by Damozel | The whole financial industry and perhaps the entire global economy is aghast that Bernard Madoff---described by Paul Krugman as "brilliant investor (or so almost everyone thought), philanthropist, pillar of the community---was successful mainly because he foisted on the world a $50 billion Ponzi scheme. That's a lot of fraud.
I didn't know what one of those is, so I looked it up on Wikipedia. It sounds a bit like a pyramid scheme or the insurance scam perpetuated against Mr. Pecksniff and others by the sinister Tigg Montague in Martin Chuzzlewit... or like the investment scam perpetuated by Mr. Merdle in Little Dorrit. (Everything that can ever happen has already happened in the fiction of Dickens, if only you look for it).
The scheme usually offers abnormally high short-term returns in order to entice new investors. The perpetuation of the high returns that a Ponzi scheme advertises (and pays) requires an ever-increasing flow of money from investors in order to keep the scheme going.The system is destined to collapse because there are little or no underlying earnings from the money received by the promoter....
If memory serves, Montague's scheme was allegedly backed by a nonexistent "Bengali Tiger Preserve." I think Mr. Merdle's was mainly backed by the fact that he was supposed by those he took in to have millions of his own (he didn't).
Krugman's point is that Madoff's banditry are a metaphor for the entire financial services industry.
The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it’s not just a matter of money: the vast riches achieved by those who managed other people’s money have had a corrupting effect on our society as a whole.
At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way. From Bush administration officials like Christopher Cox, chairman of the Securities and Exchange Commission, who looked the other way as evidence of financial fraud mounted, to Democrats who still haven’t closed the outrageous tax loophole that benefits executives at hedge funds and private equity firms (hello, Senator Schumer), politicians have walked when money talked....
According to him, Madoff is different from the noncriminal schemes that were merrily afoot on Wall street in having skipped a few steps---i.e., he presumably knew he was stealing and did it directly, instead of by talking himself into believing the hype that encouraged clients to take risks they didn't understand. "Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear."
The fact is, plenty of people knew that the money spun during the Bush era was all being spun out of straw.
At The Impolitic, Libby says:
At Newshoggers, Ron Beasley says:
But that'll have to wait. Because--speaking of madness--
Of course one necessary solution to the corrupting influence of all this Wall Street influence is simple, and isn't ever going to happen: reform of campaign finance laws so politicians no longer have the same incentive to treat Wall Street as a temple or to get into bed with the money-changers.
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