Ignorant and Free

Most of us have been trained well—we find the guilty ones in life, so that we can proclaim our own innocence. Some religions teach that the guilty ones go to hell; so much more important than to be one of the innocent ones whose ticket is punched for heaven. Now, none of this may be occurring on a conscious level; but if we are aware, we can observe how we relish in judging others for small infractions as well as for massive crimes. This week, with the sentencing of Bernie Madoff, we reeled in a big fish—it would hard to imagine someone as unambiguously guilty.

At his sentencing hearing, not one person spoke on Madoff’s behalf; and I won’t either. However, I will point out an unpleasant truth—present day America is full of Bernie Madoffs. By “full of Bernie Madoffs” I don’t mean full of people who have set up $50 billion Ponzi schemes; I mean people who think nothing of spending other people’s money as though it were their own or people who think trustworthy behavior is a ticket for being left behind in life. America is being destroyed by our Bernie Madoffs.

More individuals in America resemble Bernie Madoff than we care to admit. Some sink to the level of criminality, some don’t; but regardless, their actions erode our freedoms. First, given the size of the fraud and the countless false statements detailing trades that never occurred, it is likely that tens, if not hundreds, of others were involved in Madoff’s fraud. In May, it was revealed that Jeffrey Picower took out over $5 billion of “gains” from his Madoff fund. According to Reuters, Irving Picard, the trustee overseeing the liquidation of Madoff’s assets, “claimed that in several cases Picower’s purported annual rates of return were more than 100 percent, with some annual returns as high as 500 percent or even 950 percent.”  I expect that we will be hearing more about Picower’s relationship with Madoff.

And what of the innocent Madoff investors, the ones earning merely 10-15% a year? Only those ignorant of economics and finance could believe in the financial “perpetual motion machine” run by Madoff; only the ignorant could believe that losses are a thing of the past and a steady stream of gains is here to stay. No doubt some, despite their wealth, were ignorant; but surely, more than a few must have suspected that something was wrong. Some of these “innocents” are now demanding that the government pay them, not only for the money that they originally deposited with Madoff, but for the “gains” that their false statements showed. In other words, while many non-Madoff investors found their stock funds down by 50% or more, these “innocents” believe that they should receive the false gains that Madoff promised. And who would pay for this? Why, the taxpayer, of course. No, these “innocents” are not guilty of fraud; but like Madoff, they behave as though other people’s money is their personal piggy bank.

Yes, I know that there are many Madoff investors who would be happy to have their original investment refunded; they have no designs on false gains. Our hearts go out to these investors for what to them must be terrible suffering.

This week, alongside the Madoff story, the Washington Post reported that “Sen. Daniel K. Inouye’s staff contacted federal regulators last fall to ask about the bailout application of an ailing Hawaii bank that he had helped to establish and where he has invested the bulk of his personal wealth.” Shortly after the phone call, Inouye’s bank received $135 million.

Of course, Inouye’s conduct is part of a much bigger problem. Bill Bonner answered his own question about Madoff: “Isn’t he the biggest financial scammer of all time?”

Well…he’s the title-holder now. But he has a lot of competition close on his heels. Bernie’s crime was taking money from people under false pretenses…and then being unable to give it back to them. How is that different from the financing activities of the US government?

This year alone, the feds will borrow 50 times as much money as Bernie managed to take in during his whole 20-year career. They can only pay it back by borrowing even more money from more lenders. This is not very different from the typical “Ponzi” scheme, except that it’s the government doing it. Eventually, the suckers are going to lose a lot of money.

It is easy to rail against government, but what about the likes of Donald Trump, respected and admired by many?  The Wall Street Journal recently reported on Donald Trump’s deposition taken in late 2007 as part of his lawsuit against author Timothy L. O’Brien. The Journal describes Trump’s definition of being “sold-out”:

Mr. Trump told The Wall Street Journal in November 2007 that he sold all 1,282 units at his Las Vegas condo project that he owns with casino and hand-truck magnate Phil Ruffin. There were $1.3 billion in proceeds coming from that project, he told The Journal and other news outlets, including CNBC.

In the deposition one month later, he said he had deposits for around 900 units. Mr. O’Brien’s lawyer, Andrew Ceresney, asked whether Mr. Trump was caught in a lie?

“That’s not a lie,” Mr. Trump said. He said that he was holding on to the rest of the units as an investment. “I’m a buyer also, essentially.”

Trump was also asked whether “he has ever exaggerated in statements about his properties.” Trump’s response:

“I think everybody does,” he said in the deposition. “Who wouldn’t?”

A follow-up question: Does that mean he inflates the value of his properties in general, nonfinancial public statements? “Not beyond reason,” he said in the testimony.

And just who is the arbiter of what “not beyond reason” means? Of course, Trump himself. I personally would never knowingly do business with the likes of a Trump; and if I was forced to, I would be backed by an army of lawyers and accountants. How quickly would commerce grind to a halt if everyone did business the Trump way?

As for Madoff, he will never be a free man again; but we are not safe. The same culture that produced Madoff, produced his investors, produced Trump, and produced Washington, D.C. Our troubles are just beginning, and we are not innocent. At a minimum, we are collectively ignorant of the values and principles that preserve freedom.

On this Fourth of July weekend, we can be reminded of Jefferson’s words: “If a nation expects to be ignorant and free…it expects what never was and never will be.”

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9 Responses to Ignorant and Free

  1. Steve Pilotte says:

    I liked this article Barry. Pointing out the ubiquity of Madoff-like behavior among americans is an astute observation. Many of those so condemning of the man seem oblivious to the fact that they implicitly share with him many of the same values and principles. Differences are merely a matter of degree.
    One potential irony here is that by the time the bear market is over, even “regular” investors relying on the advice of legitimate professional money managers could find themselves not much better off than Madoff’s victims today. They will be just as angry too.

  2. Steve,

    Thank you for your observations. The societal consequences of the very possible outcome that you mention are frightening. Anger can be a very destructive force.

  3. James D says:

    Not to defend Madoff or relieve him of any of the responsibility for screwing so many people so badly, but he is a symptom of the problem, the sneeze caused by the allergy. While we may have wiped our noses, the allergy is still there, and we’ll certainly have another sneeze on our hands. Our addiction to easy money and having it all has given us a collective addiction to wanting more. This problem won’t go away until we stop wanting more and start being more. But I don’t expect that to occur en masse anytime soon, so I guess I’ll just keep alert for the next headline.

  4. Tesh says:

    As far as I’m concerned, “investing” as a whole is playing with other people’s money, and profiting from other people’s work.

    How many times have we heard “make your money work for you” or “compound interest is the eighth world wonder”? The former is really just a genteel way of saying “make your living off of usurious theft of other people’s labor”, and the latter conveniently doesn’t mention the mathematical impossibilities of perpetual growth, or that living off of compound interest is effectively stealing from the future (and other people in it, including our children) through inflation and devaluation.

    Our “investor” culture is very much to blame, and it’s unsustainable. We need to live within our means and work for what we use. Planning on using “the market” or “investments” to gamble our way into a life of luxury and decadence simply cannot work for long, and even while it does, it undermines ethics, morals, and even the core philosophies of productiveness and honesty that made the country work in the first place.

    The ants need to starve the grasshoppers.

  5. Jim,

    Great line: “Stop wanting more and start being more.”

    Tesh,

    More than one astute observer has predicted that this bear market will not end until CNBC is off the air because they are completely discredited and there is no longer any interest in the likes of Jim Cramer. We are not even close to that point yet and when the next leg down in this bear market begins many more people will be caught by “surprise.” The hope of “something for nothing” is still strong.

  6. Tesh says:

    Strong enough that it’s worth wondering who *really* profits from such hope. It isn’t the average citizen. 😉

  7. Bob G says:

    The greatest long term risk mitigator of careless investing and, conversely, the best incentive for responsible investing which, over the long term, produces innovation and overall higher living standards via the productive use of resources is the enforcement of property rights.

    When special interests are succesful in having corrupt and career based politicians transfer the consequences of bad decisions, thus protecting those who have made those bad, dishonest or unreasonable asset allocations from the natural market based outcomes of those decisions, we do get exactly what Tesh is alluding to.

    There is nothing wrong or evil in profit or trading the time value of money for labor or other resources. What is bad or even evil is the manipulation of the market system to preclude the harsh judgement of natural market forces on those who would perpetrate the kinds of decisions that Tesh speaks to.

    When we desire protection from the unbiased forces that would protect us all in the long term, and ultimately receive it, then we get neither short term or long term protection. Rather we get fukl time chaos that requires the kind of unraveling that is like a ball of yarn that has accumulated over time.

    People who are naturally frustrated (see Tesh above) are unfortunately directing their anger at the symptom and not the disease.

    When the emotions that drive fear based avoidance of natural market consequences find allies in law and governing principles, the chances that we will come out without a complete melt-down are quite slim.

  8. Tesh says:

    I’m missing something, Bob. What symptom and what disease are you talking about me being angry at? I’m certainly bothered by market manipulation, but my deepest annoyance is with the “something for nothing” gambler attitude embraced wholesale by our culture that doesn’t want to work; it would rather “invest” and get someone else to do the work.

    That culture of selfish work avoidance is what I see as the disease. Everything else flows from that, market manipulation just being a high level manifestation of that mentality, a tool of those with the power to profit from the cultural problem.

  9. Bob G says:

    Tesh,

    I think the “disease” of expecting something for nothing causes the “symptom” of directing anger at investors who seek to profit from the investment of their resources, capital, time and/or talent.

    There is a difference between selfish work avoidance and reasonable returns on capital and resource allocations.

    The medicine that creates a healthy barrier between the “disease” and healty expectations on value creaton is an on-going dose of market reality premised on a deep respect for property rights.

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