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Posts Tagged ‘Madoff’

One of the great hallmarks of a capitalist economy is successful competition.  Build a better mousetrap and the world beats a path to your door.  Theoretically, that’s how capitalism works. It’s survival of the fittest. Darwinian economics. You have to adapt to changing conditions and always make a better product if you want to successfully compete with all the other players for all the loot out there.  Of course there is another way.  Sort of a shortcut, you might say.  You can just steal the money.  For some people, actually for a lot, it’s just easier that way and it also eliminates all that inconvenient stuff about being better, stronger, faster, et cetera. Which brings me to the topic of bubbles – not the type in your bathtub, the type in our economy.

Capitalists have always resorted to the bubble method of making money whenever they ran out of resources or ideas.  The basic idea is to promote something as a “must have”, jack up the price, create a buying frenzy, make a gazillion dollars, and bail out at the top, just before the whole thing collapses.  The key ingredient to a successful bubble is having enough ignorant (meaning not fully informed) people who buy into the bubble while the bubble manufacturer stays on top of the situation, fully informed and fully in control.  Bubbles have a long and distinguished history in capitalism; however, if one looks deeper they are also a harbinger, a canary in the coal mine, if you will.  This is because they tell those who are paying attention that the movers and the shakers have resorted to the last means of making a quick fortune, all other methods seemingly having dried up or vanished.  It’s a sign of a dying economy.

One of the most colorful bubbles in history was the Dutch tulip bubble of many, many years ago.  Somehow people became enchanted with tulips and began buying them at ever higher prices.  Those tulips that were a bit different from the norm commanded higher prices, and pretty soon, people were bidding up the prices for tulips. Investors found they could buy and flip flowers for huge profits.  It was all nonsense of course.  After all, what is the intrinsic value of a flower that has such a fleeting existence? Nevertheless, the bubble grew and grew until one day it popped.  And some people became very rich and some people became very poor.

The key thing to note about the tulip bubble is that there was a major element of untruth to the whole thing – an element of deception perhaps.  There are two sides to the bubble equation: the person who makes money selling the item and the person who loses money by buying the item.  The key thing to understand is that the item being sold isn’t really worth anything close to the actual sales price.

Not too long ago we had a grand bubble in America.  I’m talking about the tech bubble, not the real estate one.  Back around the turn of the century people began to get the idea that computers and the internet and anything technical was the next big thing. The Nasdaq skyrocketed.  People were making fortunes investing in tech. However, the old money that was invested in the old economy wasn’t doing so well.  Mr. Greenspan, who was chairman of the Federal Reserve at the time decided that this was not a good thing.  So he killed the tech bubble by continuously raising interest rates so that borrowing money became too expensive for the bright young startups and they all collapsed.  People who had invested in these winning companies lot their shirts.  A lot of that money was 401k money.  Huge numbers of Americans lost big time.  But, on the bright side, the old, stodgy, unimaginative economy guys – the old wealth – did OK. Thank God for that, right Alan?

The problem, of course was that after all was said and done – all we had was an old, stodgy, unimaginative economy that was going nowhere.  So, thankfully, our government stepped in and relaxed a bunch of regulations and adopted a policy of just not paying attention and pretty soon we had a good bubble, i.e. one that the old economy guys could profit from.  That of course was the housing bubble.  The housing bubble was fertilized by the government by giving an enormous income tax benefit to little people who bought and flipped houses.  Then the banks decided they didn’t really need to verify anyone’s actual ability to repay a mortgage and they gave out free money to anyone who could breathe so they could also play the housing bubble game.  Everybody won.  Especially people like Bernie Madoff who was running a little independent bubble on the side called a Ponzi scheme. Fortunately, he came under the overall  government policy of “let the children play – it’ll all work out”. So the SEC ignored all the warnings and let Bernie make his fortune while all the suckers lost theirs.  Hey, it’s Capitalism, with a capital C.  Right? It’s not a game for sissies.

Of course the housing bubble pooped or popped and there were some really big winners and a lot of losers.  We don’t hear a lot about the big winners in the news, but they have to be there in accordance with the Law of Conservation of Winners and Losers in Economic Bubbles.  You hear a lot about the crying sissies though, don’t you?  They say it wasn’t fair and such. Please.  What does fair and just have to do with Capitalism anyway?  Just look at Pfizer.  They just got fined $2 billion for illegally promoting a drug that really wouldn’t help certain medical conditions that they said it would. Oh well.  Nice try anyway, Pfizer.  You got the deception part right, you just didn’t cover it up well enough.  You could have made a fortune otherwise.  It would have been a private drug bubble of sorts.  But don’t be a sissy, OK? Stop crying. You got caught, deal with it.  It happens.  Next time learn to cover up better. That’s how you play Capitalism. And don’t forget, next time get the government on your side.  Get some Senator or Congressman to write some legislation protecting companies that go out on a limb trying to help the public or something.  A little protection always helps.

Hey! We just had a mini-car-bubble.  Not mini-cars, a mini-bubble.  Did you notice? The cash for clunkers thing.  Everyone knows the clunkers weren’t worth a bent nail, but the people who traded them in got $4500 in clunker bucks and the car dealers sold a bunch of cars.  (I wonder who will be paying for all those clunker bucks the government gave away?)  Anyway, the Japanese car manufacturers did real well.  That’s good.  Help the world economy.  Too bad that the clunker mini bubble didn’t do so much for  GM and Chrysler. Those guys could use a good big, limousine-sized, gas-guzzler-sized bubble right about now, because the American public doesn’t seem to hold their products in high regard.  Only a big bubble can save them now.

Which bring us to us.  I think we need a bubble for us too.  Let’s face it.  Everything’s made in China now. Or India.  What little we still do make is being outsourced as fast as humanly possible.  Thank God for Bill Clinton and NAFTA.  OK.  So what do we do? We plan. Pretend, for a moment, that we are big bankers or investment houses. How can we make a ton of money from all the unsuspecting little people?  How can we get them to bite one more time?  Hmmm.  How about health care?  We could get them all to buy expensive insurance and then not pay off!  That would be good.  At least for those of us in the insurance business.  But we need something bigger than that – something that everyone can play. We need to sucker them in and then we pull out the rug from under them, just like the Robber Barons of old. We’ll make a fortune – for a few of us anyway.  First, we need to get the government on our side – so it’s all legal and such.  Hmmm…. Hey, here’s an idea: why don’t we create a shortage of water all over the planet and then sell melted Antarctic icebergs to people for drinking water?  Wait – are those icebergs salty? Maybe that won’t work.  Anyway, you get the idea. Deception is the key. Sell things for a lot more than they are worth. Get the government to look the other way, or even help out – that’s key too.

OH! I think I’ve got it! I have an idea!! Yes!!!

What??? You didn’t really think I was going to tell you my idea, did you?

Come on.  Please.  Don’t be a sissy.

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A hour ago Bernard Madoff pled guilty to what has been described as the largest Ponzi scheme in history.  Is seems that Mr. Madoff bilked quite a few people out of billions of dollars by telling them that he had a secret way of beating the market.  He always paid dividends that were much higher than the return other investors were making on their investments. He was a miracle worker, or so it seemed.  In actuality he was simply using new investor’s money to pay old investors: a classic Ponzi scheme.  It worked well for a long time – all he had to do was to keep finding new investment dollars. The collapse of global economy sort of put an end to new investments in Bernie’s scheme and that, ultimately, proved to be very inconvenient for him and somewhat more inconvenient for his investors who had gotten used to making remarkable earnings on their investments.  Bernie will be sentenced, probably to life in prison, in a few months or so.  His investors? Probably out of luck – their money is just gone.

As massive as the Madoff Ponzi scheme was, it pales in comparison to the Worldwide Real Estate Ponzi scheme that is responsible for the global loss of somewhere between $30 and $50 trillion of wealth (yes, trillion).  Just thinking about that number for a moment puts Obama’s $800 billion stimulus into perspective, doesn’t it?  One thing to note is that there is not enough money in the U.S. Treasury and probably not even enough money printing capability in the U.S. to provide refunds to everyone who lost part or all of their wealth.  It’s just gone.

The question now is: what should happen to the people who perpetrated this truly massive Ponzi scheme on the world? What should be done with all those whose complicity in this insane scheme directly led to the loss of millions of people’s 401k and 529 fund values?  What should be done to those who created Liar Loans?  What should be done to those who misrepresented the value of property in order to get a mortgage approved?  What should be done to those who rated toxic mortgages as AAA-rated?  What should be done to the bankers who sliced and diced the toxic mortgages and flipped them as fast as they could to the entire world?  What should be done to those who sold mortgage insurance on these toxic mortgages, called credit default swaps, knowing full well that their company couldn’t begin to cover the losses if these mortgages weren’t paid?  What should be done to the Wall Street bankers who took TARP bailout money, taxpayer funds meant to keep their banks from dissolving into a slimy, black pool of toxic sludge, and handed out multimillion dollar bonuses to the very people who created this gigantic Ponzi scheme?

Pretty good questions, huh?  Well, it turns out I’m not the only one who’s asking.  David Segal reports in today’s New York Times that federal investigators are starting to ask, more or less, the same questions.  It’s about time.  Isn’t it sort of surprising that Bernie Madoff rips off a fairly small number of very wealthy investors and before you can say “Free Market Capitalism” he’s hauled off to court and pleads guilty to an historic crime.  Meanwhile, as literally billions of people suffer from the greedy antics of our completely-out-of-control financial industry, we are just getting around to sort of starting to begin to think about maybe checking to see if anyone can be found who might possibly be responsible for the Worldwide Real Estate Ripoff.

So what do we do? What if it turns out that all the leaders of our financial industry are culpable?  What if every last one of our big time bankers is a crook?  Do we throw them all in jail? No, of course not. We need them – remember? Our banks are too big to fail.  Our bankers must also be too big to replace, right?  That’s why we can’t nationalize the banks: all the knowledge of the financial industry resides with these people. Who would run our financial industry if all the crooks were all in jail? The sad reality is this: we can’t throw them all in jail. The solution: find some scapegoats. Find a few of the top dogs, maybe 0.00 1% of the financial industry who probably can’t duck or hide from some massive financial fraud charges and haul them off to court and throw them in jail. Maybe they can get a cell next to Bernie.

Then we declare ourselves to be cleansed of the toxic infection and we take a few moments to mourn over the billions of people who lost their fortunes.  Everyone will feel a lot better and then we will turn our attention to rebuilding our economy.  Then we turn over the task of creating a new financial industry, with built in safeguards against any more Worldwide Real Estate Ponzi schemes, of course, to the same people who got us into this mess.

And then we start all over again.

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It is fashionable in economic and government circles to condemn the tactics of tricksters like Charles Ponzi, a man who made a fortune by using new investors’ money to pay old investors their expected returns on their investments.  The most recent person to become famous in this way is Bernie Madoff, who is thought to have cost his investors somewhere around $50 billion. These newly destitute investors are rather unhappy these days. It seems they have quickly forgotten all those fabulous investment returns they made over the years, while the rest of us  struggled just to keep up with inflation. It sure liked Bernie was a genius in the old days, and a lot of people liked him too.  They just didn’t realize that the amazing earnings he was paying out depended upon more and more people investing more and more money with him, because, after all, he wasn’t really making any money in the market.

While we all can sit back and condemn poor Bernie, we might want to consider that Ponzi schemes seems to be more the rule than the exception these days.  For example, consider our 401k plans.  I already wrote about that in a previous blog a few days ago.  If you look at the history of the Dow Jones Average you will see that the Dow really took off after the whole 401k thing was created.  Without our 401k money piling into the economy it is likely that we never would have had the growth that we did have over the past thirty years.  Sure the 401k thing is sort a Ponzi deal – the more money we put in the more market went up, and so we put in even more money!  We all benefited right? Well, except for recent history anyway – if you want to count that.

But look at the real estate bubble.  Wasn’t that a grand Ponzi scheme too?  Everybody buying and selling houses to each other and every time houses were bought and fixed up and sold everyone making money.  It was great. You couldn’t lose – even the banks knew that.  And the government.  Thank God for the government and how they changed the tax laws so that you could flip a house every two years and not pay tax on the profit.  If that wouldn’t create a beautiful Ponzi scheme what would?  And didn’t we all benefit from that? Didn’t America, and a lot of the rest of the world too, just sprout up with gorgeous McMansions?  They’re everywhere now – not all of them inhabited, mind you – but beautiful nonetheless.  And all thanks to the brilliance of Charles Ponzi.

But wait.  There’s more.  Remember the Tech bubble?  Remember how the stock market just skyrocketed when Tech was born and there was a new IPO every day and everyone could make a fortune just by buying IPO stock one day and selling it the next? I know some people who made fortunes doing that.  Those were the days, I’ll tell you.  The Nasdaq going up and up and Greenspan saying we were guilty of irrational exuberance.  I wish I had sold my stock then.

Just think back: the 401k bubble, the tech bubble, the housing bubble…wait there’s another bubble I forgot to mention. The Social Security Ponzi scheme bubble.  That’s the one where you take money out of your paycheck for your entire life and the government uses that money to pay other people who are older than you their retirement income.  It works great as long as the population keeps on increasing, but when you have a population bubble, like the Baby Boomers, well, someone is probably going to wind up holding the short end of the stick.  But you have to admit it has worked really well for a long time and lots of people have had very nice retirements from this government sponsored Ponzi scheme.  We’ll just have to tell the boomers that you can’t win them all – I’m sure they’ll understand.

So, if you look back, it’s pretty clear that we’ve been running our economy on bubbles and Ponzi economics for a long time now – and we’ve had a good time doing it!  Do we really want to change horses in mid-stream and try to find some sort of drab, responsible sort of economic plan that is based upon creating real products and people actually working and making stuff?  What kind of growth rate could we possibly get from that? 2%? 3%? Doesn’t our government realize that, like all of Bernie Madoff’s clients, we have become used to 10% or more growth?  We can’t get that from just having an economy that makes stuff that people buy because they want the stuff!

No, we need an economy that works because people buy stuff because they think they can flip it to someone else and a make a ton of money in the process. We are a Ponzi people who really like Ponzi economics: make your money fast, get out, and stick it to the last guy in line.  Isn’t that how our businesses work?  Isn’t that how Wall Street works? Isn’t that the system our government created with 401k, and 529 plans, and Social Security too? Sure it is.  And that’s what we need now to get us out of this economic mess we’re in.  We just need a new Ponzi Plan – preferably one endorsed by the government, of course.

Hmmm…now what sort of plan could that be? Let’s see we’ve done Ponzi housing, Ponzi tech, Ponzi retirement stuff…what else is there?  How about Ponzi banks?  What if we give the banks a lot of money so we become part owners? OK… So how about then the banks loan the money to whoever wants it? That’d be good!  Then…then we use the money we borrow from the banks to buy more stock in the banks! I bet that would drive up the stock price! Then we just keep doing that over and over again! We can’t lose!

Oh, wait…I have another idea. How about we buy the U.S. automobile companies! And then we all get stock in them and then we buy our cars from them and then….

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Bush, Cheney, Paulson, Rumsfeld, and now Madoff…the list could go on and on.  For far too many years Americans and the world have sat back and watched as these men and others have proved, time and again, that they lack a moral compass.  Most recently it was announced that Bernard Madoff bilked investors out of billions of dollars. Some wealthy investors have been virtually wiped out.  Who cares? Life goes on.  The best the Wall Street Journal has to offer is the advice that we must be careful with whom we invest our money.  How about some regulation and real oversight of the Wall Street crooks? Wouldn’t that be a good thing too?

Recently, Dick Cheney admitted that he approved the use of torture on people who were suspected of being enemy agents. The specific form of torture being discussed was waterboarding, a technique used during the Roman Catholic Church’s Spanish Inquisition.  Despite the fact that torture is against the laws of the United States and the world in general, Cheney is able to sit comfortably, unconcerned about being arrested and thrown into jail, and say that he was for it and that he helped in getting the “process cleared”. And yet, look at us.  We have become so accustomed to this sort of lack of integrity that we all just sit back and just turn the channel to see what else is on TV.

When the Iraq War was initiated, our Secretary of Defense was Donald Rumsfeld. Unhappy with General Shinseki, truthfully telling Congress that Rumsfled’s war plans were inadequate and non-sensical, he publicly scorned Shinseki saying that he was “far off the mark”. Rumsfled’s Deputy Secretary of Defense, Paul Wolfowitz said that Shinseki was “wildly off the mark”. Now, both Rumsfeld and Wolfowitz have been shown to “wildly off the mark” – after too many thousands of Americans and Iraqi civilians died in an entirely unjustified war against Iraq – a war advocated by Wolfowitz long before 9/11.  So where is the outrage of the American people? Why aren’t we marching in the streets in protest? Is it because there is something better on TV?

Today it was reported that President Bush is considering an “orderly” bankruptcy for the U.S. auto industry as part of a rescue package.  Some rescue.  It’s like going to a hospital for a heart transplant and later being told, while you are on life support, they have replaced your heart with a donor liver – it’s the best they could do.   I wonder if Goldman Sachs would have been interested in an orderly bankruptcy as part of their “rescue”?  How about Morgan Stanley? How about Fannie Mae or Freddie Mac?  I guess that if you are in the money business you get special treatment in this country.  If you are in the manufacturing business – well, you just don’t get it, do you? You see, we’re outsourcing all that kind of work – part of the global economy, you see.  We’re not really interested in having a strong manufacturing industry in the U.S. when we can get the poor people of other countries to make things cheaper over there in their poor countries. Then we just import the stuff, add on a nice profit margin, and run a sale – buy now and pay later. That’s the Bush business model: no rules finance, usurious interest rates, and let the rest of the world go through the labor of actually making stuff for us to buy cheap, while the country’s millionaires and billionaires make even more billions from the interest on our credit card purchases – interest that we’ll be paying for the rest of our lives, if all goes according to plan.

Recently, an Iraqi man was arrested for throwing his shoes at President Bush.  The news of this incident has made headlines around the world. President Bush has laughed it off as if it were a sort of carnival game he and the man were playing – like Whack a Mole or something.  Now the man who threw the shoes at Bush has become a hero to Arabs around the world who are unhappy with the war in Iraq.  However, it is my guess that while these Arabs might clearly associate the shoe throwing incident with a rejection of Bush and his war, there are many millions of other people worldwide who are quietly smiling at this act of rebellion and rejection because it symbolizes something more.  It also symbolizes a repudiation of Bush and his cronies, a repudiation of a disastrous war and a disastrous economic policy, a repudiation of a lawless presidency that endorses torture and the systematic dismantling of our Constitutional rights, a repudiation of a President who failed to “protect and defend the Constitution of the United States”, a repudiation of a President who even failed to save the drowning citizens of New Orleans.  His list of failures goes on and on.  The lack of integrity of this president, the most unpopular in the history of the United States, and his cronies, appears to have no limit.  The only plausible reason for not impeaching the man is that it would have left us with Cheney for President.

So America,  don’t ask for whom that Iraqi man threw those shoes, they were thrown for you.

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