By Spengler
Now that the whole horrible truth has come to light, I have no more reason to conceal my true identity. I am Bernard Madoff.
Well, not really. But I wish I were. Few Americans have done more to punish stupidity, pretension and complacency than Madoff, whose apparent US$50 billion swindle calls to mind the caper by Mephistopheles in the second part of Goethe's Faust. The fictional devil persuaded the emperor to issue paper money against buried treasured yet to be discovered.
This month, I cited Benedict XVI's 1985 essay on morality and economics, in which the future pope warned that the decline of ethics "can actually cause the laws of the market to collapse". (See Benedict XVI is magnificently right, Asia Times Online, December 9, 2008). In counterpoint to that message from our sponsor, satanic laughter pealed through the marketplace on December 12, when Madoff's apparent misdeeds came to light. That was just the sort of thing for which God summoned the devil into being, as the Lord explained to Mephistopheles in the prologue to Faust, for man seeks unconditional rest and needs a provocateur as companion. Mephisto is an Old Testament devil, drawn from the Book of Job, who is part of the Divine Court.
Madoff, 70, a former Nasdaq chairman, was arrested by federal prosecutors last week in relation to what he reportedly told his sons was a long-running Ponzi scheme - that is one in which investors are paid high returns from money paid in by subsequent investors.
Most gratifying is the fleecing of the rich and famous - director Steven Spielberg, producer Jeffrey Katzenberg, and even actress Uma Thurman's financier boyfriend Arpad Busson got stung, along with a list of supposedly savvy investment firms. The man deserves a medal. Deplorable, to be sure, is the ruin of hundreds of families who entrusted Madoff with their life savings, not to mention charities and school endowments. Call them collateral damage. I have never been squeamish about killing civilians when urgent military objectives are at stake. We give medals all the time to people who cause innocent death in war. Tough on them if they can't take a joke, as the artillery likes to say about friendly-fire casualties.
The very rich believe what F Scott Fitzgerald said about them, that "the very rich are different from you and me". Serried ranks of lawyers, accountants and financial advisors surround them and keep them from harm. Madoff proved otherwise, making a few of them into paupers and humiliating a very large number of them. Not because of what they do, but because of who they are, the very wealthy consider themselves above the fate of ordinary people. They know the right people, they join the right clubs, and they have access to the right advice. Sometimes it takes a national catastrophe to teach them otherwise. The slaughter of the subalterns in World War I destroyed the flower of the English gentry, and the Russian revolution left counts driving taxicabs in Paris. There was no recuperation from such punishment.
Madoff has given Americans a lesson in humility that is cheap and painless by comparison. America's elite - the people characterized as "one-trick wizards" who lived off leverage (see Obama's one-trick wizards, Asia Times Online, November 25, 2008) - turn up as a self-satisfied, feckless gang of incompetents who could not spot the wolf within their own sheepfold.
After the fact, it is obvious that it was physically impossible for Madoff to produce the returns he reported. "While Mr Madoff's stated strategy was valid, it would have been impossible to execute with the amount of money he was managing ... Mr Madoff's firm couldn't have bought and sold the options he claimed because those totals would have outstripped total trading volume those days," according to the The Wall Street Journal on December 16. Nonetheless, his wealthy dupes believed that he could spin straw into gold year-in, year-out.
If that sounds deluded, what shall we say about hedge-fund investing for the masses, who believed that American home prices would double every 10 years, as the National Association of Realtors continues to claim in television advertisements? Perhaps they should call themselves Sur-realtors. Madoff offered small change compared to Mom and Pop America, who put 10% down on a home that appreciated 10% each year, for an annualized return on capital of 100%.
Americans luxuriated in a trillion dollars a year of capital inflows. The aging savers of Europe and Japan viewed American markets (and American brick and mortar) as a source of returns in a moribund world, while the newly prosperous savers of China and the emerging world saw America as a safe haven. The world threw money at Americans, and Americans threw the money into a housing bubble. The idea was absurd that Americans could fund their collective retirement by bidding up the price of each others' houses and then cash out at the same moment. But it was no more absurd than Madoff's claim to make a steady 10%-15% by trading illiquid stock options.
There weren't a tenth the number of stock options traded to carry out Madoff's putative strategy, as anyone with a complete set of fingers, let alone a pocket calculator, could determine without great difficulty. For that matter, there weren't enough families to keep the home price-bubble going. Americans are retiring faster than they are forming families, and aging Americans whose children have left the home ("empty nesters" ) typically sell large homes and buy smaller ones. A very crude comparison below shows Americans aged 25-50, when they are most likely to raise children and buy larger homes, against those aged over 50, who are more likely to sell large homes.
Demographers have been warning for 10 years of a home price collapse in America's suburbs. Whistleblowers first warned the American authorities about Madoff's machinations in 1999. There is no way to make either case less embarrassing than it is. Among defenders of the market mechanism, there is a half-hearted effort to blame the collapse of the American housing market on the machinations of Democrats and the government-sponsored housing lenders, Fannie Mae and Freddie Mac.
It was disappointing to see the usually astute Michael Novak resort to this fairy-tale in the January 2009 issue of First Things. Novak is an estimable political philosopher - I have cited his work in the past - but he vastly overestimates the extent to which "the political system helped create this mess" by mandating low-quality loans. Novak simply doesn't know the details of the mortgage market; he repeats, inaccurately, what he has heard from Republican apologists in Washington. He attributes part of the problem to the fact that "some too brilliant Wall Streeters got the clever idea of buying Fannie Mae mortgages and packaging them to sell in large bundles". In fact, this bundling began in the mid-1980s and helped finance the quarter-century economic boom inaugurated by president Ronald Reagan.
The problem, rather, was that the investment banks began packaging low-quality "subprime" mortgages with high credit risk, and the credit rating agencies knowingly represented dicey packages as default-proof triple-A credits. The bankers knew they were cheating, as much as did Madoff, and the ratings agencies knew they were selling their soul for revenues, as an unnamed official stated in an e-mail made public by a US congressional committee. They got away with this because the childless dystopias of Europe and Japan needed investments in places where families still were formed, and were willing to ship their money to the American subprime market without asking too many questions, just like Madoff's investors.
There were underlying causes, but the human factor that should have sent up alarm bells simply was not present - not at the Securities and Exchange Commission in the case of Madoff, nor at the Federal Reserve in the case of the banks. The American public got greedy and lazy, and is getting what it deserved. It is comforting that America's elite also is getting what it deserved, thanks in part to Madoff, who ensured that a representative sampling of the very rich learned that Scott Fitzgerald was wrong.
The Federal Reserve's strategy for economic revival reduces to trying to put air back into the bubble, by forcing mortgages rates so low that Americans will return to punting on houses. That goes against common sense, for Americans who have lost their nest egg in the housing market will not soon return, and against demographics. "When the Baby Boomers were young, families with children made up more than half of households ... The Boomers themselves are becoming empty-nesters, and many have voiced a preference for urban living. By 2025, the US will contain as many single-person households as families with children," wrote Christopher Leinberger in the March 2008 Atlantic Monthly, citing academic research that predicted a 40% surplus of large-lot single-family homes by 2025.
Like Mephistopheles' invention of paper money, the Federal Reserve's ballooning balance sheet will not restart the American economy. In Goethe's play, the emperor distributes paper money and finds that his courtiers use it to drink, gamble, or otherwise dissipate more than they otherwise would have. He complains (in lines 6150-54, Walter Arndt's translation):
I hoped for pluck and zest for ventures new;
I should have known you, and what each would do;
For all new bloom of wealth, it's plain to see
That each remains just what he used to be.
America's economy will remain in the monetary equivalent of an iron lung until Americans show "pluck and zest for ventures new", or what John Maynard Keynes called "animal spirits". There is no more trend to ride. Wealth now will require sweat, brains and guts.
No comments:
Post a Comment