Merry Xmas - An article on "Police State Britain"

 The Paranoia Squad

A British police unit is demonising peaceful protesters to stay in business. For how much longer will the government permit the police forces to drum up business like this? And at what point do we decide that this country is beginning to look like a police state?

GEORGE MONBIOT

When you hear the term "domestic extremist", whom do you picture? How about someone like Dr Peter Harbour? He's a retired physicist and university lecturer, who worked on the nuclear fusion reactor run by European governments at Culham in Oxfordshire. He's 70 next year. He has never been tried or convicted of an offence, except the odd speeding ticket. He has never failed a security check. Not the sort of person you had in mind? Then you don't work for the police. Dr Harbour was one of the people who campaigned to save a local beauty spot � Thrupp Lake - between the Oxfordshire villages of Radley and Abingdon. They used to walk and swim and picnic there, and watch otters and kingfishers. RWE npower, which owns Didcot power station, wanted to empty the lake and fill it with pulverised fly ash(1). The villagers marched, demonstrated and sent in letters and petitions. Some people tried to stop the company from cutting down trees by standing in the way. Their campaign was entirely peaceful. But RWE npower discovered that it was legally empowered to shut the protests down. Using the Protection from Harrassment Act 1997, it obtained an injunction against the villagers and anyone else who might protest. This forbids them from "coming to, remaining on, trespassing or conducting any demonstrations or protesting or other activities" on land near the lake(2). If anyone breaks this injunction they could spend five years in prison. The act, parliament was told, was meant to protect women from stalkers. But as soon as it came onto the statute books, it was used to stop peaceful protest. To obtain an injunction, a company needs to show only that someone feels "alarmed or distressed" by the protesters, a requirement so vague that it can mean almost anything. Was this an accident of sloppy drafting? No. Timothy Lawson-Cruttenden, the solicitor who specialises in using this law against protesters, boasts that his company "assisted in the drafting of the … Protection from Harassment Act 1997″(3). In 2005 parliament was duped again, when a new clause, undebated in either chamber, was slipped into the Serious Organised Crime and Police Act(4). It peps up the 1997 act, which can now be used to ban protest of any kind. Mr Lawson-Cruttenden, who represented RWE npower, brags that the purpose of obtaining injunctions under the act is "the criminalisation of civil disobedience"(5). One of the advantages of this approach is that very low standards of proof are required: "hearsay evidence … is admissable in civil courts". The injunctions he obtains criminalise all further activity, even though, as he admits, "any allegations made remain untested and unproven."(6) Last week, stung by bad publicity, npower backed down. The villagers had just started to celebrate when they made a shocking discovery: they now feature on an official list of domestic extremists. The National Extremism Tactical Co-ordination Unit (NETCU) is the police team coordinating the fight against extremists. To illustrate the threats it confronts, the NECTU site carries images of the people marching with banners, of peace campaigners standing outside a military base and of the Rebel Clown Army (whose members dress up as clowns to show that they have peaceful intentions). It publishes press releases about Greenpeace and the climate camp at Kingsnorth(7). All this, the site suggests, is domestic extremism. NECTU publishes a manual for officers policing protests. To help them identify dangerous elements, it directs them to a list of "High Court Injunctions that relate to domestic extremism campaigns", published on NECTU's website(8). On the first page is the injunction obtained by npower against the Radley villagers, which names Peter Harbour and others.Dr Harbour wrote to the head of NETCU, Steve Pearl, to ask for his name to be removed from the site. Mr Pearl refused. So Dr Harbour remains a domestic extremist. It was this Paranoia Squad which briefed the Observer last month about "eco-terrorists". The article maintained that "a lone maverick eco-extremist may attempt a terrorist attack aimed at killing large numbers of Britons."(9) The only evidence it put forward was that someone in Earth First! had stated that the world is overpopulated. This, it claimed, meant that the movement might attempt a campaign of mass annihilation. The same could be said about the United Nations, the Optimum Population Trust and anyone else who has expressed concern about population levels. The Observer withdrew the article after NETCU failed to provide any justification for its claims(10). NETCU now tells me that the report "wasn't an accurate reflection of our views"(11). But the article contained a clue as to why the police might wish to spread such stories. "The rise of eco-extremism coincides with the fall of the animal rights activist movement. Police said the animal rights movement was in disarray" and that "its critical mass of hardcore extremists was sufficiently depleted to have halted its effectiveness."(12) If, as the police maintain, animal rights extremism is no longer dangerous, it is hard for NETCU to justify its existence: unless it can demonstrate that domestic extremism exists elsewhere. A better headline for the article might have been "Keep funding us, say police, or civilisation collapses." NETCU claims that domestic extremism "is most often associated with single-issue protests, such as animal rights, anti-war, anti-globalisation and anti-GM crops."(13) With the exception of animal rights protests, these campaigns in the UK have been overwhelmingly peaceful. As the writer and activist Merrick Godhaven points out, the groups whose tactics come closest to those of violent animal rights activists are anti-abortion campaigns(14). The UK Life League, for example, has published the names and addresses of people involved in abortion and family planning(15,16). Two of its members have been convicted of sending pictures of mutilated foetuses to doctors and pharmacies(17). Anti-abortionists in the US have murdered doctors, nurses and receptionists. Yet there is no mention of the UK Life League or anti-abortion campaigning on the NETCU site. This looks to me like partisan policing. Just as the misleading claims of the security services were used to launch an illegal and unnecessary war against Iraq, NETCU's exaggerations will be used to justify the heavy-handed treatment of peaceful protesters. In both cases police and spies are distracted from dealing with genuine threats of terrorism and violence. For how much longer will the government permit the police forces to drum up business like this? And at what point do we decide that this country is beginning to look like a police state? www.monbiot.com References: 1. saveradleylakes.org.uk/ 2. The High Court of Justice. Order arising from Case HQ07X00505. para 6.4. netcu.org.uk 3. lawson-cruttenden.co.uk 4. Sections 125-127. opsi.gov.uk 5. Timothy Lawson-Cruttenden, 2007. Injunctive Relief Against Harassment and trespass.Case Commentaries, p194. Environmental Liability. 6. ibid. 7. netcu.org.uk 8. NETCU, November 2007. Policing Protest: pocket legislation guide, p51. It can be viewed here: indymedia.org.uk 9. Mark Townsend and Nick Denning, 9th November 2008. Police warn of growing threat from eco-terrorists. The Observer. 10. Stephen Pritchard, 23rd November 2008. Anonymous sources and claims of eco-terrorism. The Observer 11. NETCU, pers comm, 22nd December 2008. 12. Mark Townsend and Nick Denning, ibid. 13. netcu.org.uk 14. Merrick Godhaven, 15th November 2008. Civil Disobedience is a Terrorist Threat. UK Watch. 15. Leading article, 12th March 2006. Email campaigns. The Observer. 16. Linda Harrison, 9th July 2001. Anti abortion activists step up UK Net campaign. theregister.co.uk 17. Jeremy Laurance, 8th May 2006. Anti-abortionist jailed for photo protest. independent.co.uk

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Can You See The Fog?

  

Links between financial crises and recessions are unalterably vague

KAUSHIK BASU

Until a few weeks ago there was no agreement among experts on whether or not a recession was imminent. Then last week, America's National Bureau of Economic Research—widely viewed as the final arbiter on such matters—declared that the recession is here. Not just that, it started in December 2007. So a recession, it seems, is not only unpredictable, but also cannot always be recognised when present. Clearly, this is not the high point of the economics profession. The fact that this financial crisis came upon us with so little forewarning has led to a lot of criticism of economics as a discipline. Some of the criticism is valid, but not all. First, it needs to be appreciated that in economics a prediction itself can alter the object of the prediction. Hence, for certain kinds of economic phenomena, forecasting may be a logical impossibility. Consider predicting a fall in stock prices one month in advance. If anyone can actually master the art of doing this, then, as soon as the person makes this forecast, people will sell their shares and prices will come down immediately. So no one can have a reputation for predicting share price declines well in advance. Second, in these troubling times, the demand is for economists who do not temporise but make clear statements, who do not waver about the causes of the crisis but are unequivocal. This, however, is the wrong lesson. I am currently reading Jean-Jacques Rousseau's autobiography, Confessions. Poor fellow. When at last, in his late forties, he makes it as a man of letters, music composer, trenchant critic of 18th century European mores and, above all, the grand philosopher, his bladder gives way. Page after page, he laments about poor "urine retention" and how he cannot accept invitations from kings and dukes for fear that he may have to run, mid-conversation, to the loo. He sees the best doctors of France and Geneva. The medical diagnoses that follow (and are described in some detail) remind me of the pronouncements on the current crisis by finance experts. Notwithstanding the primitive knowledge of human anatomy, Rousseau's doctors prescribed confidence treatments that had no scientific basis. The correct stance in such situations is to recognise that we do not understand. So for economists, now is the time to be sceptical and to question. Fortunately, scepticism is the mainspring of knowledge. It may not be entirely coincidental that at the same time that contributions to knowledge in ancient Greece peaked, the philosophy of scepticism was also at its height. Pyrrho of Ellis (circa 300 BC), the "apostle of disillusionment", lectured on the value of equivocation. Pyrrho's disciple, Timon, wrote about the essential ambiguity of nature. Later, circa 200 AD, Sextus Empiricus penned a series of books challenging traditional knowledge. This is clear from the titles of his many books—Against Dogmatists; Against the Physicists; Against the Ethicists; Against the Professors. He wrote more, but you get the point. In economics the big open question is the connection between financial assets and the real economy. If one million rupee notes owned by a businessperson burns down, what will happen to the total amount of apples, homes and haircuts in the economy? Not only do we not have an answer to this question, we do not even have a methodology for answering it. Till we get to grips on this, the link between financial crises and recessions will remain ambiguous. In this age of quick claims and hasty recognitions, our urge is for quick assertions. However, 'social phenomena' are inherently ambiguous. To ignore this is to court failure. Postscript: Tenuous though its links may be with science and scholarship, and feeble though it may be in humour, let me end with the best account of ambiguity that I have heard.It consists of a husband's remark and how one may interpret it. After a lady was declared dead and was being carried out of the house in a coffin, the pall-bearers bumped into a wall, whereupon they heard a groan. The coffin was promptly set down and, lo and behold, the lady had not died. She was taken out and nursed back to health. Ten years passed, and then she died. Her corpse was placed in a coffin; and, as the pall-bearers carried it out, they heard her husband's anxious voice, "Mind the wall". (Kaushik Basu is Chair and C. Marks Professor, Department of Economics, Cornell University)

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Financial crisis: Bank of England 'did not understand problem' 

• Julia Kollewe
• guardian.co.uk, Monday 22 December 2008 08.26 GMT

 

The Bank of England underestimated the severity of the current financial crisis, according to its deputy governor who has admitted that interest rates are only a "blunt instrument" with which to control the economy.
 

Sir John Gieve told the BBC's Panorama programme, to be screened tonight, that new tools are needed to complement rates. He also admitted that the Bank knew "crazy borrowing" was taking place and the price of houses and other assets was rising unsustainably, but did not fully understand the problem.

 
"We didn't think it was going to be anything like as severe as it's turned out to be," says Gieve, who is in charge of financial stability at the Bank. "Why didn't we see that it was so serious? I think that's because we, perhaps, we hadn't kept pace with the extent of globalisation. So the upswing here didn't involve the big increases in earnings and consumption and activity which we saw in previous booms. We saw the credit, we saw the house prices, but we did see a fairly stable pattern of earnings, prices and output."

 
Explaining why the Bank did not raise interest rates to curb the lending and house price boom, Gieve says: "If we'd used interest rates to try and address this asset-price credit growth, we would have been holding down the level of activity elsewhere in the economy, in manufacturing, in other services, holding down the level of employment at a time when consumer price inflation and earnings were stable and reasonably low. And people would have said, you know, 'this is a wilful reduction in the prosperity of the country'."

 
The Bank cannot just rely on interest rates to control the economy, he argues. "One of the main lessons from this is that we need to develop some new instruments which sit somewhere between interest rates, which affect the whole economy and activity, and individual supervision and regulation of individual banks," Gieve says.

 
"Maybe we need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand ... I think we need to complement interest rates, which are a blunt instrument - you set one interest rate for the whole economy - with something which is more financial-sector specific."

 
"This is a major storm we haven't seen the like of for 100 years," he adds. "It would be very surprising if we weren't learning lessons from it and we are."

Gieve also casts doubt on whether the Treasury will get all of the money back that it has poured into the banking sector, pointing to a "level of defaults" in the books of nationalised lenders Northern Rock and Bradford & Bingley, which are now held by the taxpayer.

 
Speaking on the same programme, John Varley, the chief executive of Barclays, predicts that consumers and businesses will struggle to access credit for the next one to two years.

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No Houris Inside Our Jails - Why Kasab must have legal defence and why he mustn't hang

 

Ram Jethmalani

Mohammad Ajmal Amir Kasab does not need a lawyer; someone in this country needs a client. That's why some lawyers seem to be amusing themselves imagining that Kasab sought their services and that they declined only to oblige Mother India. In medieval times, witches were feared, despised and burnt by furious mobs. They never got a fair trial; no one dreamt of giving them one. Prejudice and irrational fear ensured that they got nothing but undeserved punishment. In modern society, the "spy" has taken the place of the witch, with one vital difference. The danger so-called witches posed was entirely imaginary. Some spies do pose a threat. But to argue that a crime is so vile and dastardly that an accused must not be allowed to demonstrate his innocence is bad law. The measure of a civilisation is the way its society treats those it hates. It is the duty of every lawyer to defy a bar association resolution that a particular accused should not be defended. So important is the right of an accused to have the services of a lawyer that our constitution-makers were not satisfied with the right to defence created by criminal law. They made it a fundamental right so that no tyrannical regime could curtail or destroy it. Article 22 declares that no accused shall be denied the right to consult and be defended by a legal practitioner of choice. And the 42nd Amendment of the Constitution, carried out during the Emergency, introduced at least one wholesome provision. The newly-added Article 39-A mandated that the legal system shall provide free legal aid to ensure that opportunities for securing justice are not denied to any one by reason of economic or other disabilities. When Thomas Paine was jailed and tried for treason for his pamphlet Rights of Man, the great advocate Thomas Erskine was briefed to defend him. Erskine, at that time, was the attorney-general for the Prince of Wales. Though he was allowed private practice, he was warned that if he accepted Paine's brief, he would be dismissed from office. Undeterred, Erskine accepted the brief and was deprived of office. His immortal words, which the editor of Howell's State Trials printed in capitals, stand out as a shining light: "From the moment that any advocate can be permitted to say that he will or will not stand between the Crown and the subject arraigned in the Court where he daily sits to practice, from that moment the liberties of England are at an end. If the advocate refuses to defend from what he may think of the charge or of the defence, he assumes the character of the Judge; nay he assumes it before the hour of judgement; and in proportion to his rank and reputation puts the heavy influence of perhaps a mistaken opinion into the scale against the accused in whose favour the benevolent principle of English law makes all assumptions, and which commands the very Judge to be his Counsel." Indian lawyers have followed this great tradition. The Razakars of Hyderabad were defended; Sheikh Abdullah and his co-accused were defended; and so were some of the alleged assassins of Mahatma Gandhi and Indira Gandhi. No Indian lawyer of repute has ever shirked responsibility on the ground that it will make him unpopular or affect the electoral prospects of his party. The Bar Council of India has also formulated standards of professional conduct. Among other things, the resolution says that an advocate is bound to accept any brief; that anyone in need of a lawyer is entitled to one, whether or not he can pay for one; that an advocate shall uphold the interests of a client...without regard to any unpleasant consequences to himself or any other; and that an advocate shall defend an accused regardless of his opinion as to the guilt of the accused, bearing in mind that his loyalty is to the law, which requires that no man should be convicted without adequate evidence. So, no doubt, Kasab has a right to defence. But what will the lawyer do? It does not seem to me possible for any lawyer or even a combination of lawyers seriously to dispute that he committed what he is accused of. The arguable question will be one of sentence—namely the choice between death and life imprisonment. If I were a judge I wouldn't sentence Kasab to death. For it is only in the hell of an Indian jail that he would realise that what the mullahs told him is false. God has no place for him in heaven and probably none exists. His nine dead companions will not, in any event, communicate with him about their sad fate. A long stay in an Indian prison will detoxify him of the superstitions and illusions instilled in him.

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Christianity and Capitalism

 

Time for some morality trades

 
By Christopher Caldwell
 
Published: December 19 2008 19:37 | Last updated: December 19 2008 19:37

 
Is our present financial crisis the result of a mistake or a crime? Is it evidence of incompetence or of corruption? Is its remedy to be sought in committee rooms or in individual consciences? When Rowan Williams, the archbishop of Canterbury, worried aloud this week that the government's stimulus package "seems a little bit like the addict returning to the drug", he revealed that we are fudging these questions.
 
The public has no settled idea about whether the global finance system seized up last summer because it was mismanaged or because it was, in a moral and metaphysical sense, wrong. The archbishop's intervention was a bold one. Much as prelates in centuries past praised Jesus's expulsion of the money-changers from the temple, we pat ourselves on the back for having driven the priests from the bourse. Morality has little purchase on economics nowadays. Maybe it ought to have more.
 
In 1926, R. H. Tawney, the great Christian socialist and economic historian, argued that we were wrong to be so complacent. His history of the Reformation, Religion and the Rise of Capitalism, described the origins of the idea that "business is business", that the economy is a separate compartment that ought to be quarantined from other spheres.
 
At a time when most encounters were face-to-face, it was possible to lead a moral economic life simply by extrapolating from the injunction to love one's neighbour, but a revolution in manufacturing, finance and trade made this extrapolation less possible. "Granted that I should love my neighbour as myself," Tawney wrote, "the questions which, under modern conditions of large-scale organisation, remain for solution are, 'Who precisely is my neighbour?' and, 'How exactly am I to make my love for him effective in practice?' To these questions the conventional religious teaching supplied no answer, for it had not even realised that they could be put."
 
Tawney, an activist in the Labour party, believed the period between Machiavelli and the English Revolution had a lot to teach his own time. Maybe it has more to teach ours, since it was marked by a "sweeping redistribution of wealth" and an "orgy of interested misgovernment", not to mention its "reassertion of the traditional doctrines with an almost tragic intensity of emotion", in the face of a world that was rendering them irrelevant.
 
Contrary to what one might expect, it was over credit, not wages, that the new capitalist classes clashed most violently with the economic morality that prevailed on the eve of the Reformation. Medieval economic morality centred on abhorrence of usury. This abhorrence is a bit embarrassing to modern Christians, who learn about it through the hounding of Shylock in The Merchant of Venice. We tend to view it as a shabby outlet for xenophobia and anti-Semitism. The main moneylenders in the period Tawney discusses were Spanish, Portuguese and Lombard Catholics, abetted by the Church and the Armada. Public outrage was not as benighted or unfocused as it looked. Large enterprises and royal courts borrowed without much difficulty, so preaching against usury did not unduly clog up the financial system – although businessmen claimed that it did. What troubled economic moralists was extortionate lending to desperately poor (we would call them "subprime") borrowers. But the term usury also covered "the man who buys [a thing] in order that he may gain by selling it again unchanged" (which we would call speculation).
 
Usury was a general term meaning "taking advantage". We dismiss those who were obsessed with it at considerable peril to our own business ethics. "If the medieval moralist was often too naïve in expecting sound practice as the result of lofty principles alone," Tawney wrote, "he was at least free from that not unfashionable form of credulity which expects it from their absence or from their opposite." In this light we can see that Fairtrade, promoters of socially responsible investing, activists for sustainable development and the micro credit movement are all groping towards a workable, tolerant, enforceable modern doctrine of usury.
 
Tawney showed that the religious revival of the 16th and 17th centuries ushered in its opposite – an individualism untethered from any social contract. As people grew firmer in their conviction that salvation could be had through God's grace, it became a much less pressing matter whether the public sphere was run on Christian principles. There was a transvaluation of values and with them, of institutions. So feudalism, "once an engine of exploitation, was now hailed as a bulwark to protect the weak against the downward thrust of competition". (Our own attitude to jobs in heavy industry has undergone a similar transformation.)
 
Tawney was not the first to make such arguments but his explanation is uniquely subtle. To simplify, Calvinism both glorified the entrepreneurial virtues and kept them under strict watch. But it turned out you could not do both. Those virtues could only be exercised if they were not universal. "How would merchants thrive if gentlemen would not be unthriftes?" One is reminded of the hedge fund mogul Andrew Lahde who, this autumn, having taken short positions on subprime real estate, wrote a crowing letter to the Ivy League hotshots at Bear Stearns, Lehman Brothers and elsewhere "stupid enough to take the other side of my trades".
 
"An organised money-market has many advantages," Tawney wrote. "But it is not a school of social ethics or of political responsibility." Competition, he added, is not a substitute for honesty. We do not at present have any non-economic ways of discussing economic and financial matters. It appears we are due to get some.
 
The writer is a senior editor at The Weekly Standard

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No questions asked

 

  By Francesco Guerrera, Anuj Gangahar and Deborah Brewster

 
Published: December 19 2008 19:57 | Last updated: December 19 2008 19:57

 
Looking down on a sunlit Manhattan skyline from the seaplane carrying him to work, Bernard Madoff must have felt on top of the world.
 
In the late 1980s, when his morning routine involved a short hop from Long Island to the East River, a stone's throw from his office in New York's financial district, Mr Madoff was just another successful Wall Street operator.
 
A prominent member of the securities industry with deep ties to the wealthy Jewish community that divides its time between New York and Florida, Mr Madoff had an otherwise fairly ordinary lifestyle and could have been forgiven the extravagant touch of an aerial commute.
But after last week, when US prosecutors say he confessed to what could be the largest fraud ever perpetrated, nothing will ever be ordinary again for the 70-year-old Mr Madoff.
 
There will be no more seaplanes after a court ordered Mr Madoff to submit to electronic monitoring and remain in his Manhattan duplex daily from 7pm to 9am. Gone, too, is the adulation of the rich investors who used to beg "Bernie" to take their money – replaced by the shock and pain of huge financial losses and betrayal of trust.
 
As details begin to emerge of a "Ponzi scheme" that is alleged to have swindled up to $50bn (£33bn, €36bn) from investors ranging from HSBC, the giant UK bank, to the charity of Steven Spielberg, the film director, one central question remains unanswered. How could Bernie have duped so many investors for so long?
 
Those who met Mr Madoff during a career that began in 1960, when he founded his securities firm with $5,000 earned installing garden sprinklers and patrolling Long Island beaches, talk of a private, self-effacing man. "The last thing Bernie Madoff wanted was publicity," says one of his fellow travellers on the East River seaplane.
 
Affable and polite but not overly talkative, Mr Madoff was active on the social and charity scenes in Manhattan and Palm Beach – the Florida town that serves as an escape hatch for rich New Yorkers.

Wrapped up: Bernard Madoff returns to his New York apartment on Tuesday after a court imposed a curfew

Yet despite his wealth – he owns a yacht and houses in Palm Beach and Cap d'Antibes in France as well as his Upper East Side apartment – Mr Madoff did not stand out from the crowd of well-off middle-aged people with whom he socialised. "He was low-key," recalls Charles Gradante, a hedge fund adviser who met him regularly on the Palm Beach social circuit. "When I saw him at cocktail parties, he would be in the corner and investors would sometimes go over to him. He didn't have a charismatic presence; he wasn't exuding confidence."
Senio Figliozzi, owner of the Ever­glades Barber Shop in Palm Beach, cut his hair and gave him facials, manicures and pedicures for 17 years but rarely heard him talk about business. He describes Mr Madoff as a "very nice man who was always polite and gentlemanly" and tipped the standard 20 per cent.
 
But behind that everyman persona, Mr Madoff weaved a complex web of connections that lured more and more investors into his fold. Ponzi schemes – pyramid arrangements named after the Italian immigrant to the US who first attempted the scam in the 1920s – are relatively unsophisticated frauds in which the organisers repay old investors not with genuine gains but with funds from new investors. Investigators allege that Mr Madoff's was in operation from at least 2005.
 
If he did indeed craft one, there were no outward signs when, more than a decade ago, Mr Madoff added an investment firm to his brokerage house and later moved to the tall, thin midtown skyscraper known as the Lipstick Building. With a reputation as a leading market-maker – the middle-man between buyers and sellers – on Nasdaq, the stock market he chaired for a few years, Mr Madoff was not unusual in moving from broking to investing.
 
Nor did it seem strange that, as a self-made man of a certain standing in the Jewish community, Mr Madoff's should tap his friends and acquaintances in New York society and Palm Beach's exclusive Country Club.
 
To be sure, Mr Madoff did not move in the top circles of American social life – the parties dominated by film celebrities, tycoons such as Donald Trump or super-rich donors such as Sandy Weill, the former Citigroup chief. His was a more intimate, less flashy group, according to David Patrick Columbia, the editor of NewYorkSocialDiary.com – a tightly-knit community centred on Upper East Side synagogues and charitable organisations.
Many of these pious, often elderly, people looked to increase their retirement nest-eggs without taking too many risks and thought they had found the holy grail in Mr Madoff's enviable record: he consistently beat other fund managers and the market, year after year.
 
"This is a community of affluent Jewish people who basically socialise with each other. They are very philan­thropic and all support each other's charities," Mr Columbia says. "Even though Mr Madoff was not a top member of this community, his business made him the man to know. He became an icon of financial success for them."
 
But after a few years, word of Mr Madoff's ability to generate steady returns, by employing a seemingly simple strategy of buying shares in large companies and selling options on the same names to mitigate risk, began spreading beyond his inner circle. Yet as more and more people wanted in on Mr Madoff's outstandingly consistent performance, he played it cool. "He never pushed investing with him: he would turn people away sometimes or tell them, 'it is not for you', recalls Mr Gradante. "That all added to the mystique and made people want to get in."
 
Barbara Rosenthal, a Palm Beach property agent, says Mr Madoff's standing was such that people felt "you had to be lucky for him to talk to you", while another resident recalls that many people joined the Country Club "so they could meet this guy". Experts on "affinity frauds" say the strong demand for Mr Madoff's services – and the fact that many investors were coming in through "friends" – had a crucial consequence: those who did get in felt they had a special deal and were less inclined to ask questions.
 
But as the friends and family network became inadequate to satisfy investors' craving for a piece of Mr Madoff's miraculous returns, an informal marketing system began to take shape. In Palm Beach, one of the main middlemen for Mr Madoff's business was Robert Jaffe, according to several investors. Dapper and well-spoken, Mr Jaffe got a number of individuals and charities to place their money with Bernard Madoff Investment Securities.
Mr Jaffe is the son-in-law of Carl Shapiro, founder of the Kay Windsor clothing company and a renowned Boston philanthropist. Mr Shapiro's foundation is believed to have lost nearly half of its $345m in assets and both he and his family are thought to have suffered significant losses as a result of the collapse of Mr Madoff's firm.
 
There is no suggestion that either Mr Jaffe or any members of his family knew about Mr Madoff's alleged fraud. A spokeswoman for Mr Jaffe did not return calls.
 
As the years went by without any sign of a dip in performance, the tentacles of Mr Madoff's operations began stretching beyond Palm Beach's manicured lawns and Manhattan's skyscrapers. The long list of potential victims of his alleged actions includes Swiss and Austrian private banks, hedge funds owned by large insurance companies such as MassMutual's Tremont Capital Management, as well as famous names such as Fred Wilpon, owner of the New York Mets baseball team.
 
Other high-profile investors, such as Mr Spielberg's Wunderkinder foundation and several charitable organisations that now face ruin, went in through the more traditional route of their long-standing financial advisers.
 
Some of the funds that fed international money into Mr Madoff's operation were run by well-known financiers such as Walter Noel, the founder of Fairfield Greenwich Group. A Harvard-educated former banker, Mr Noel had the ability to reach investors around the globe, partly thanks to the help of Andres Piedrahita, a well-connected banker who is Mr Noel's son-in-law and runs Europe and Latin America for Fairfield.
 
Fairfield, which is the largest potential victim of Mr Madoff's alleged fraud with some $7.5bn invested in his firm, declined to comment.
Ascot Partners, a hedge fund run by Ezra Merkin, also chairman of GMAC, General Motors' former finance arm now owned by Cerberus, the private equity group, was also an active recruiter of funds for Mr Madoff's enterprise. Ascot and Mr Merkin could not be reached.
 
The "feeder funds", whose returns were augmented by billions of dollars in loans from banks such as HSBC and Royal Bank of Scotland, had a powerful incentive to persuade investors to place money with Mr Madoff: lucrative returns. He forwent the standard 20 per cent cut on profits demanded by most fund managers and, by and large, charged feeder funds only commissions on trades.
 
Crucially, not many of the investors appear to have challenged that unusual structure, let alone Mr Madoff's suspiciously good returns over the years.
Those who did were less than impressed with Mr Madoff's answers. Jim Hedges, an asset manager, said that when they met in the late 1990s, Mr Madoff was unable to explain his winning strategy. "He made little conversation – he looked interested in ending the meeting as soon as possible," says Mr Hedges, who decided against investing.
 
Another hedge fund expert recalls that he once approached Mr Madoff at a party and quipped that his performance was too good to be true. Mr Madoff chuckled and replied: "A lot of people say that."
 
Now, as investors contemplate the ruins of the financial edifice he built, the tragedy is that among that "lot of people", so few paused to ask themselves why.
 

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The devil and Bernard Madoff

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.