Economists debate free trade at forum - Campus News
November 26, 2008 - Dani Rodrik
Your crisis, my crisis
David Leonhardt attributes the following thought to Larry Summers: "any system that created the Mexican peso crisis, the Asian financial crisis and the current troubles needs to be changed." I couldn't agree more. But I also cannot help but recall that at the time of the Mexican and Asian crises, it was far more common to attribute those mishaps to the misbehavior of the governments involved.
When developing countries get into a financial crisis, the problem must lie with their venal politicians and lack of financial discipline. When it is U.S. that is in trouble, the fault must lie with the system. Of course.
Paul Krugman: The Madoff Economy
Artigo: A economia Madoff
PAUL KRUGMANDO "NEW YORK TIMES"
A REVELAÇÃO de que Bernard Madoff -brilhante investidor (ou assim quase todos acreditavam), filantropo, pilar da comunidade- era um trapaceiro causou choque em todo o mundo, e é compreensível que isso tenha acontecido. A escala de sua suposta fraude, da ordem de US$ 50 bilhões, é difícil de compreender.
Mas eu certamente não devo ser a única pessoa a estar fazendo a pergunta óbvia: até que ponto a história de Madoff difere da história do setor de investimentos como um todo? O setor de serviços financeiros passou a última geração expandindo cada vez mais sua participação na riqueza nacional, e isso tornou as pessoas que o dirigem incrivelmente ricas. No entanto, a esta altura, parece que boa parte das empresas do setor estava destruindo, e não criando, valor. E não se trata apenas de dinheiro: a vasta riqueza acumulada por aqueles que administravam o dinheiro alheio exerceu um efeito de corrupção sobre a nossa sociedade mais ampla.
Vamos começar pelas remunerações. No ano passado, o salário médio dos trabalhadores nos segmentos de "títulos, contratos de commodities e investimentos" era mais de quatro vezes superior ao salário dos empregados do restante da economia. Remuneração da ordem de US$ 1 milhão ao ano não tinha nada de especial, e até mesmo renda da ordem de US$ 20 milhões ao ano parecia comum para alguns executivos.
A renda dos norte-americanos mais ricos registrou crescimento explosivo na geração que passou, enquanto os salários dos trabalhadores comuns se estagnavam. Mas com certeza todos aqueles superastros das finanças mereciam os milhões que faturavam, não é? Não necessariamente. O sistema de pagamento em Wall Street recompensa suntuosamente a aparência de lucro, mesmo que essa aparência venha a se provar ilusória.
Considerem o exemplo hipotético de um administrador de investimentos que alavanque o dinheiro que obtém junto a seus clientes fazendo dívidas elevadas no mercado, e depois invista a maior parte desse capital combinado em ativos de alto retorno mas arriscados, como por exemplo títulos dúbios lastreados por hipotecas.
Por algum tempo -digamos que enquanto uma bolha persistir no setor de habitação-, ele (e esses administradores quase sempre são homens) obterá grandes lucros e receberá grandes bonificações. Depois, quando a bolha estourar e seus investimentos se transformarem em lixo tóxico, os investidores que confiaram dinheiro a ele terão imensos prejuízos -mas o administrador manterá o dinheiro de sua bonificação. OK, talvez meu exemplo não seja assim tão hipotético.
Assim, qual é a diferença entre o que Wall Street costumava fazer e o que aconteceu no caso Madoff? Bem, Madoff supostamente ignorou certas etapas do processo e decidiu simplesmente roubar o dinheiro dos clientes, em lugar de receber altos honorários enquanto expunha o capital dos investidores a riscos que estes não compreendiam. E, enquanto Madoff aparentemente praticava fraudes deliberadas, muitos dos profissionais de Wall Street acreditavam nas patranhas que contavam. Ainda assim, o resultado final é o mesmo (exceto no que tange à prisão domiciliar): os administradores de fundos enriqueceram e os investidores viram seu dinheiro desaparecer.E estamos falando de muito dinheiro, em todo esse processo. Nos últimos anos, o setor financeiro respondia por 8% do Produto Interno Bruto (PIB) dos Estados Unidos, ante menos de 5% uma geração atrás.
Se esses 3% adicionais representam dinheiro que não tinha base em valores reais -e é provável que o faça-, estamos falando de US$ 400 bilhões anuais em fraudes, desperdícios e abusos. Além disso, os custos da era da fraude nas finanças norte-americanas vão além do dinheiro diretamente perdido.Em seu nível mais cru, os ganhos espúrios de Wall Street corromperam e continuam a corromper a política, e de maneira simpaticamente bipartidária. De funcionários do governo Bush como Christopher Cox, o presidente da Securities and Exchange Commission (SEC, órgão que fiscaliza o regulamenta o mercado de valores mobiliários), que preferiu fechar os olhos diante dos crescentes indícios de fraude, aos democratas que ainda não eliminaram a repugnante lacuna fiscal que beneficia executivos de fundos de hedge e de empresas privadas (alô, senador Schumer), os políticos nunca recusaram ordens do dinheiro.
Enquanto isso, como determinar que proporção do futuro do nosso país terminou danificada pela atração magnética da riqueza pessoal, que por muitos anos atraiu alguns dos nossos melhores e mais brilhantes jovens a bancos de investimento, em detrimento da ciência, do serviço público e tudo o mais?
Acima de tudo, a vasta riqueza que estava sendo amealhada em nosso inchado sistema financeiro, e que idealmente deveria ter sido conquistada por mérito, servia para solapar nosso senso de realidade e para distorcer nosso julgamento.
Pensem na maneira pela qual quase todas as pessoas em posições importantes desconsideraram os sinais de alerta quanto a uma crise iminente. Como isso pôde acontecer? Como, por exemplo, Alan Greenspan pode ter declarado não muitos anos atrás que "o sistema financeiro como um todo se tornou mais resistente" -e graças aos derivativos, aliás? A resposta, acredito, é que existe uma tendência natural, mesmo entre as elites, a transformar em ídolos os homens que estão ganhando muito dinheiro, e a presumir que eles sabem exatamente o que estão fazendo.
Afinal, foi por isso que tantas pessoas confiaram em Madoff. Agora, enquanto contemplamos as ruínas e tentamos compreender como as coisas podem ter dado errado, a resposta se torna simples: estamos diante das conseqüências do louco mundo de Madoff.
Tradução de PAULO MIGLIACCI
The Talented Mr. Madoff
By JULIE CRESWELL and LANDON THOMAS Jr.
January 24, 2009
After Bernard L. Madoff’s fraud arrest, two versions of his life story are emerging: the Wall Street statesman, and the high-finance charlatan.
TO some, Bernard L. Madoff was an affable, charismatic man who moved comfortably among power brokers on Wall Street and in Washington, a winning financier who had all the toys: the penthouse apartment in Manhattan, the shares in two private jets, the yacht moored off the French Riviera. ... ... .... .... .... ....
12/12/2008 - 00h43
Ex-presidente da Nasdaq é preso por fraude de US$ 50 bi nos EUA
da Folha Online
Bernard Madoff, ex-presidente da bolsa de empresas de tecnologia Nasdaq, foi preso nesta quinta-feira acusado de liderar um esquema de fraude ao mercado financeiro. Segundo a agência de notícias Reuters, a fraude pode chegar a US$ 50 bilhões.
Leia a cobertura completa da crise nos EUAEntenda a evolução da crise que atinge a economia dos EUAVeja os países e instituições financeiras afetados diretamente pela criseVeja as medidas já anunciadas no Brasil para combater os efeitos da crise
Conselheiro de investimentos em Wall Street, o executivo participava de fraudes conhecidas como esquema Ponzi. O crime consiste em formar uma pirâmide de investidores iniciais atraídos por promessas de altos ganhos e que acabam remunerados com o dinheiro de quem adere ao esquema posteriormente.
Segundo a Reuters, Madoff, 70, praticava seu esquema a partir de sua empresa de investimentos, a Bernard L. Madoff Investment Securities LLC, fundada em 1960.
Em declarações, Madoff afirmou que "isso é uma grande mentira" e que foi "basicamente, um grande esquema Ponzi", que causaram prejuízos de até US$ 50 bilhões a investidores.
O advogado afirmou que "Bernard Madoff é um conhecido líder na indústria de serviços financeiros" e que "vai lutar para superar essa série de casos infelizes".
A fraude de Madoff pode ser considerada uma das maiores da história dos Estados Unidos, atrás da falência da Enron, em 2001, segundo a Reuters.
A Enron declarou a segunda maior quebra da história empresarial americana após reconhecer que havia contabilizado centenas de créditos como operações de compra e venda, com prejuízo de US$ 63,4 bilhões.
Segundo os procuradores, ele pode pegar uma pena de até 20 anos de prisão e ser obrigado a pagar multa de até US$ 5 milhões.
A Nasdaq (Nacional Association of Securities Dealers Automated Quotations) é a segunda Bolsa de Nova York, depois do Stock Exchange, e concentra especialmente os papéis tecnológicos.
Com Reuters e France Presse
18/12/2008 - 12h36
Órgão regulador chegou a investigar Madoff em 2006, diz jornal
da France Presse, em Nova York
Os inspetores da SEC (Securities and Exchange Commission, a CVM americana) investigaram irregularidades que envolviam o gestor e ex-presidente da Nasdaq Bernard Madoff em 2006, mas descartaram a possibilidade de fraude, informou o "Wall Street Journal" nesta quinta-feira.
"Os inspetores da SEC descobriram em 2006 que Bernard Madoff havia enganado a agência sobre a maneira como administrava o dinheiro dos clientes, mas a SEC desperdiçou a chance de descobrir a gigantesca fraude montada pelo investidor", afirma o WSJ.
Leia a cobertura completa da crise nos EUAEntenda a evolução da crise que atinge a economia dos EUAVeja os países e instituições financeiras afetados diretamente pela criseVeja as medidas já anunciadas no Brasil para combater os efeitos da crise
O jornal teve acesso a mensagens eletrônicas e documentos de um investidor concorrente, Harry Markopolos, trocados com a SEC durante vários anos.
"Quando começou a se interessar pelo rendimento dos investimentos de Madoff no fim de 1999, Markopolos disse a um colega da época: 'Isto não faz sentido. Isto deve ser um esquema Ponzi'", conta o "WSJ". O esquema Ponzi é baseado na teoria da pirâmide financeira --pelo qual são oferecidos investimentos com atraentes rentabilidades, que são abonadas com o dinheiro fornecido pelos novos investidores.
Com base nas acusações de Markopolos, a SEC abriu em 4 de janeiro de 2006 uma investigação sobre a empresa de Madoff, examinando documentos do investidor. A agência também interrogou Madoff, assim como um auxiliar e um diretor da administradora de ativos Fairfield Greenwich Group, um de seus clientes e mais tarde a mais importante vítima da fraude.
A SEC descobriu irregularidades, mas encerrou a investigação por considerar que as mesmas não eram suficientemente graves para determinar uma ação judicial, destaca o jornal econômico.
Acusado de uma gigantesca fraude de US$ 50 bilhões, Bernard Madoff foi detido semana passada e se encontra em prisão domiciliar.
A SEC anunciou na noite de terça-feira que fará uma investigação interna para determinar como a gigantesca fraude de Bernard Madoff não foi detectada antes, apesar das "repetidas" advertências.
"A comissão tem conhecimento de que denúncias confiáveis e precisas alertando sobre a fraude de Madoff foram entregues ao pessoal da SEC de maneira repetida desde 1999", admitiu o presidente do órgão, Christopher Cox, que qualificou a situação de "profundamente inquietante".
"Determinei um estudo completo e imediato das denúncias envolvendo Madoff e sua empresa e por que motivo não foram consideradas criveis" pelo pessoal da SEC. Cox classificou a situação como profundamente preocupante.
A investigação vai se concentrar no funcionamento interno da SEC, com o objetivo de determinar se as regras vigentes foram aplicadas ou se devem ocorrer modificações.
Também será preciso determinar se os contatos entre o pessoal da SEC e a empresa ou a família de Madoff interferiram nas decisões tomadas pelo órgão.
O "Wall Street Journal" já havia revelado no final de semana passado que a SEC investigou Madoff em várias ocasiões a partir de 1992, sem identificar indícios da fraude bilionária.
Desde 2001, a MAR/Hedge, uma publicação especializada em fundos de investimentos, questionava como os investimentos de Madoff podiam manter "tal regularidade e tal falta de volatilidade". A publicação também criticava a falta de transparência na gestão e o modo arrogante de Madoff ignorar as perguntas de seus jornalistas.
Além disso, o "Wall Street Journal" informou que a SEC está analisando a relação de uma sobrinha de Bernard Madoff com um ex-inspetor da entidade reguladora. "A SEC vai examinar a relação entre um ex-diretor da agência e uma sobrinha do financista Bernard Madoff", escreveu o jornal econômico.
O inspetor geral da SEC encarregado da investigação, David Kotz, indicou em entrevista ao "Wall Street Journal" que tinha "a intenção de examinar a relação entre a sobrinha de Madoff e o senhor Swanson". Eric Swanson trabalhou para a SEC durante dez anos, entre outras coisas supervisionando programas de inspeção. Ele deixou a agência em 2006, o mesmo ano em que teria começado a sair com Shana Madoff, com quem se casou em 2007.
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Leia o que já foi publicado sobre o caso Madoff
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Madoff Scheme Kept Rippling Outward, Across Borders
Eight Years of Madoffs
By FRANK RICH
While our new president indeed must move on and address the urgent crises that cannot wait, Bush administration malfeasance can’t be merely forgotten or finessed.
SFO investigates middlemen who fed cash to Madoff [100%]
The Serious Fraud Office is examining whether UK banks or financial advisers acted improperly by putting their clients into Bernard Madoff's record-breaking Ponzi scheme.- 20/12/2008, Business News
Madoff: was Wall Street's regulator asleep at the wheel? [81%]
"Madoff Securities is the world's largest Ponzi Scheme." This was the conclusion of the Securities and Exchange Commission, Wall Street's regulator, when it charged Bernard Mado- 18/12/2008, Business Analysis
Bernard Madoff, Trust-Buster
Nicholas von Hoffman posted December 17, 2008 (web exclusive)
... Bernard Madoff, Trust-Buster. Howl. By Nicholas von Hoffman. December 17, 2008. ... » More. Bernard Madoff, Trust-Buster. White-Collar Crime. ...
Who Wants to Kick a Millionaire?
By FRANK RICH
Published: December 20, 2008
DURING the Great Depression, American moviegoers seeking escape could ogle platoons of glamorous chorus girls in “Gold Diggers of 1933.” Our feel-good movie of the year is “Slumdog Millionaire,” a Dickensian tale in which we root for an impoverished orphan from Mumbai’s slums to hit the jackpot on the Indian edition of “Who Wants to Be a Millionaire.”
It’s a virtuoso feast of filmmaking by Danny Boyle, but it’s also the perfect fairy tale for our hard times. The hero labors as a serf in the toilet of globalization: one of those mammoth call centers Westerners reach when ringing an 800 number to, say, check on credit card debt. When he gets his unlikely crack at instant wealth, the whole system is stacked against him, including the corrupt back office of a slick game show too good to be true.
We cheer the young man on screen even if we’ve lost the hope to root for ourselves. The vicarious victory of a third world protagonist must be this year’s stocking stuffer. The trouble with “Slumdog Millionaire” is that it, like all classic movie fables, comes to an end — as it happens, with an elaborately choreographed Bollywood musical number redolent of “Gold Diggers of 1933.” Then we are delivered back to the inescapable and chilling reality outside the theater’s doors.
Just when we thought that reality couldn’t hit a new bottom it did with Bernie Madoff, a smiling shark as sleazy as the TV host in “Slumdog.” A pillar of both the Wall Street and Jewish communities — a former Nasdaq chairman, a trustee at Yeshiva University — he even victimized Elie Wiesel’s Foundation for Humanity with his Ponzi scheme. A Jewish financier rips off millions of dollars devoted to memorializing the Holocaust — who could make this stuff up? Dickens, Balzac, Trollope and, for that matter, even Mel Brooks might be appalled.
Madoff, of course, made up everything. When he turned himself in, he reportedly declared that his business was “all just one big lie.” (The man didn’t call his 55-foot yacht “Bull” for nothing.) As Brian Williams of NBC News pointed out, the $50 billion thought to have vanished is roughly three times as much as the proposed Detroit bailout. And no one knows how it happened, least of all the federal regulators charged with policing him and protecting the public. If Madoff hadn’t confessed — for reasons that remain unclear — he might still be rounding up new victims.
There is a moral to be drawn here, and it’s not simply that human nature is unchanging and that there always will be crooks, including those in high places. Nor is it merely that Wall Street regulation has been a joke. Of what we’ve learned about Madoff so far, the most useful lesson can be gleaned from how his smart, well-heeled clients routinely characterized the strategy that generated their remarkably steady profits. As The Wall Street Journal noted, they “often referred to it as a ‘black box.’ ”
In the investment world “black box” is tossed around to refer to a supposedly ingenious financial model that is confidential or incomprehensible or both. Most of us know the “black box” instead as that strongbox full of data that is retrieved (sometimes) after a plane crash to tell the authorities what went wrong. The only problem is that its findings arrive too late to save the crash’s victims. The hope is that the information will instead help prevent the next disaster.
The question in the aftermath of the Madoff calamity is this: Why do we keep ignoring what we learn from the black boxes being retrieved from crash after crash in our economic meltdown? The lesson could not be more elemental. If there’s a mysterious financial model producing miraculous returns, odds are it’s a sham — whether it’s an outright fraud, as it apparently is in Madoff’s case, or nominally legal, as is the case with the Wall Street giants that have fallen this year.
Wall Street’s black boxes contained derivatives created out of whole cloth, deriving their value from often worthless subprime mortgages. The enormity of the gamble went undetected not only by investors but by the big brains at the top of the firms, many of whom either escaped (Merrill Lynch’s E. Stanley O’Neal) or remain in place (Citigroup’s Robert Rubin) after receiving obscene compensation for their illusory short-term profits and long-term ignorance.
There has been no punishment for many of those who failed to heed this repeated lesson. Quite the contrary. The business magazine Portfolio, writing in mid-September about one of the world’s biggest insurance companies, observed that “now that A.I.G is battling to survive, it is its black box that may save it yet.” That box — stuffed with “accounting or investments so complex and arcane that they remain unknown to most investors” — was so huge that Washington might deem it “too big to fail.”
Sure enough — and unlike its immediate predecessor in collapse, Lehman Brothers — A.I.G. was soon bailed out to the tune of $123 billion. Most of that also disappeared by the end of October. But not before A.I.G. executives were caught spending $442,000 on a weeklong retreat to a California beach resort.
There are more black boxes still to be pried open, whether at private outfits like Madoff’s or at publicly traded companies like General Electric, parent of the opaque GE Capital Corporation, the financial services unit that has been the single biggest contributor to the G.E. bottom line in recent years. But have we yet learned anything? Incredibly enough, as we careen into 2009, the very government operation tasked with repairing the damage caused by Wall Street’s black boxes is itself a black box of secrecy and impenetrability.
Last week ABC News asked 16 of the banks that have received handouts from the Treasury Department’s $700 billion Troubled Asset Relief Program the same two direct questions: How have you used that money, and how much have you spent on bonuses this year? Most refused to answer.
Congress can’t get the answers either. Its oversight panel declared in a first report this month that the Treasury is doling out billions “without seeking to monitor the use of funds provided to specific financial institutions.” The Treasury prefers instead to look at “general metrics” indicating the program’s overall effect on the economy. Well, we know what the “general metrics” tell us already: the effect so far is nil. Perhaps if we were let in on the specifics, we’d start to understand why.
In its own independent attempt to penetrate the bailout, the Government Accountability Office learned that “the standard agreement between Treasury and the participating institutions does not require that these institutions track or report how they plan to use, or do use, their capital investments.” Executives at all but two of the bailed-out banks told the G.A.O. that the “money is fungible,” so they “did not intend to track or report” specifically what happens to the taxpayers’ cash.
Nor is there any serious accounting for executive pay at these seminationalized companies. As Amit Paley of The Washington Post reported, a last-minute, one-sentence loophole added by the Bush administration to the original bailout bill gutted the already minimal restrictions on executive compensation. And so when Goldman Sachs, Henry Paulson’s Wall Street alma mater, says that it is not using public money to pay executives, we must take it on faith.
In the wake of the Madoff debacle, there are loud calls to reform the Securities and Exchange Commission, including from the president-elect. Under both Clinton and Bush, that supposed watchdog agency ignored repeated and graphic warnings of Madoff’s Ponzi scheme as studiously as Bush ignored Al Qaeda’s threats during the summer of 2001.
But fixing that one agency is no panacea. All the talk about restoring “confidence” and “faith” in capitalism will be worthless if we still can’t see what’s going on in the counting rooms. In his role as chairman of the Federal Reserve Bank of New York, Timothy Geithner, Barack Obama’s nominee for Treasury secretary, has been at the center of the action in the bailout’s black box, including the still-murky and conflicting actions (and nonactions) taken with Lehman and A.I.G. His confirmation hearings demand questions every bit as tough as those that were lobbed at the executives from Detroit’s Big Three.
On Friday, Geithner’s partner in bailout management, Paulson, asked Congress to give the Treasury the second half of the $700 billion bailout stash. But without transparency and accountability in Washington’s black box, as well as Wall Street’s, there will continue to be no trust in the system, no matter how many cops the S.E.C. puts on the beat. Even the family-owned real-estate company of Eliot Spitzer, the former “Sheriff of Wall Street,” had entrusted money with Madoff.
We’ll keep believing, not without reason, that the whole game is as corrupt as the game show in “Slumdog Millionaire” — only without the Hollywood/Bollywood ending. We’ll keep wondering how so many at the top keep avoiding responsibility and reaping taxpayers’ billions while relief for those at the bottom remains as elusive as straight answers from those Mumbai call centers fielding American debtors.
This wholesale loss of confidence is a catastrophe that not even the new president’s most costly New Deal can set right.
ESCÂNDALO MADOFF Investidores ou vigaristas? A fraude envolvendo o investidor norte-americano Bernard Madoff mostra que as grandes finanças da nossa época não são senão uma grande burla, um jogo de cassino em que todos fazem artimanhas entre si e que, em si mesmas, se baseiam num mero embuste. A análise é do economista espanhol Juan Torres Lopez. Juan Torres Lopez - 23/12/2008
Madoff: So where's the money, Bernie?
terça-feira, 30 de dezembro de 2008, 22:00:01
Three weeks ago he was one of Wall Street's grandees and one of its most sought-after investment professionals. Today, he is under house arrest at his $7m (£4.9m) Manhattan apartment, accused of being the biggest swindler that the world of finance has ever seen.
New Timing on Madoff’s Confession
By DIANA B. HENRIQUES
Bernard Madoff remained free on bail as questions arose about when he told his brother Peter B. Madoff, the firm’s chief compliance officer, of his Ponzi scheme.
Quotes of 2008: 'We are in a state of shocked disbelief'
ontem, 31 de dezembro de 2008, 22:00:01
It was the year that the great and the good of the financial world were humbled as the severity of the credit crunch and recession forced climbdowns, expressions of shock and, eventually, even apologies.
December 20, 2008
Blanchard: How to Emerge from the Crisis in 2009
Olivier Blanchard, chief economist of the IMF, says that if the right policies are followed, it's possible to begin emerging from the crisis before the end of 2009:
How to emerge from the crisis in 2009, by Olivier Blanchard, Project Syndicate: ...Let me first set the scene by making three observations on where we are today. First, in the advanced countries, we have probably seen the worst of the financial crisis. There are still land mines,... but the worst days ... are probably over.
Second, and unfortunately, the financial crisis has moved to emerging countries. In crossing borders, the sharp portfolio reallocations and the rush to safer assets are creating not only financial but also exchange-rate crises. Add to this the drop in output in advanced countries, and you can see how emerging countries now suffer from both higher credit costs and decreased export demand.
Third, in the advanced economies, the hit to wealth, and even more so the specter of another Great Depression, has led people and firms to curtail spending sharply... The result has been a sharp drop in output and employment, reinforcing fears about the future, and further decreasing spending.
Let me now turn to policy. If my characterization of events is correct, then the right set of policies is straightforward:
» Continue reading "Blanchard: How to Emerge from the Crisis in 2009"
ROBERT SKIDELSKY: This is a crisis of deviant economics
Alan Greenspan says his entire intellectual edifice has been demolished by the global economic crisis.
ECONOMICS, it seems, has very little to tell us about the current economic crisis. Indeed, no less a figure than former United States Federal Reserve chairman Alan Greenspan recently confessed that his entire "intellectual edifice" had been "demolished" by recent events.
Scratch around the rubble, however, and one can come up with useful fragments. One of them is called "asymmetric information".
This means that some people know more about some things than other people. Not a very startling insight, perhaps. But apply it to buyers and sellers. Suppose the seller of a product knows more about its quality than the buyer does, or vice-versa. Interesting things happen -- so interesting that the inventors of this idea received Nobel Prizes in economics.
In 1970, George Akerlof published a famous paper called The Market for Lemons. His main example was a used-car market. The buyer doesn't know whether what is being offered is a good car or a "lemon". His best guess is that it is a car of average quality, for which he will pay only the average price.
Because the owner won't be able to get a good price for a good car, he won't place good cars on the market. So the average quality of used cars offered for sale will go down. The lemons squeeze out the oranges.
Another well-known example concerns insurance. This time it is the buyer who knows more than the seller, since the buyer knows his risk behaviour, physical health and so on.
The insurer faces "adverse selection", because he cannot distinguish between good and bad risks. He, therefore, sets an average premium too high for healthy contributors and too low for unhealthy ones. This will drive out the healthy contributors, saddling the insurer with a portfolio of bad risks -- the quick road to bankruptcy.
There are various ways to equalise the information available -- for example, warranties for used cars and medical certificates for insurance. But, since these devices cost money, asymmetric information always leads to worse results than would otherwise occur.
All of this is relevant to financial markets because the "efficient market hypothesis" -- the dominant paradigm in finance -- assumes that everyone has perfect information and, therefore, that all prices express the real value of goods for sale.
But any finance professional will tell you that some know more than others, and they earn more, too. Information is king. But just as in used-car and insurance markets, asymmetric information in finance leads to trouble.
A typical "adverse selection" problem arises when banks can't tell the difference between a good and bad investment -- a situation analogous to the insurance market.
The borrower knows the risk is high, but tells the lender it is low. The lender who can't judge the risk goes for investments that promise higher yields. This particular model predicts that banks will over-invest in high-risk, high-yield projects, i.e. asymmetric information lets toxic loans onto the credit market.
Other models use principal/agent behaviour to explain "momentum" (herd behaviour) in financial markets.
Although designed before the current crisis, these models seem to fit current observations rather well: banks lending to entrepreneurs who could never repay, and asset prices changing even if there were no changes in conditions.
But a moment's thought will show why these models cannot explain today's general crisis. They rely on someone getting the better of someone else: the better informed gain, at least in the short-term, at the expense of the worse informed. In fact, they are in the nature of swindles. So these models cannot explain a situation in which everyone, or almost everyone, is losing -- or, for that matter, winning -- at the same time.
The theorists of asymmetric information occupy a deviant branch of mainstream economics. They agree with the mainstream that there is perfect information available somewhere out there, including perfect knowledge about how the different parts of the economy fit together.
They differ only in believing that not everyone possesses it. In Akerlof's example, the problem with selling a used car at an efficient price is not that no one knows how likely it is to break down, but rather that the seller knows well how likely it is to break down, and the buyer does not.
And yet the true problem is that, in the real world, no one is perfectly informed. Those who have better information try to deceive those who have worse; but they are deceiving themselves that they know more than they do.
If only one person were perfectly informed, there could never be a crisis -- someone would always make the right calls at the right time.
But only God is perfectly informed, and He does not play the stock market.
"The outstanding fact," John Maynard Keynes wrote in his General Theory of Employment, Interest and Money, "is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made."
There is no perfect knowledge "out there" about the correct value of assets, because there is no way we can tell what the future will be like.
Rather than dealing with asymmetric information, we are dealing with different degrees of no information. Herd behaviour arises, Keynes thought, not from attempts to deceive, but from the fact that, in the face of the unknown, we seek safety in numbers. Economics, in other words, must start from the premise of imperfect rather than perfect knowledge. It may then get nearer to explaining why we are where we are today.
The writer, a member of the British House of Lords, is professor emeritus of political economy at Warwick University, author of a prize-winning biography of economist John Maynard Keynes and a board member of the Moscow School of Political Studies
The Wall Street Ponzi Scheme called Fractional Reserve Banking Borrowing from Peter to Pay Paul
By Ellen Brown
Global Research, January 3, 2009webofdebt.com
Cartoon in the New Yorker: A gun-toting man with large dark glasses, large hat pulled down, stands in front of a bank teller, who is reading a demand note. It says, “Give me all the money in my account.”
Bernie Madoff showed us how it was done: you induce many investors to invest their money, promising steady above-market returns; and you deliver – at least on paper. When your clients check their accounts, they see that their investments have indeed increased by the promised amount. Anyone who opts to pull out of the game is paid promptly and in full. You can afford to pay because most players stay in, and new players are constantly coming in to replace those who drop out. The players who drop out are simply paid with the money coming in from new recruits. The scheme works until the market turns and many players want their money back at once. Then it’s game over: you have to admit that you don’t have the funds, and you are probably looking at jail time.A Ponzi scheme is a form of pyramid scheme in which earlier investors are paid with the money of later investors rather than from real profits. The perpetuation of the scheme requires an ever-increasing flow of money from investors in order to keep it going. Charles Ponzi was an engaging Boston ex-convict who defrauded investors out of $6 million in the 1920s by promising them a 400 percent return on redeemed postal reply coupons. When he finally could not pay, the scam earned him ten years in jail; and Bernie Madoff is likely to wind up there as well.Most people are not involved in illegal Ponzi schemes, but we do keep our money in accounts that are tallied on computer screens rather than in stacks of coins or paper bills. How do we know that when we demand our money from our bank or broker that the funds will be there? The fact that banks are subject to “runs” (recall Northern Rock, Indymac and Washington Mutual) suggests that all may not be as it seems on our online screens. Banks themselves are involved in a sort of Ponzi scheme, one that has been perpetuated for hundreds of years. What distinguishes the legal scheme known as “fractional reserve” lending from the illegal schemes of Bernie Madoff and his ilk is that the bankers’ scheme is protected by government charter and backstopped with government funds. At last count, the Federal Reserve and the U.S. Treasury had committed $8.5 trillion to bailing out the banks from their follies.1 By comparison, M2, the largest measure of the money supply now reported by the Federal Reserve, was just under $8 trillion in December 2008.2 The sheer size of the bailout efforts indicates that the banking scheme has reached its mathematical limits and needs to be superseded by something more sustainable.Penetrating the Bankers’ Ponzi SchemeWhat fractional reserve lending is and how it works is summed up in Wikipedia as follows:“Fractional-reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other liquid assets) with the choice of lending out the remainder, while maintaining the simultaneous obligation to redeem all deposits immediately upon demand. This practice is universal in modern banking. . . .The nature of fractional-reserve banking is that there is only a fraction of cash reserves available at the bank needed to repay all of the demand deposits and banknotes issued. . . . When Fractional-reserve banking works, it works because:“1. Over any typical period of time, redemption demands are largely or wholly offset by new deposits or issues of notes. The bank thus needs only to satisfy the excess amount of redemptions.“2. Only a minority of people will actually choose to withdraw their demand deposits or present their notes for payment at any given time.“3. People usually keep their funds in the bank for a prolonged period of time.“4. There are usually enough cash reserves in the bank to handle net redemptions.“If the net redemption demands are unusually large, the bank will run low on reserves and will be forced to raise new funds from additional borrowings (e.g. by borrowing from the money market or using lines of credit held with other banks), and/or sell assets, to avoid running out of reserves and defaulting on its obligations. If creditors are afraid that the bank is running out of cash, they have an incentive to redeem their deposits as soon as possible, triggering a bank run.”Like in other Ponzi schemes, bank runs result because the bank does not actually have the funds necessary to meet all its obligations. Peter’s money has been lent to Paul, with the interest income going to the bank. As Elgin Groseclose, Director of the Institute for International Monetary Research, wryly observed in 1934:“A warehouseman, taking goods deposited with him and devoting them to his own profit, either by use or by loan to another, is guilty of a tort, a conversion of goods for which he is liable in civil, if not in criminal, law. By a casuistry which is now elevated into an economic principle, but which has no defenders outside the realm of banking, a warehouseman who deals in money is subject to a diviner law: the banker is free to use for his private interest and profit the money left in trust. . . . He may even go further. He may create fictitious deposits on his books, which shall rank equally and ratably with actual deposits in any division of assets in case of liquidation.”3How did the perpetrators of this scheme come to acquire government protection for what might otherwise have landed them in jail? A short history of the evolution of modern-day banking may be instructive.The Evolution of a Government-Sanctioned Ponzi SchemeWhat came to be known as fractional reserve lending dates back to the seventeenth century, when trade was conducted primarily in gold and silver coins. How it evolved was described by the Chicago Federal Reserve in a revealing booklet called “Modern Money Mechanics” like this:“It started with goldsmiths. As early bankers, they initially provided safekeeping services, making a profit from vault storage fees for gold and coins deposited with them. People would redeem their "deposit receipts" whenever they needed gold or coins to purchase something, and physically take the gold or coins to the seller who, in turn, would deposit them for safekeeping, often with the same banker. Everyone soon found that it was a lot easier simply to use the deposit receipts directly as a means of payment. These receipts, which became known as notes, were acceptable as money since whoever held them could go to the banker and exchange them for metallic money.“Then, bankers discovered that they could make loans merely by giving their promises to pay, or bank notes, to borrowers. In this way, banks began to create money. More notes could be issued than the gold and coin on hand because only a portion of the notes outstanding would be presented for payment at any one time. Enough metallic money had to be kept on hand, of course, to redeem whatever volume of notes was presented for payment.“Transaction deposits are the modern counterpart of bank notes. It was a small step from printing notes to making book entries crediting deposits of borrowers, which the borrowers in turn could ‘spend’ by writing checks, thereby ‘printing’ their own money.”If a landlord had rented the same house to five people at one time and pocketed the money, he would quickly have been jailed for fraud. But the bankers had devised a system in which they traded, not things of value, but paper receipts for them. It was called “fractional reserve” lending because the gold held in reserve was a mere fraction of the banknotes it supported. The scheme worked as long as only a few people came for their gold at one time; but investors would periodically get suspicious and all demand their gold back at once. There would then be a run on the bank and it would have to close its doors. This cycle of booms and busts went on throughout the nineteenth century, culminating in a particularly bad bank panic in 1907. The public became convinced that the country needed a central banking system to stop future panics, overcoming strong congressional opposition to any bill allowing the nation’s money to be issued by a private central bank controlled by Wall Street. The Federal Reserve Act creating such a “bankers’ bank” was passed in 1913. Robert Owens, a co-author of the Act, later testified before Congress that the banking industry had conspired to create a series of financial panics in order to rouse the people to demand “reforms” that served the interests of the financiers.4Despite this powerful official backstop, however, the greatest bank run in history occurred only twenty years later, in 1933. President Roosevelt then took the dollar off the gold standard domestically, and Federal Reserve officials resolved to prevent further bank runs after that by flooding the banking system with “liquidity” (money created as debt to banks) whenever the banking Ponzi scheme came up short.“Too Big to Fail”: The Government Provides the Ultimate BackstopWhen these steps too proved insufficient to keep the banking scheme going, the government itself stepped up to the plate, providing bailout money directly from the taxpayers. The concept that some banks were “too big to fail” came in at the end of the 1980s, when the Savings and Loans collapsed and Citibank lost 50 percent of its share price. Negotiations were conducted behind closed doors, and “too big to fail” became standard policy. Bank risk was effectively nationalized: banks were now protected by the government from loss regardless of risk-taking or bad management.There are limits, however, to the amount of support even the government’s deep pocket can provide. In the past two decades, the bankers’ lending scheme has been kept going by an even more speculative scheme known as “derivatives.” This is a complex subject that has been explored in other articles, but the bottom line is that more dollars are now owed in the derivatives casino than exist on the planet. (See Ellen Brown, “It’s the Derivatives, Stupid!” and “Credit Default Swaps: Derivative Disaster Du Jour,” www.webofdebt.com/articles.) Attempting to fill the derivatives black hole with taxpayer money must inevitably be at the expense of other essential programs, such as Social Security and Medicare. Interestingly, Social Security and Medicare themselves are in some sense Ponzi schemes, since earlier retirees collect their benefits from the contributions of later workers. These programs, too, may soon be facing bankruptcy, in this case because their mathematical models failed to account for a huge wave of Baby Boomers who would linger longer than previous generations and demand expensive drugs and care through their senior years, and because the fund money has have been drawn on by the government for other purposes. The question here is, should the government be backstopping private banks that have mismanaged their investment portfolios at the expense of workers contractually entitled to a decent retirement from a fund they have paid into all their working lives? The answer, of course, is no; but there may be a way that the government could do both. If it were to nationalize the banking system completely – if the government were to assume not just the banks’ losses but their profits, oversight and control – it might have the funds both to maintain Social Security and Medicare and to provide a sustainable credit mechanism for the whole economy.Replacing Private with Public CreditReadily available credit has made America “the land of opportunity” ever since the days of the American colonists. What has transformed this credit system into a Ponzi scheme that must continually be propped up with bailout money is that the credit power has been turned over to private parties who always require more money back than they create in the first place. Benjamin Franklin reportedly explained this defect in the eighteenth century. When the directors of the Bank of England asked what was responsible for the booming economy of the young colonies, Franklin explained that the colonial governments issued their own money, which they both lent and spent into the economy:“In the Colonies, we issue our own paper money. It is called ‘Colonial Scrip.’ We issue it in proper proportion to make the goods pass easily from the producers to the consumers. In this manner, creating ourselves our own paper money, we control its purchasing power and we have no interest to pay to no one. You see, a legitimate government can both spend and lend money into circulation, while banks can only lend significant amounts of their promissory bank notes, for they can neither give away nor spend but a tiny fraction of the money the people need. Thus, when your bankers here in England place money in circulation, there is always a debt principal to be returned and usury to be paid. The result is that you have always too little credit in circulation to give the workers full employment. You do not have too many workers, you have too little money in circulation, and that which circulates, all bears the endless burden of unpayable debt and usury.”In an article titled “A Monetary System for the New Millennium,” Canadian money reform advocate Roger Langrick explains his concept in contemporary terms. He begins by illustrating the mathematical impossibility inherent in a system of bank-created money lent at interest:“[I]magine the first bank which prints and lends out $100. For its efforts it asks for the borrower to return $110 in one year; that is it asks for 10% interest. Unwittingly, or maybe wittingly, the bank has created a mathematically impossible situation. The only way in which the borrower can return 110 of the bank’s notes is if the bank prints, and lends, $10 more at 10% interest . . . . The result of creating 100 and demanding 110 in return, is that the collective borrowers of a nation are forever chasing a phantom which can never be caught; the mythical $10 that were never created. The debt in fact is unrepayable. Each time $100 is created for the nation, the nation’s overall indebtedness to the system is increased by $110. The only solution at present is increased borrowing to cover the principal plus the interest of what has been borrowed.”The better solution, says Langrick, is to allow the government to issue enough new debt-free dollars to cover the interest charges not created by the banks as loans:“Instead of taxes, government would be empowered to create money for its own expenses up to the balance of the debt shortfall. Thus, if the banking industry created $100 in a year, the government would create $10 which it would use for its own expenses. Abraham Lincoln used this successfully when he created $500 million of ‘greenbacks’ to fight the Civil War.”National Credit from a Truly National Banking SystemIn Langrick’s example, a private banking industry pockets the interest, which must be replaced every year by a 10 percent issue of new Greenbacks; but there is another possibility. The loans could be advanced by the government itself. The interest would then return to the government and could be spent back into the economy in a circular flow, without the need to continually issue more money to cover the interest shortfall.The fractional reserve Ponzi scheme is bankrupt, and the banks engaged in it, rather than being bailed out by its victims, need to be put into a bankruptcy reorganization under the FDIC. The FDIC then has the recognized option of wiping their books clean and taking the banks’ stock in return for getting them up and running again. This would make them truly “national” banks, which could dispense “the full faith and credit of the United States” as a public utility. A truly national banking system could revive the economy with the sort of money only governments can issue – debt-free legal tender. The money would be debt-free to the government, while for the private sector, it would be freely available for borrowing at a modest interest by qualified applicants. A government-owned bank would not need to rob from Peter to advance credit to Paul. “Credit” is just an accounting tool – an advance against future profits, or the “monetization” (turning into cash) of the borrower’s promise to repay. As British commentator Ron Morrison observed in a provocative 2004 article titled “Keynes Without Debt”:“[Today] bank credit supplies virtually all our everyday means of exchange, and this brings into sharp focus the simple fact that modern money is no longer constrained by outmoded intrinsic values. It is pure fiat [enforced by law] and simply a glorified accounting system. . . . Modern monetary reform is about displacing the current economic paradigm of ‘what can be afforded’ with ‘what we have the capacity to undertake.’”5The objection to government-issued money has always been that it would be inflationary, but today some “reflating” of the economy could be a good thing. Just in the last year, more than $7 trillion in purchasing power has disappeared from the money supply, including wealth destruction in real estate, stocks, mutual fund shares, life insurance and pension fund reserves.6 Money is evaporating because old loans are defaulting and new loans are not being made to replace them.Fortunately, as Martin Wolf noted in the December 16 Financial Times, “Curing deflation is child’s play in a ‘fiat money’ – a man-made money – system.” The central banks just need to get money flowing into the economy again. Among other ways they could do this, says Wolf, is that “they might finance the government on any scale they think necessary.”7Rather than throwing money at a failed private banking system, public credit could be redirected into infrastructure and other projects that would get the wheels of production turning again. The Ponzi scheme in which debt is just shuffled around, borrowing from one player to pay another without actually producing anything of real value, could be replaced by a system in which the national credit card became an engine for true productivity and growth. Increased “demand” (money) would come from earned wages and salaries that would increase “supply” (goods and services) rather than merely servicing a perpetually increasing debt. When supply keeps up with demand, the money supply can be increased without inflating prices. In this way the paradigm of “what we can afford” could indeed be superseded by “what we have the capacity to undertake.”Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from “the money trust.” Her eleven books include Forbidden Medicine, Nature’s Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are http://www.webofdebt.com/ and http://www.ellenbrown.com/.
1. Kathleen Pender, “Government Bailout Hits $8.5 Trillion,” San Francisco Chronicle (November 26, 2008).2. “Federal Reserve Statistical Release H.6, Money Stock Measures,” http://www.federalreserve.gov/ (December 18, 2008).3. Robert de Fremery, “Arguments Are Fallacious for World Central Bank,” The Commercial and Financial Chronicle (September 26, 1963), citing E. Groseclose, Money: The Human Conflict, pages 178-79.4. Robert Owen, The Federal Reserve Act (1919); “Who Was Philander Knox?”, www.worldnewsstand.net/history/PhilanderKnox.htm. (1999). 5. Ron Morrison, “Keynes Without Debt,” www.prosperityuk.com/prosperity/articles/keynes.html (April 2004).6. Martin Weiss, “Biggest Sea Change of Our Lifetime,” Money and Markets (December 22, 2008).7. Martin Wolf, “‘Helicopter Ben’ Confronts the Challenge of a Lifetime,” Financial Times (December 16, 2008).
January 08, 2009
Crime and Economy
I don't know the literature on this topic well enough to be able to say whether or not this claim that it is difficult to find a link between macroeconomic conditions and crime is accurate:
Crime and Economy, by James Q. Wilson, Commentary, LA Times: ...During the last two decades, scholars have made great progress in explaining why some individuals are more likely than others to commit crimes, but very little in explaining why the crime rate ... rises or falls.
Everyone knows that there is more crime in economically depressed inner-city neighborhoods than in affluent suburbs. That fact leads naturally to the assumption that if a community becomes more prosperous, crime rates will go down, and if income levels decline, crime rates go up. Economists who have checked this view have discovered that it is often true, but not always. ...
A lot of other factors affect the crime rate... It often goes up when the population gets younger, and when drug abuse becomes more common. Murder rates are profoundly influenced, at least in big cities, by gang activity. ...
So can the economy help explain fluctuations in crime? Sometimes yes, sometimes no. It would be difficult to link rising crime during the prosperous 1960s to economics. On the other hand, a declining economy provides a plausible theory to explain increases in crime during the 1990s. Matters become even more complicated if one goes back to the Depression of the 1930s. We had no FBI data on crime rates at that time, but several studies of individual cities suggest that crime rates fell even though one-quarter of all Americans were unemployed. Why? One reasonable hypothesis is that the Depression pulled families together, and this cohesion inhibited crime. ...
The role of the police in reducing crime is often overlooked by those preoccupied with the jobs-crime link. The sharp decline in crime in New York -- and now in Los Angeles -- has a lot to do with how those police departments changed. ...
To try to sort out the combined and complex relations between crime and the economy, the age of the population, imprisonment, police work, neighborhood culture and gang activity, the National Academy of Sciences Committee on Law and Justice (which I chair) has begun an effort to explain something that no one has yet explained: Why do crime rates change? If you have any good ideas, let me know.
+ coments .. ... ... ..