Were the damage not so great, it would be amusing to see SEC Chairman Chris Cox running around shocked, shocked, that Bernard Madoff had allegedly pulled off the biggest financial fraud in history — and the watchdog was again caught napping. Or worse. The agency ignored years of warnings about Madoff's activities, and Barron's did an article questioning his returns a decade ago. Madoff reportedly bragged about his influence in D.C., including having an in-law who worked for the SEC.
As the victims of the alleged scheme, including many charities, see their investments wiped out, Madoff is out on bond, having to wear an ankle bracelet and stay home. Had he been a minority/poor kid who stole $100 from a cash register drawer, he'd be in county lockup with hardened criminals. Meanwhile, Attorney General Michael Mukasey has recused himself from the investigation, without giving a reason. This is America in the new gilded age, where government has been essentially handed over to the wealthy and connected — and we're surprised they went wilding?
An older America learned from the frauds and follies of the 1920s, including the legendary collapse of the Samuel Insull monopoly. Regulation of securities and banks was put in place, helping to ensure the success of American business for decades through transparency, competition and fairness. That all began to unravel with the Reagan Revolution — but especially in the 1990s with deregulation pushed by Sen. Phil Gramm (R-UBS) and Clinton Treasury Secretary Robert Rubin, a kingpin from Goldman Sachs.
The intellectual conceit pushed actively by Gramm & company, and tacitly embraced by Rubin, was that regulation was largely unnecessary and an impediment to competitiveness. Conservatives believed the reducto ad absurdam of Milton Friedman the popular polemicist (as opposed to his role as a great economist). It went like this: Who needs regulation? If a company acts bad, customers will go elsewhere. This doesn't work too well, say, if you were the customer on an airliner that crashed because of negligent, oursourced maintenance. It didn't work for Madoff's clients, either. But such was the taproot of the anti-regulatory philosophy.
The long history of bubbles and scams (Crédit Mobilier, anyone?) The major causes of the Depression. The huge scandals of 2001-2002, topped by Enron. Nothing was learned because those in power were true believers. The "free market" is a religion that abides no apostasy. As for your retirement, your 401(k), your house — devil take the hindmost.
Ponzi schemes are as old as human action in the marketplace, but the alleged Madoff fraud is more. That it was so huge, carried out by one of the most respected financiers on the Street, against some of the wealthiest and most sophisticated investors, and that it was countenanced by regulators for years — wow. The Fed can cut interest rates to minus-zero and it can't fix the fundamental rot of our institutions. Until that renewal begins, we can't begin to address this recession, much less the larger Great Disruption, which is only beginning.
Follow the chatter on CNBC and you catch a whiff of the millenialism that’s at the heart of libertarian economics. Get the government out of the way and we’ll all be rich! Even televangelism speaks this language. The salient factor is belief itself. You gotta believe.
When Reagan signed the bill deregulating the S&Ls, he talked about “hitting the jackpot”. Indeed, we might as well be believers in a holy crap game. And you can’t win if you don’t play.
The Madoff affair is not just a particularly brazen example of greed. It’s also emblematic of a country mesmerized by promises of easy wealth. Amercan eschatology meant early retirement, playing golf in Maui, and double-digit annual returns on mutual funds. Just lower taxes, cut government, and most of all, believe with all your heart.
I wonder if the glue that really held the Republican coalition together for so long wasn’t this very thing called “belief”. True, libertarians were not churchgoers as such but they matched their fundamentalist compatriots in terms of magical thinking. Now that the bubble is burst, there’s not much left except imagining a different world where believing makes it so.
Mukasey recused himself from the case because his son is defending one of Madoff’s associates. I’m glad he chose not to stand in the way of his son’s big payday.
And I think – I’m not sure – but I think Mukasey’s son works for Rudy Guliani’s law firm. The coziness just never stops, does it?
At least one guy will go to prison. Too bad about the rest, including Madoff’s greedy, too rich already, customers.
Madoff’s greedy customers do indeed deserve punishment, and they got punished in the most fitting way possible — they lost their money.
What you guys don’t seem to understand is that the banking industry has been heavily regulated for many, many years. It requires a lifetime of study just to become a specialist in some small part of banking regulation (there’s no one who knows it all), and the complexity and depth of regulation is most of the problem. As we all noticed, the highly paid government regulators didn’t do their job and all that volume of regulation was ineffective.
Adding yet more layers of law to the situation won’t help because it has nothing to do with HOW MUCH regulation you have and everything to do with HOW EFFECTIVE your regulation really is. The basic problem is that we keep trying to make investors believe they can get high returns on their investment without taking substantial risk. Then when reality comes along and keeps trying to demonstrate that this is impossible, we go looking for way to shield the investors from reality and keep living in fairyland.
Regulation won’t fix this problem… investors must make a loss now and then to remind them the meaning of risk. If charities want a low risk place to invest their money then the best possible investment for a charity would be to spend the money being charitable.
As for transparency and honesty in business, it’s an excellent idea (in theory). There have always been people who can convincingly talk B.S. and there always will be. Turn on the TV and look closely at the advertisements, try to find a single one that is telling the plain honest truth. I doubt you will find any. Try to find a politician who isn’t a bit flexible on the definition of words and policies. Not easy is it?
All you who want to point hard at what went wrong, better be coming up with a great new idea for a scheme to make people tell the truth. Another government department? A federal committee of straight-talkers? Ha! Start with one federal straight-talker and see if you get that far.
You want to stop corruption… marvelous. Now explain how it’s done. Another branch of government to stop the first branch from getting corrupt? How about a special corruption investigator who has great powers and is answerable to no one? Lot of rules saying “don’t be corrupt” in an endless sequence of tangled verbage?
You maybe want to start with an investigation of living under the Soviet economy where corruption was a way of life, or China where bribes are considered legitimate business expense or Singapore where one party and one family owns everything (including the government). We are rapidly seeing Chavez go the same way in South America as he gets comfortable with power and decides he never wants to let go.