1 Boring Old Man

The Madoff Economy
By PAUL KRUGMAN
December 19, 2008

^{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…

^{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, 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.}

• it looks as if much of the industry has been destroying value, not creating it
• the vast riches being…“earned”…in our bloated financial industry undermined our sense of reality and degraded our judgment

It’s beginning to look like Bernard Madoff didn’t even make the trades that his clients were expecting him to make, but rather spent his time cooking the books, evading detection, and "working the streets." One way to "hedge" your bets is to never make them in the first place, which is possibly what he did. He took his investor’s money and then paid them the dividends they wanted to receive out of the money they’d given him – skipping the investment part altogether. I’m betting that when it’s all said and done, Bernard Madoff will be found to have been cooking his books in one way or another for his whole career.

John Paul Sartre, the french philosopher, idealized Jean Genet, a lifelong criminal [and author], whom he called Saint Genet. "Sartre proclaimed Genet to be the prototype of the existentialist man, whose distinction between good and evil is the result of personal choices and decisions [link]." Watching Madoff walking down the street with his quilted jacket, jeans, and a baseball hat, it was hard not to notice that he had a slight hint of a smile on his face. While some of the news photos had captions like, "Humiliated Investor Bernard Madoff," he didn’t look humiliated to me. He looked to be at peace with himself – a man who had made his choices and is now living them out.

At first when I saw those pictures, I thought, "He’s an old man. Unfortunately, he couldn’t retire and turn his business over to his sons [since there was less than nothing to turn over.] If he just quit, he would immediately be discovered. So he was still doing it at seventy. He must be relieved to have it over." And I expect that’s true. But then I thought of what I’ve been told by prostitutes about their business. Something like, "It’s easy money. Guys want sex and some kind of illusion. You give them what they want and they pay you." If you ask about the emotional thing, every one of them I ever asked said something like, "Oh, that’s with my husband [boyfriend]," and seemed kind of insulted that I’d even inquired. The appearance of "connection" is just part of the product [Jean Genet was, by the way, a male prostitute for much of his career]. So, I kind of think Bernard is just an old whore who was good at it. And I expect he sees his clients in much the same way that prostitutes see their customers – fellow sinners. A "John" is kidding himself if he thinks he’s getting love, or even companionship. Likewise, the wealthy clients of Bernard Madoff were kidding themselves if they thought his low fees and high returns were the real thing.