Monday, April 19, 2010


For students of the economy, there are many lessons to be learned from the 2009 Bernie Madoff debacle.  Madoff  actually ran a bank, masqueraded as an investment institution . He gave 'investors' steady  'returns' at about 5%, but not one trade was made. When the global economy crashed in 2008, 'investors' began pulling their money out, and the pyramid structure fell down. He confessed to his family, and his two sons turned him into the FBI.
We live in a world of cons and Ponzi schemes: your health insurance, Social Security, government bonds, bank accounts, unemployment benefits are Ponzis on a much larger scale than Madoff ‘s empire.
In these ‘legal' Ponzi schemes, younger participants' money is by law donated to older participants. These donations are masqueraded as our ‘taxes', ‘ insurance payments' , and the like. Purportedly adjusted for inflation, instead our returns diminish annually. This is why most of us will receive a pitiful $100 a week social security from the government despite putting in 40 years of taxes into the system. Newer investors face price hikes. It's why health insurance has increased by 20 percent in the last few months in the US.
Investment companies like Goldman Sachs invent financial instruments like ‘ credit default swaps’ to favor certain clients and rip off others. Big finance is big fraud (see this:
Banks are run on a Ponzi scheme too. By law, they only carry 30% of their assets in cash. That's called fractional banking . If you want to liquify your bank assets, the bank releases cash from newer customers' deposits. But if there is a run on the banks, you're out of luck. Banks' government insurance money , estimated at $8 trillion in December of 2008, does not equal the total amount of money in banks.
What else can we learn from Bernie Madoff? Consider this:
Bernie operated on the ‘power of no.' Initially, if you asked to invest with his company, he'd say no, it's closed to you. You didn't have to be fleeced. But investors reacted as if they'd been refused entry into an exclusive golf club , and insisted on being part of the world of Madoff.
So Madoff didn't force investors to enter into his Ponzi scheme. Yet, the great American public has no such choice : it is forced to pay into a national insurance program and an insecure banking system that yields less and less returns for the middle and working classes. Income tax was never constitutionally amended; in other words, it’s imposed illegally.
Bernie knew who his investors were. The list has been made public, and it includes some big names of the great and good. Whereas, the great American public has not a clue whose toxic assets they are paying off in the big trillion dollar bailout. The world public is vulnerable, as President Obama and UK Prime Minister Brown recently pointed out, to shadow banking systems, where there is no monitoring or regulation or transparency.
Madoff admitted his losses . A shadow banking system doesn't have to. The above ground banking system is equally deceptive. When report time comes, hide losses by shuffling them through offshore accounts and other banks. The US government shuffles off losses by going into extraordinary debt.
Madoff didn't have the power to print new money, which the government does when unsustainable financing crashes. Today, we talk in trillions of dollars, unheard of five years ago. More paper money leads to more inflation.
He didn't do what the Federal Reserve did, take money out of circulation by imposing higher interest rates, and then call that a ‘credit crunch.' The Federal Reserve is not a government institution yet is allowed to release or withdraw money supply at will. The US government pays interest to the Federal Reserve to print the dollar. Greenbacks anyone? (government-printed, interest-free dollars).
Madoff didn't apply for corporate welfare, and ask the taxpaying public to buy off his toxic assets like the big corporate boys .
Madoff “only “ defrauded on a reported $50 billion, whereas Clinton Treasury Secretary Robert Rubin is accused of defrauding Citibank shareholders of more than $122 billion, also described as a Ponzi scheme. Top brass of the US military are being investigated for billions of dollars in ‘missing contracts'.
Madoff holds up a mirror to our economy's shortcomings.
He reminds us once again of the Golden Rule: ‘if it's too good to be true, then it is.”
He reminds us that if you gamble on your wealth, the casino always wins hands down.
Madoff helped to create the largest on-screen stock exchange, NASDAQ, reminding us that today, money is just digits typed on a computer keyboard.
He spilled the beans about the greedy, vicious world of trading and its so-called guardian, the Securities and Exchange Commission. See his priceless ‘confession' on
Madoff's demise provides us with a cautionary tale of social responsibility: your money is an extension of yourself. Know where it is going, who and what benefits or is destroyed by your investments.
Madoff was an equal opportunity swindler. Like banks and corporations, it didn't matter to him if his investors owned a sweatshop, sold lethal weapons or ran charities. Should you be concerned who your co-investors are?
One of his ‘victims' was actor John Malkovitch. That's karma for ya, John, for threatening to kill journalist Robert Fisk because you didn't like his reporting on the Middle East. (“I'd like to shoot Fisk , ” Malkovitch told the Cambridge Union in 2002).
On a personal note, I like Bernie because his baseball cap makes him look kinda cute for a ‘father knows best' type of guy. A LOJM (little old jewish man) wearing a bulletproof vest and ankle tag – how gangsta cool is that?
Of course, if Bernie looks charming it's because all conmen are charmers, including heads of state, CEOs , the IMF and anyone else who are now promoting the current ‘global, one world solution' to the crisis.
Why would you trust the people that got us into this mess, to get us out of it?
Finally, before his arrest, Bernie took the time to sign over his houses and jewelry to his wife.
Always thinking of his family.