The Human and Non Human Face of Greed

Unless you live on another planet, by now you have heard about the Bernard Madoff scandal. Through his investment company, he lured trusting investors (including personal friends as well as high level banks and investment companies) into a Ponzi scheme that resulted in the loss of billions of dollars. Essentially a Ponzi scheme brings in investors, and then uses money coming in from subsequent investors to pay what appears to be returns to the early investors. Of course, this unravels because the only way this works is to keep expanding your base of new investors, and that is not possible since the number of human beings on this planet is finite.

What makes people invest in Ponzi schemes (or multi-level marketing, for that matter)? The lure of assured positive returns, no matter what. We have seen that this is not possible in all environments, but greed and fear can blind people - or at least, cause them to see only what they want to see.

This scandal puts a human face on false markets and false returns. I do believe that the last two bull-and-bear scenarios were also cooked up with false pretenses. The 1998-2000 bull market was fueled by insane expectations regarding the profits of high tech and Internet companies (many of whom had no real product that created actual economic value). When we finally looked to see where the money was, it wasn't where we thought it was (in the true value of the companies) and stock prices dropped as the assets were drastically re-valued. Many of those firms no longer exist (remember Pets.com and the sock dog puppet?). The 2003-2007 bull market was fueled by low interest rates and the housing boom, which drove financial institutions to "engineer" and sell securities backed by home mortgage debt; by the "engineering" I refer to the fact that these securities were then borrowed against, and the money created from the sales was used to purchase more of the same type of securities. So, theoretically, the same loan was sold 1o to 40 times. Again, when we looked to see if the money was there, it wasn't , since the financial engineering created a sort of technical Ponzi scheme. The money wasn't there, and the assets had to be revalued. This time, it wasn't just stocks, but home values, and even the viability of the banks and investment firms (some of which have gone out of business just like Pets.com) that plummeted, along with our confidence in "the system."

This may seem depressing, but we now have a chance to dust ourselves off, change our thinking, and figure out ways to help the economy recover through the creation of real value and growth. Perhaps after two "trickster" markets, during which we really didn't make any progress, we can now set aside greed and fear, and put some real thought into what we do going forward. I have appended an interesting chart to this rather long blog (making up for the lack of posts thus far) which illustrates two things: the two "false" markets, and the possibility that we have once again returned to reality with the chance to move forward with true growth.