Krugman: "A World Gone Madoff"

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).

A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns to investors out of the money paid in by subsequent investors, rather than from the profit from any real business....

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.

Let’s start with those paychecks. Last year, the average salary of employees in “securities, commodity contracts, and investments” was more than four times the average salary in the rest of the economy. Earning a million dollars was nothing special, and even incomes of $20 million or more were fairly common. The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence....

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:

I was calling the Bushenomic boom a Ponzi scheme for years, even when the experts were waving their charts around and proclaiming all this wonderful growth....If I had a dollar for every time someone called me stupid for saying it then, I could be vacationing in the tropics right now.

At Newshoggers, Ron Beasley says:

Wall Street...has gone from an institution to raise needed capitol to something more closely resembles a Los Vegas casino where the house always wins.  It will take more than regulation to end this.  A good start would be a securities transaction tax - a quarter or half of one percent to discourage excessive trading.  It would force investors to invest for the long term. 

But that'll have to wait.  Because--speaking of madness--

Over the last few days a number of readers had told me they were picking up hints that the folks fleeced by Bernie Madoff might themselves come calling for a government bailout. I'd been skeptical. But now it seems like that is exactly what may be coming. (TPM)

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.

Memeorandum has more here.

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Comments

[Charles II]

Off-topic, here's (phoenixwoman.wordpress.com/2008/12/19/news-that-makes-one-go-gulp/) one for your... amusement?

[2010TankMethod]

You Can "Make Money" Or Learn To Earn A Living Online! Big Difference...

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The cartoon like others such as the old Dagwood and Blondie in the 50s or Peanuts resonates because of a kernel of truth at which we can chuckle not an accurate mapping of reality. To try to turn this into some big life lesson with homilies about intervention for social change is something that Scott Adams and the Dilbert gang could probably have a lot of fun with.