Tuesday, December 16, 2008

Madoff - warnings were ignored

Good article here on Huffington Post. "Who Could Have Known?" ..about 9/11? Fannie Mae? Citigroup? Bernie Madoff?

It goes into the (ignored) warnings on this succession of disasters.

On the Madoff Ponzi debacle, it shows that Harry Markopoulos, who was in the business (a rival firm to Madoff's) knew:

In 1999, after researching Madoff's methods, Markopolos wrote a letter to the SEC saying, "Madoff Securities is the world's largest Ponzi Scheme." He pursued his claims with the feds for the next nine years, with little result.

Jim Vos, another investment adviser who had examined Madoff's firm, says: "There's no smoking gun, but if you added it all up you wonder why people either did not get it or chose to ignore the red flags."

The answer comes from Vos's cohort Jake Walthour Jr., who told HuffPost blogger Vicky Ward: "In a bull market no one bothers to ask how the returns are met, they just like the returns."

[Update: Markopoulos alleges physical threats against his person]

This is not the last of these funds to go bust.We should not be surprised to hear multiple billion-dollar popping sounds as the Ponzi funds (and non-ponzi funds also) implode through the end of the era of indefinite economic growth.

In a sense, the whole financial/economic system is a global Ponzi scheme, reliant on growth for its continued existence. It is axiomatic that it is impossible to grow forever in a finite system, yet this is the financial orthodoxy of the 20th century, which still is believed to be true by grey politicians and economists.

The problem with economic growth lies in the throughput of materials - mining at one end, and disposing at the other. This is unsustainable. It cannot be done. It has to come to an end. Yet when Greens say this, we are ignored, or sidelined as stupid idealists.

We would do better, if we re-framed the position to this: "The growth in throughput cannot go on forever". There is an opportunity for a major growth in the Green sector of the economy , and by putting Keynesianism into a Green New Deal, we can address the financial crisis and the ecological crisis at the same time.

But I digress. Neither the financial economy nor the throughput economy can expand forever. The stopping point of both have been predicted. Economics students (don't wait for your lecturers to do it - did they predict the crunch) should look back and become familiar with the thinking of people who did predict this mess. Beginning with Hyman Minsky.

A clue is given above: "In a bull market no one bothers to ask how the returns are met, they just like the returns."

Bull markets are the up-side of a bipolar system. The market exists on sentiment, which is another word for emotion. They were bull, now they're bear. They were hypomanic, now they're depressed. Dr Paulson has given them a massive script of PROZAC (Fluoxetine - I write that in to get a load of hits from people researching their medication - sorry) equivalent - $700 billion, to be taken in the bank account when necessary - but the patient is still looking pale and listless; more worryingly, the patient is fretting about getting back to work to do the same thing all over again. This is because Dr Paulson shares the patient's growthist delusions.

The real doctors are the guys like Minsky and Herman Daly - he of the steady State Economy. This stuff is not difficult intellectually - just paradigmatically.

Paradigmatically. New word. I think it sounds nice. What do you think?

Our way of viewing the world is going to have to shift. We are entering a critical time of change on a par with the Industrial Revolution, the Reformation or the Renaissance.

Don't say no-one told you this was going to happen.

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