Re: Madoff et al, what to make of the stunning emperor has no clothes quality of it all? And what does it say about us? This sort of existential confidence game couldn't be wholly perpetrated without us, to some degree, buying into the legitimacy of these empires with all the right establishment credentials and discreet social connections that turned out to be built on quicksand?

A colleague writes, "In principle I don't think there's much difference between Madoff and a common embezzler except that people are always looking for genius financial entrepreneurs to push their money on. The whole system, particularly the tax code, is built to worship the sacred personality of the entrepreneur. It would be surprising if some of them were not exposed as frauds. Even Zuckerman, as smart a guy as I've ever seen interviewed on financial matters, got taken by Madoff! If we undrstood how that happened, we'd understand a lot. Maybe these guy are only exposed in a crisis.

"More generally, I think the question has to do with the financialization of capitalism itself. It used to be that industrial capital (i.e. the car makers) had pride of place and practically defined the 'real' economy. Finance capital, mostly the bond markets, were at most two or three times larger (although no one has ever establshed what a 'normal' ratio is) At the peak of the market last sprng, finance capital was ten times 'real' or industrial capital. So the financial markets were so large that they displaced the capital that does the actual work that produces real value (rathr than interest or fees). Before the crisis, the comparatively small stock market (small compared to bonds) contributed only one percent of its value to the pool of real capital, meaning was used to create things; the rest was and still is almost entirely speculation. ... What was globalized was actually nothing more than a series of speculative financial bubbles. They are finally being deflated. We're gradually returning to the bedrock of the 'real' economy, based on the manufacture and sale of things of actual value.

"So if Mr Madoff is in some sense a common embezzler, in another, higher sense, so was the entire US economy. Who's to say who's guiltier than anyone else in the financial class?"

(Update: More along these lines from Paul Krugman: "So, how different is what Wall Street in general did from the Madoff affair?")

Bloomberg compiles Madoff's investors here.

Posted by Laura at December 17, 2008 10:58 AM