[Pen-l] PK on the Madoff Nation

["Jim Devine" <jdevine03@xxxxxxxxx>]

[Has the financial industry really been a Ponzi scheme, i.e., paying
current dividends by selling new assets? Right-wingers used to call
the US social security system (OASI) a "Ponzi scheme," but that was
totally bogus...]

New York TIMES / December 19, 2008 / Op-Ed Columnist

The Madoff Economy
By PAUL KRUGMAN

The revelation that Bernard Madoff — brilliant investor (or so almost
everyone thought), philanthropist, pillar of the community — was a
phony has shocked the world, and understandably so. The scale of his
alleged $50 billion Ponzi scheme is hard to comprehend.

Yet surely I'm not the only person to ask the obvious question: How
different, really, is Mr. Madoff's tale from the story of the
investment industry as a whole?

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.

But surely those financial superstars must have been earning their
millions, right? No, not necessarily. The pay system on Wall Street
lavishly rewards the appearance of profit, even if that appearance
later turns out to have been an illusion.

Consider the hypothetical example of a money manager who leverages up
his clients' money with lots of debt, then invests the bulked-up total
in high-yielding but risky assets, such as dubious mortgage-backed
securities. For a while — say, as long as a housing bubble continues
to inflate — he (it's almost always a he) will make big profits and
receive big bonuses. Then, when the bubble bursts and his investments
turn into toxic waste, his investors will lose big — but he'll keep
those bonuses.

O.K., maybe my example wasn't hypothetical after all.

So, how different is what Wall Street in general did from the Madoff
affair? Well, Mr. Madoff allegedly skipped a few steps, simply
stealing his clients' money rather than collecting big fees while
exposing investors to risks they didn't understand. And while Mr.
Madoff was apparently a self-conscious fraud, many people on Wall
Street believed their own hype. Still, the end result was the same
(except for the house arrest): the money managers got rich; the
investors saw their money disappear.

We're talking about a lot of money here. In recent years the finance
sector accounted for 8 percent of America's G.D.P., up from less than
5 percent a generation earlier. If that extra 3 percent was money for
nothing — and it probably was — we're talking about $400 billion a
year in waste, fraud and abuse.

But the costs of America's Ponzi era surely went beyond the direct
waste of dollars and cents.

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.

Meanwhile, how much has our nation's future been damaged by the
magnetic pull of quick personal wealth, which for years has drawn many
of our best and brightest young people into investment banking, at the
expense of science, public service and just about everything else?

Most of all, the vast riches being earned — or maybe that should be
"earned" — in our bloated financial industry undermined our sense of
reality and degraded our judgment.

Think of the way almost everyone important missed the warning signs of
an impending crisis. How was that possible? How, for example, could
Alan Greenspan have declared, just a few years ago, that "the
financial system as a whole has become more resilient" — thanks to
derivatives, no less? The answer, I believe, is that there's an innate
tendency on the part of even the elite to idolize men who are making a
lot of money, and assume that they know what they're doing.

After all, that's why so many people trusted Mr. Madoff.

Now, as we survey the wreckage and try to understand how things can
have gone so wrong, so fast, the answer is actually quite simple: What
we're looking at now are the consequences of a world gone Madoff.

-- 
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
_______________________________________________
pen-l mailing list
pen-l@xxxxxxxxxxxxxxxxxx
https://lists.csuchico.edu/mailman/listinfo/pen-l