In recent years, our society has failed to invest in things like cold
fusion, and also in conventional technology such as automobiles. Of
course there are many complex reasons, but I believe that one of them
is the recurring financial bubbles and rampant criminality on Wall
Street and in banks. Everyone is familiar with Enron, the sub-prime
loan cases and so on. Two more cases have been reported in the news
recently and they are more stark -- or more emblematic of the era --
you might say. They illustrate the irrational bender that our society
is going through:
Bernard Madoff, a securities trader and investment adviser has
apparently stolen $50 billion in a Ponzi scheme. See:
http://online.wsj.com/article/SB122909368630101789.html?mod=googlenews_wsj
Marc S. Dreier is accused of stealing $380 million using schemes that
are so mind-bogglingly stupid and transparent, I am amazed that he
managed to steal $100. See:
http://www.nytimes.com/2008/12/12/nyregion/12lawyer.html?ref=business
Some quotes:
"A prominent New York lawyer arrested this week on fraud charges
ranks as "a Houdini of impersonation and false documents" who used
guile, a box of cellphones and a series of phony Web sites and e-mail
addresses to steal more than $380 million, a federal prosecutor said
on Thursday. . . ."
. . . Mr. Dreier was initially arrested in Canada on Dec. 2 after an
elaborate ruse to sell $45 million of the phony promissory notes
there collapsed, according to a Toronto police department document.
After meeting with a lawyer for a teachers' pension plan on another
matter and obtaining that man's business card, Mr. Dreier asked to
use a phone and was ushered into a conference room by a secretary,
according to the document. A short time later, he used the room to
meet with the representative of a hedge fund whom he had previously
invited to the offices, and impersonated the lawyer whose card he had
just been handed.
But the scheme quickly unraveled, authorities said, when the hedge
fund representative and the secretary felt something was amiss, and
Mr. Dreier was arrested soon after. . . ."
Can you imagine trying to steal $45 million by impersonating someone
who is in the next room?!? He should, at least, get the Nobel prize
for chutzpah.
I am a cynical person and always ready to believe the worst, but I
never imagined there were so many incompetent people and so many
crooks on Wall Street, or that the regulators were so lax.
Our economy, banks and investment institutions and so on appear to so
dysfunctional, you wonder how they ever managed to work in the first
place. Of course there has always been a measure of corruption. Wall
Street has always been a gambling casino in some ways. But these
institutions used to build wealth and reward innovation. Now they
seem to be destroying wealth to an extent not seen since 1929.
This sort of corruption always surfaces at the end of a financial bubble era.
This kind of mania has occurred many times throughout history. See:
C. Mackay, "Extraordinary Popular Delusions & the Madness of Crowds"
(1841). An excellent modern source is the documentary movie about
Enron, "The Smartest Guys in the Room."
I have read many books and historical accounts of these incidents.
Something that is not often noted is that when a financial bubble is
at its peak years, investments in conventional, sound industry
languishes (as we see in the automobile industry), and investments in
high-risk, high-return ventures nearly disappear (cold fusion is an
example). Presumably this is because people who want to take risks
are not adverse to gambling, and a bubble based on the greater fool
theory is a gamble, by definition. It is a highly lucrative gamble
while it lasts. Even if you could make a cold fusion reactor work, it
would be difficult to make as much money as quickly as people have
done in the subprime mortgage Ponzi schemes. In the 1850s, big-time
San Francisco gamblers would sometimes risk $100,000 a night ($2.3
million in 2008 dollars), but Theodore Judah could not persuade them
to risk $6,000 on the transcontinental railroad, which turned out to
be one of the most lucrative investments in history.
- Jed
