Obama ''gets it,'' but Geithner clearly doesn't.

As we try to put the grand lunacy of AIG's grand larceny in some rational perspective, it might help to think of this latest bonus brouhaha as a reverse stress test--of the Obama administration's leadership, the political-financial complex as a whole and, ultimately, our very conceptions of capitalism. Is this really the economy that our leaders promised and the American people paid for? And are the elites who have been running and corrupting this system actually capable of changing it?



So far we are flunking on all counts. And, fitting for this most surreal of situations, this is the blessing in disgust. We now know what "the bottom" looks like. It looks like a company that perpetrated the biggest business loss in the history of the world handing out half a billion dollars in retention bonuses to the unit that almost singlehandedly destabilized the global economy--and a government that could not see this madness for what it was until millions of average Americans who could not tell a derivative from a Derringer called them out on it.

Herein is the silver lining of AIG's (nyse: AIG - news - people ) taxpayer gold digging. This most outrageous ripoff yet, as White House adviser Larry Summers called it, has ripped off the last remnants of the free-market mask on our economy and exposed the full extent of the broad fraud that American capitalism has become. Moreover, it's forcing all of us to confront our own complicity in this con--as well as the limitations of even our best-intentioned leaders to de-rig our degenerated economic system.

In theory, that system, as we have been repeatedly told since the dawn of the Reagan Revolution, is supposed to be guarantor of the American Dream. The free market creates the ultimate level playing field, rewarding initiative instead of privilege. And it offers the ultimate accountability mechanism, allocating capital with ruthless efficiency to the opportunity seizers and profit makers, regardless of their status or connections.

That's the uniquely American bargain most of us have bought into--and which differentiates us from the political economies of most of our developed competitors. We like our basic regulations that disclose information, prevent crime and keep our investments safe. And while we debate it at the margins, we like the modest government safety net we have constructed to protect us in times of trouble. But otherwise, we embrace the tradeoff of democratic capitalism--equal opportunities, not equal outcomes.

The problem for most of us is not with that premise, which we have long accepted as flawed but functional and fair enough in practice. It's that, as we have learned over and over in the last several months, this idealized system is now total fiction, as phony as Bernie Madoff's returns and exponentially more damaging.

There is no meaningful transparency anymore, not when investors are pouring hundreds of billions of dollars into junk loans masquerading as triple AAA CDOs and banks are paying off ostensibly independent rating agencies to pimp their products. Nor is there any meaningful accountability left, not when Lehman Brothers (nyse: LEHMQ - news - people ) is handing out multimillion-dollar bonuses to the executives who drove it out of business and the heads of the Big Three car companies are rewarded for their incompetence with lavish pay and perk packages. All of which was compounded by the lack of transparency and accountability in the bailout deals that the crony capitalists in the Bush administration cut last year before leaving office.
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Today, we are so far from capitalism, in fact, that we have lost even the basic understanding of a contract. It was bad enough that the government-appointed CEO of AIG was foolish enough to believe he was legally obligated to pay a retention bonus to the people who bankrupted the company--i.e., the people who should have been fired once the company posted a $60 billion loss in the last quarter of 2008. But how it is possible that Treasury Secretary Tim Geithner and the rest of the Obama economic team were swayed by this ridiculous argument, when taxpayers own 80% of the company and it was our money paying the bonuses?

With more and more damaging facts like this coming out, some of our political leaders have tried to explain away the fiction of our economy with a fiction of their own. The meltdown of our markets, we are told, was the result of greed and the recklessness it inspired. But the truth is that greed has always existed and driven our markets. What is different now is that the core checks and balances we have long relied on to constrain excessive risk taking and protect the integrity of our markets--which are as essential to capitalism as money--have been systematically dismantled over the last generation.

This is where our complicity comes in. More than just buying houses we could not afford, average Americans bought into a mythology--one that the political-financial complex peddled--that held all regulation equally evil and an impediment to economic growth. This was, of course, a perversion of capitalism, not a promotion of it, led by a coalition of self-interested, rent-seeking businesses and their free market-idolizing enablers in Washington. But we as a people failed to see the difference and were glad to live inside the blinding bubble we helped blow out of proportion.

Now that bubble has burst, we are starting to appreciate just how warped and unbalanced our system has become and the costs of that to us all. Indeed, forget about the AIG bonuses for a moment and consider what happened before it crashed and burned us. How did our government let one insurance company get so big that its collapse would imperil the world financial system? Why was it allowed to sell a financial product--credit default swaps--that some financial analysts concede even they don't understand? And perhaps most important, why was it allowed to assume so much risk without carrying the reserves necessary to cover it?

We are also seeing the political bubble of our expectations for change in Washington burst along with the economic one. Many of us still believe Obama personally "gets it," as he said; but the actions of his administration are draining the country's confidence on a daily basis. Geithner, who was an architect of the stupid deal that the government originally cut with AIG last fall, is clearly to blame here--his hapless handling of the bonus issue proved that he is too much part of the problem, too compromised by the warped thinking of the status quo, to be part of the solution. But this troubling mindset goes much deeper than one cabinet secretary.

That is evident from the White House's new strategy for dealing with the AIG scandal. What they are now doing, trying to get AIG to pay back the taxpayer-funded bonus money with other taxpayer money, is a cheap political solution designed to quell a controversy, not fix the problem. The only real way to remedy the original mistake--allowing the bonuses to go forward in the first place--would be to demand the employees who already got bonuses to return them, sue those who don't comply and block the rest of the bonus money from being released. Then the public might be convinced that the president is prepared to fight for the fundamental values he so eloquently invokes.

At the same time, the response of the Republicans has been every bit as disappointing--and even more disingenuous. The fact that they are continually playing the socialist card in attacking the president is absurd and irresponsible on its face, but it is particularly so coming from the party that paved the way for the destruction and defrauding of American capitalism over the last generation, albeit with some occasional help from the Democrats. In that context, it is hard not to see the Republicans' tough talk on AIG and the other bailouts as a cynical cover for their lack of accounting for their past mistakes--not to mention their lack of ideas for restoring the regulatory equilibrium of our markets.

Suffice it to say, then, that change is not going to happen just because we voted for it. If we want to end capitalism as we know it--that is, the perverted form we are stuck with today--then we as investors, consumers and workers are going to have to demand it. That means more than just complaining about indefensible bonuses--we need to call on both parties to support a smart, tough, 21st century regulatory reform package that will free our markets of fraud and rebuild public confidence in their integrity.

That's arguably the most important lesson to be learned from the disastrous AIG bailout--it's time for a voter bail-in.

Dan Gerstein, a political communications consultant and commentator based in New York, is the founder and president of Gotham Ghostwriters. He formerly served as communications director to Sen. Joe Lieberman, D-Conn., and as a senior adviser on his vice presidential and presidential campaigns. He writes a weekly column for Forbes.