whitewashing greed

In "Anatomy of Gullibility: Why we keep falling for financial scams," Stephen Greenspan, an emeritus professor of educational psychology, tries to explain why he too fell for Mr. Madoff's Ponzi scheme. The piece is in today's WSJ. 

Dr. Greenspan, who calls himself well-educated (he says:" I'm a college professor"), and "relatively intelligent," and "an expert on gullibility and financial scams to boot," portrays himself as a "victim." He needs two pages and several photographs to come to terms with himself.

Like all pseudo-scientists Dr. Greenspan has an elaborate "multi-dimensional" theory to explain where he and countless others went wrong. He says:"based on my academic work in psychology, I propose a multi-dimensional theory that would explain why so many people behave in a manner that exposes them to severe and predictable risks."

If that doesn't get you for gullibility, you surely deserve to be in the company of the good doctor.

If there is one thing worse than being greedy it is surely trying to justify your greed. Professor Greenspan invokes anything and everything, from being Jewish (like Mr. Madoff), to visiting Boca Raton (where the golf courses are), to being sophisticated and not easily deceived, so as to avoid having to admit plain greed. I am surprised he does not invoke the fact that he shares a last name with our friend Allen, one of the engineers of the bubbleconomics.

In the end, all professor Greenspan can come up with is a double indirection to absolve himself. He quotes his sister, who -he is careful to point out- fell for it more than he did, as saying: " I suppose it was greed on some level." On some level? Duh? 

Surely it wasn't as simple as greed, but it had something to do with the four dimensions of Situation, Cognition, Personality, and Emotion? How about I am some greedy Jewish (situation) idiot (personality), faced with a too-good-to-be-true opportunity (cognition) to get insanely rich (emotion)?

Or, I am not greedy, I am an innocent victim, trying to protect what is rightfully mine so I can survive in my old age. Weep, weep.

ponzi in the open

I have to say, the P-word is becoming quite popular. First regulators uncovered "super-genius" investor and all time star Madoff, who practiced the "pure" form of this art. That was followed by a long series of articles, some of which went to great lengths to explain to people what Ponzi schemes are and how they work.

Then today, Nobel Laureate Krugman went a step further and called our beloved financial system a Ponzi scheme. He went about it in a very systematic way and pointed out why this is so. He then highlighted how Mr. Madoff fit into this picture. He showed how others did exactly what Madoff had done but with a few extra steps. It can't get any more basic than this. 

And there you have it folks, from a true expert, something I have been saying all along: our Western financial system is a Ponzi scheme.

Guess what, we just authorized our government to pump $700 billion into that system to make sure it survives. Because, as W would say, it is fundamentally a "good" system and we want to keep it around. There were just a few rotten apples and we should not throw out the baby with the bath water, as the old cliche goes.

Unfortunately, reality is a bit different. The system apparently is rotten to the core and maybe there are a few unspoiled apples, and perhaps many apples that look OK but are really rotten inside, who knows?

The more we find out the more America in the 21st Century starts looking like Rome in the 3rd century. And we all known what happened there next.

the P word

There is one word that is probably more upsetting to US policy makers than the trio, recession, depression and deflation. That is the P-word, or Ponzi-scheme. The reason why is that while recessions, depressions, and deflation are serious to very serious, these conditions are not seen as criminal. Ponzi schemes are. In a Ponzi scheme money is taken from the masses and funneled into the pockets of a few. Ponzi schemes grow quickly based on deception, and when they inevitably collapse, they leave many victims in their wake.

When George W. went out repeatedly to tell the world that US style capitalism and the free markets are basically wonderful and should not be discarded, he is in essence saying our economy is legitimate. Our financial systems are legitimate. They are not there to make some people rich by deceiving everyone else. They actually do create wealth. It is not a Ponzi scheme. 

Unfortunately, our current financial system is a Ponzi scheme. It does not create wealth as much as shifting it from the poor to the very rich. While most of the victims are in other countries, ordinary Americans were not ignored in this latest crisis. 

Our financial system did deceive people and it did so on a grand scale. During the 90's it valued companies with no revenues higher than some of the world's most profitable and solid corporations. In the 21st century it valued essentially worthless housing in the remote desert areas at top location rates.

Additionally, the system introduced leverage at every level. Worthless houses were overvalued by 10 fold, and these mortgages were then wrapped in securities with another 10 fold markup. Securities that were then repackaged in derivatives with yet another order of magnitude markup, and bought with borrowed money to introduce yet another order of magnitude of leverage. In the end, less than 1/100th of 1% of what was sold was backed up by reality. 

All along the way people were deceived. Deceived into believing that their house was worth more than it was. That they could pay for it with money they did not have, because it was only going to up in value and they would flip it and cash out big. Investors were told these securities were solid, backed up by ever-more valuable real estate. It goes on and on.

It was a Ponzi scheme of the vilest kind.

And while you may think this is an extremist view, I am glad to see that the most recent Nobel Laureate in Economics thinks so too. He is a man who knows.

Here is Paul Krugman, commenting on the tech bubble and the housing bubble that followed:

"Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?" 

Needless to say our financial system needs a major overhaul. It is not a legitimate system in any sense of the word. Not in its current implementation.