Saturday's New York Times has a lengthy and interesting piece about Bernard Madoff and the global reach of his ponzi scheme. What is fascinating is the degree to which people (and institutions) willingly forked over millions of dollars to this guy with virtually no due diligence whatsoever. Banks, universities, foundations, and the wealthy and well-connected considered themselves fortunate to have Madoff let them into the club and "invest" their money.
This would seem to give the lie to common libertarian notions of the perfect information available in the free market as well as the ability of the market to police itself. The persistence of this ahistorical foolishness by free market idolaters is remarkable.
The history of the United States, from its earliest origins through the New Deal is simply replete with frauds and financial panics, of excess and greed time and time again plunging the economy into recession or depression. These bouts of economic turmoil occurred regularly every ten to twenty years, causing enormous dislocation and unrest, and significant episodes of violence. Major panics and their attendant economic downturns occurred in 1797, 1819, 1837, 1857, 1873, 1893, 1907, and of course, 1929.
The length and frequency of recessions was drastically reduced following the implementation of the New Deal's regulatory scheme and there has been nothing like the Great Depression or the depressions of 1873 or 1893 since World War II. The fact that the U.S. has gone without a depression-like cataclysm for seventy years is not the product of happenstance.
The erosion of regulation of banks, both retail and investment, coupled with the absence of any regulation in large areas of the financial world such as derivative financial instruments and hedge funds, has led us to the current mess. Any economic stimulus package or bailout program that does not address the fundamental need for oversight in the capital markets is going to be inherently incomplete.
“We have always known that heedless self-interest was bad morals; we know now that it is bad economics” --from FDR's Second Inarugural address.
From the Lessons Already Learned Dept.
Posted by: drip | December 21, 2008 at 11:08 AM
...the perfect information available in the free market as well as the ability of the market to police itself.
You can't refute a theology.
These people would rather sit in the ruins and keep warm by wrapping themselves up in intellectual consistency -- and old newspapers -- than live in a functional society that flies in the face of their orthodoxies.
I'd say "let 'em", if there weren't so many innocent victims, so much collateral damage.
Posted by: Davis X. Machina | December 21, 2008 at 11:59 AM
But the collateral damage is to people who knew Madoff was trading on inside information. He was a thief and a cheat and they were his partners.
Posted by: drip | December 21, 2008 at 12:48 PM
drip,
The interesting thing is that I don't think there is any evidence that Madoff was trading on inside information. People assumed that he was -- if it was a classic ponzi scheme he probably wasn't trading much at all.
It is of course shameful if people thought they would benefit by insider trading, but I'm not sure I'd wish this on them.
Posted by: Sir Charles | December 21, 2008 at 01:12 PM
The invisible handjob of the market would actually do a much better job if Madoff were not under arrest and instead people were patting him on the back for being smarter than his victims.
It would be a lousy society, but there would be a lot more scrutiny of fund managers.
Posted by: MikeJ | December 21, 2008 at 01:29 PM
SC, i'm not sure i'd wish this on them either, but, their own blindness, sense of insiderness, and greed does, i think, require a broadening of the critique. this is not simply a failure of ideologues or believers; it is a failure of people who don't think beyond their desires (and yet, oddly not of us all, though all of us fail to think beyond our desires at times). these people wanted quick money; sometimes for themselves, sometimes, sadly, for charity. i think that when even the people running charities are looking for quick returns, we have a widespread problem that many have to own up to.
Posted by: big bad wolf | December 21, 2008 at 01:49 PM
bbw and Mike J have it right, to the shame of the investors. I have no sympathy for them the fact that Madoff didn't cheat for them and instead just cheated them is justice. The allure of the Madoffs of the world is that their magic machines, systems and information are known only to the knowing. The risks were high, the rewards unlikely, so deal with it. If I was representing the SPIC, I would shift the burden to the conspirator/investors to show the affirmative fraud Madoff committed. Simply losing your money in a high risk adventure, or claiming that you were going to use it for some noble purpose should not result in another taxpayer funded insurance program for pigs.
Posted by: drip | December 21, 2008 at 02:16 PM
I suspect that there are varying degrees of culpability in this among investors. Some may well have been trying to ride on a wave of cheating in which they were on the inside. However, I suspect many of these people only knew of Madoff's reputation as some kind of genius and they viewed it as not so much a get rich scheme, but rather the opportunity to get very solid and steady returns. After all, Madoff wasn't returning 20, 30 or 40% per year -- he just kept clocking in with 10-12% per year. I am sure that this was highly alluring to a certain class of retiree in particular.
That and the flattering aspect of being allowed in the club.
Posted by: Sir Charles | December 21, 2008 at 10:34 PM
when i say a broader critique is warranted, i am not saying everyone is a criminal in this matter. they aren't. they are, however, so self-involved as to be blinded and they are not alone, as a society we have lost the ability to see that growth has costs and limits. yes, we need investments, as SC as pointed out about union pensions, but we need reasonable expectations of what returns are sustainable---10, 12, 15 is not. that was a neon warning sign, for people who could look beyond self-interest.
rhetorically, it may be politically useful to focus on a few clearcut bad guys, but, if we want to get out of this, we (that is, the obama administration) have to use this as a teachable moment---not to teach that bad guys are bad, but that growth for its own sake is bad, that self-interested seekign to the exclusion of broader community thinking is bad, and that, just like momma said, doing omething because everybody else is doing it is bad.
interesting article, i thought:
http://www.prospect-magazine.co.uk/article_details.php?id=10554
Posted by: big bad wolf | December 23, 2008 at 10:28 AM