Friday, December 19, 2008

Ponzi Economy

While Bernie Madoff was wrong to break the law and cheat wealthy, gullible people out of their money (and should be thrown in prison), Krugman's analogy between Madoff and the American Economy is Grade A CYA.
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.
The same could be said for the trades of academic finance and macroeconomics, graduates of which fill the nation's universities, government departments, and yes, banks. Bernie's fraud was of the straightforward kind, and while $50B is no small sum, it is still a trifle compared to the $6T or so (and counting) in real wealth destroyed by the fraud that is Academic Finance and Macroeconomics.

The $6T loss was not caused by anyone breaking the law, it was caused by a system which is fundamentally, structurally unsound. And the people in charge with studying and designing this system had no clue. But the same individuals who had no idea what was going on pontificate at length -- after the fact -- about what went wrong, how to fix it, and who the winners and losers should be. It makes me nostalgic for Bernie.


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