do what they always do in such cases, they print money and pump it into the economy. More money sloshing around means more available at the base of the Ponzi pyramid.

Can this work? Not over the long term. More money always leads to inflation which, while it makes apparent prices go up, does nothing for the real price of assets. In fact banks and other lenders hate inflation because they get back devalued currency. The reluctance of banks to lend the bailout funds shows that they understand that inflation is on the horizon and that lending money now is not in their interests. Economists have been predicting that inflation is under control because of the new understanding of fiscal and monetary controls. These are the same people who claimed that we were in a new era of continually rising asset values just a few years ago. Wrong then, wrong now.

The Gilded Age ended with the creation of the "progressive era" regulatory structures. The Jazz Age ended with the Great Depression. What will come now that the Ponzi Age is winding down?

There is much talk lately about what should be done about all the illegal acts committed during the Bush administration. The Democrats are already talking about "moving forward" and not focusing on the past. This is a claim to practicality, but is just an excuse.

There have been clear indications for much of the past 50 years that GOP administrations are more willing to violate the laws. These fall into two broad categories. The easier one to deal with has to do with standard corruption. Selling government influence, taking bribes in the form of campaign contributions or promises of future employment, or favors while in office.

This has become especially outrageous during the Bush years as a total lack of desire to prosecute, or even investigate such misdeeds, rose to an unprecedented state. Even private firms have become generally immune to punishment for violating the law.

The second violation of the law has to do with government actions meant to further legitimate aims, but which themselves break the laws to achieve their aims. Right now those in the forefront have to do with sanctioning torture, violating the privacy provisions of the Fourth Amendment and obstructing investigations by the legislative branch.

As the Clinton years showed the GOP is willing to use legal mechanisms for political aims. The impeachment of Clinton being the pinnacle of their efforts. There were many others, including the refusal to allow federal judges to be seated and misuse of the filibuster.

Now if the Dems turn around and start to prosecute the violations of government policy the they will run the risk that the next time the GOP is in power they will even engage in more politically motivated persecutions. This is what happens in third world countries which only pretend to be democracies. At each change of government all the prior leaders are at risk of prosecution. Such a course of action leads to the complete destruction of any adherence to the rule of law. Since the GOP has already shown that they are willing to play this game, timidity by the Dems is unwise. You don't defeat a bully by giving in to him.

So what should be done?

I suggest two courses of action. The activities which are based upon traditional monetary corruption should be left to the appropriate judicial departments to investigate. This, of course, means that the hacks and cronies have to be removed from the departments. Obama seems to be making some moves in this direction, but a lot depends upon appointments of US Attorneys and the willingness of local jurisdictions to investigate regional crimes. The regulatory agencies have to be restored as well.

As for policy-based misdeeds. There needs to be away to counter the already-forming critique that any investigations are just "partisan politics". Existing law protects most government officers even if they do the most stupid or ill-conceived things as long as they do them in good faith and as part of their official duties. So "heckuva job" Brownie never gets charged for being incompetent.

There is nothing to stop congress, however, from holding hearings on what went wrong and who was responsible. This is similar to the truth and reconciliation commissions that have arisen elsewhere. I'm not sure about the forgiveness part of the process, people in the US don't seem very willing to ever admit to a mistake or apologize.

In addition to hearings, the Obama administration should sign the treaty which established the International Criminal Court. If there are injured parties, say Guantanamo detainees, who want to bring charges at the ICC then this would allow them to do so. International law allows countries to arrest people accused of being war criminals as the UK did with Pinochet. If the ICC decides to issue a warrant for Gonzales or Cheney or Rumsfeld then this is not a political act by the Obama administration.

If the US is not willing to adhere to international law, including taking responsibility when it breaks it, then why do they expect others to do so. We are quick to condemn Al Qaeda or Hamas for their actions, but don't want to be judged for ours. This is not the rule of law, it is the law of the jungle - might makes right.

How about, Mr. Constitutional Lawyer president? Join the ICC.