Madoff’s Crookedness Was a Feature, Not a Bug

By: Ian Welsh Wednesday December 31, 2008 12:42 pm

Ian Walsh nails it with a short and sweet indictment of Bernie Madoff being representative of the past few decades:

Okay, let's point out the obvious: the fact that Bernie Madoff was a crook was known to every competent financial professional. If they didn't know that, it was because they weren't competent or they didn't want to know and if they didn't want to know, they weren't competent. It is impossible to make 1% a month, every month. Impossible. . . .

The worst thing about this is that an honest business can't compete with a crooked one. You can't make the same profits as a corporation whose business model is based on fraud. So bad business forces out good business. Everyone is either forced to engage in fraud, or forced to only do the small segment of business which legitimately has very high returns. Normal businesses which don't engage in fraud or aren't in extremely high margin niche businesses are either forced out of business or can't get credit. And business models which only return 5% to 8% a year, which in non-fraudulent, ordinary times, are excellent returns, are never even funded, since all the money is rushing into CDOs, credit default swaps, and crooked businesses which promise higher returns.

Because they aren't funded we lost huge amounts of real economic growth and in exchange got empty returns which once they were undeniable lead to this financial crisis and economic downturn. In fact, in a real sense, we were in a recession for years, we just didn't know it. The majority of profits the economy was living off of, simply didn't exist.

What Ian does not discuss is what it says about millions of Americans who also went along for the ride, content to watch their IRAs and 401-Ks "increase in value." Only now that the ride is over, are they beginning to wake up to the reality it was all some phantasmagorical pie of road apples. There's lots of economic illiteracy and ignorance out there that will be an impediment to workable solutions.