Tuesday, December 16, 2008

Stuffing Money Under the Mattress

Anne Applebaum has an article in Slate about how schemes like the Madoff fraud will erode trust and make doing business much more difficult. (here)

Worst of all, everyone who invests anywhere will think just that much harder, take that much longer, demand that much more documentation. And they will do so not only because of Madoff, but because of the subprime lenders, Wall Street investment banks, and Enron fraudsters who have worked so hard to erode our faith in the reliability of our system.


Madoff's pyramid scheme, far broader than anything MMM dreamed up, was made possible by our own tradition of lawfulness. And now he will help bring that tradition down. Here's a prediction: In the coming years, American capitalism will become slower, more cautious, less productive, and less entrepreneurial. We're still a long way from Eastern Europe of the 1990s or from the Latin America or Russia of the present. But maybe not as far as we think.

Who can you trust these days with your money? Is burying gold in your backyard the soundest investment strategy?

On a related note: It's troubling to me that the government of Canada sold off virtually all of its gold holdings. Is our entire Treasury based on questionable paper?


  1. This happens every generation. The Dot com boom involved people too young to remember the wipe out of 1974. The late 60s boom took on people too young to care about 1929. The Panic of 1907 was all but forgotten in the late 20s. After a bust it takes decades to rebuild investment trust.

  2. Anon: Good point. But, for example, the Crash of '29, was a speculative bubble that burst. The outright frauds like Madroff, the Wall Street Investment Banks, and Moody's rating garbage as AAA, make this so much worse. In my opinion.

  3. Actually, after bubbles there are always frauds that come out of the wood work. All the financial regulations in the 1930s were to correct frauds and scams. The 1920s is so long ago the fraud stories, pump and dump scams, have long been forgotten. Even the Pres. of the NYSE went to prison for fraud. During booms people are having too much fun, they look the other way at any bad news.

  4. Anon: Very good point again. Weren't pump and dump schemes usually for the fly by night companies? These days all the big time Wall Street firms are extremely tainted. Weren't people supposed to feel safe with their money with Merril Lynch or Morgan Stanley? I wouldn't have thought they were pump and dump. Unfortunately they were.

  5. "pump and dump" = the one-night stand of finance. Even the best need some sort-term visceral excitement.