Paul Krugman’s column in the New York Times today, “The Madoff Economy,” uses the $50 billion ponzi scheme of Bernard Madoff to slam the whole investment industry. Krugman says that it appears that every year there is at least $400 billion a year in waste, fraud and abuse in the financial sector and that this slosh of money has corrupted our whole economic and political system.
Krugman asks: “How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole? The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it’s not just a matter of money: the vast riches achieved by those who managed other people’s money have had a corrupting effect on our society as a whole.”
Excerpts:
- Last year, the average salary of employees in “securities, commodity contracts, and investments” was more than four times the average salary in the rest of the economy. Earning a million dollars was nothing special, and even incomes of $20 million or more were fairly common. … The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.
- Consider the hypothetical example of a money manager who leverages up his clients’ money with lots of debt, then invests the bulked-up total in high-yielding but risky assets … Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he’ll keep those bonuses.
- In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse.
- Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way. From Bush administration officials like Christopher Cox, chairman of the Securities and Exchange Commission, who looked the other way as evidence of financial fraud mounted, to Democrats who still haven’t closed the outrageous tax loophole that benefits executives at hedge funds and private equity firms (hello, Senator Schumer), politicians have walked when money talked.
- There’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing. After all, that’s why so many people trusted Mr. Madoff.
- Now, as we survey the wreckage and try to understand how things can have gone so wrong, so fast, the answer is actually quite simple: What we’re looking at now are the consequences of a world gone Madoff.
