Don't panic

ARTICLE: Breach of Trust: Bernard Madoff's massive fraud will cripple American capitalism,
By Anne Applebaum, Slate, Dec. 15, 2008

The almost hysterical extrapolating of current data points into dark futures re: capitalism reaches near apogee in this piece: Madoff dooms American capitalism.

These are simply the realities of frontier integration in a period of expansive globalization. Such a historically rapid spread of the global economy is naturally going to hit rough spots, replete with swindlers, but to then draw such conclusions from the latest bubble burst is extremely unstrategic in terms of analysis--almost childish.

People are losing all perspective, marking this moment as a true panic. But serious System Perturbations do that, thus the temptation of reaching for "strong leaders" in "uncertain times."

Here is where we hope Barack Obama is so much smarter than the pundits.

I'm not saying it's a high bar. I just want to clear it by a big-ass margin--please!

More seriously: you see the low quality of the strategic implications analysis currently being offered, and you realize how smart people can trigger something like the Great Depression through lengthy and determined acts of great myopia.

(Thanks: Pat O'Connor)

Comments

[Lexington Green]

American capitalism is driven by extremely aggressive self-starting overconfident type A personalities. On the margins, these people are crooks and sociopaths, hucksters and con men. Some start out meaning well and drift into quicker bucks by looting the gullible, and usually end up badly as a result.

We put up with some of this on the margins, and we accept that we will get the occasional spectacular scoundrels -- Jay Gould and Samuel Insull come to mind. This is part of the price we pay for not crushing out the animal spirits which drive our economy.

As always, caveat emptor.

But the purported death of capitalism because of one outrageous fraudster is a wild misdiagnosis.

[stuart abrams]

I'm not sure this piece is so bad. I think the references to Fukuyama's analysis of the role of trust in capitalism are interesting. The Madoff case is very symptomatic of the regulatory gaps that are playing a major role in the current financial situation. We have major financial institutions (hedge funds) and financial instruments (derivatives) that lack systematic regulation, and because of financial de-regulation over the past 20 years (Glass-Steagall repeal) the inevitable swindles that occur in an unregulated environment have had much broader impact than they should have had. The fact is that new regulations are necessary, and regulation always entails both costs and benefits. The "trust" that Applebaum is talking about doesn't just happen by magic; it is a biproduct of effective regulation. Whenever conservatives rail against personal injury lawyers, I ask them how they would feel about putting their children on a scary-looking ride at Disney World in a world without personal injury lawyers. Capitalism is not doomed, but the delusion that capitalism can function without effective regulation ought to be, and in the long run, we will all be better off for that.

[Lexington Green]

"We have major financial institutions (hedge funds) and financial instruments (derivatives) that lack systematic regulation."

Unregulated hedge funds have not cratered in this downturn. Their "unproteced" investors have done relatively well. Heavily regulated entities like investment banks have blown to bits. All of these dead entities were probably SarBox compliant. "Regulation" categorically is not the answer to anything, and it never is. The delusion that "regulation" can prevent scams ought to be, in the long, defeated by the experience of history.

[tazzerman]

Never underestimate the influence that the MSM has on us ALL. They've been screaming recession for over a year now (just like they were giving us the daily drumbeat regarding a 'civil war' in Iraq) and under that daily barrage its no wonder consumer confidence has been ground down to dust.

I've already seen signs of the MSM 'ligtening' up a little bit and I fully expect their tone to change completely after Jan 20th. with a much more positive spin regarding our economic situation.

[William R. Cumming]

Doubtful that Capitalism is doomed by Madoff or anything else. It is an economic system masquerading as a political system. Nonetheless, Madoff is being helpful in allowing the man/woman on the street (and not of Wall Street) to understand that basic greed and criminality underlies a great deal of the current economic crisis. The emerging market story, and the BRIC's economic situation, is likely to loom much larger in 2009 than the domestic economic story or B. Madoff! We still need, however, a way to write-off or value the almost $700 Trillion in derivatives and off-book financial instruments. If recovery on even $.10 on the $1 occurs I will be greatly surprised.

[Louis Heberlein]

(Ed. Note: This is based on a Pickles Cartoon)

Adam said:

Eve, we've been here for hundreds of years and watched many of our generations grow, learn and live. I've noticed something.

"The more we learn, the more we forget.The more we forget, the less we know.The less we know, the more we learn.The more we learn, the more we forget.

I could go around and around like this for hours."

Was that what we got for eating that fruit?"

And, Eve threw a shoe at Adam to make him stop.

[Dan K]

I don't think Tom is scared enough about the financial crisis - no matter what happens, it fits neatly into the core/gap worldview - this one is simply a "system perturbation." Ha, so is the event that set the stage for the story in "The Road," Cormac McCarthy's Pulitzer-winning book. (http://www.amazon.com/Road-Cormac-McCarthy/dp/0307265439)

If you read Tom, you have to read John Robb (http://globalguerrillas.typepad.com/johnrobb/) as well (they even share a manager for booking speaking events). I'd love to see you two guys on the same stage - has it ever happened?



What we know as society is essentially an agreement by individuals and groups to live by a certain series of rules, given the availability of clean water, food, and a basic sense of security. Absent these, society breaks down - as we've seen in Somalia, Zimbabwe - and in that well-known gap state - New Orleans.

The "go ahead and panic" stuff that we're starting to see in more reputable sources such as this Slate article one is based on the idea that there is a conceivable link between Madoff losing/stealing $50B and that can of beans like the one sitting in my cupboard not making it to my grocer's shelves a year from now.

Bad things happen when nation-states lose legitimacy - and now we know that the guy who invented NASDAQ is a fraud and a crook, as is the Governor of Illinois, as are the leaders of several of our biggest financial institutions... are all these guys "on the margins"? Yes we can handle these con men when they are on the margins, but as they say in poker: "if you can't spot the sucker at the table, you're it."