Wednesday, May 13, 2009

Bernie Madoff & Greed

After listening to Frontline on PBS, I made the following observations:
1. The rich are no wiser than the rest of us-- witness the French aristocrat who invested his entire fortune with Madoff and advised his royal friends to do the same.
2. Greed blinds.
3. Madoff used the social capital (affinity) of his friends, but offered none to them.
4. When the unregistered investment adviser, Michael Bienes, was asked if he ever questioned himself about earning millions just forwarding checks to Madoff he replied,”I’m a little too lucky. Why am I so fortunate? Then I came up with the answer ... God wanted us to have this and to be a conduit for good causes. .... God gave us this ,,,,”
5. Madoff was a marketing genius who understood how the human brain works. When any investor asked him any questions about his investment strategy, he simply offered to give them their money back. Few did, reasoning that there was no other place where they could earn as much. Their faith in Madoff’s black box strategy is akin to a child’s belief in Santa,
6. The failure of the SEC is emblematic of Bush’s public policy. So much for the “sophisticated investor” theory that was used to justify no regulation of hedge funds, etc.
7. In the end, Madoff's Ponzi scheme was brought down by large investors taking their money out faster than new money came in-- not because they questioned Madoff’s investments, but because they needed cash to cover their other bad investments.
8. What punishment is appropriate for Madoff? Perhaps he should be placed in the stocks in front of the NY Stock Exchange Building every day for the rest of his life. George Bush could be assigned guard duty to keep Madoff from being killed.

Sunday, May 10, 2009

"The Fed now has a very large and very risky balance sheet and it must rely on the Treasury for a potential bailout and recapitalization," so writes Tyler Cowen writes in the New York times, June 9.
This is not true. The Fed balance sheet is simply an accounting device that never needs to balance. No one worries when the Fed buys Treasury bonds to affect bank reserves, and no one needs worry if it buys other bank assets or whatever. Being a professor of economics is no guarantee of economic literacy stuck in historic myth.

Friday, May 8, 2009

Consumer Credit Plunges

The Federal Reserve announced that consumer borrowing dropped 5.2 percent in March Consumers are the weak link in recovery. Even if the banks were sound, business may not borrow and invest if they think consumers won't buy. What to do?

When there are massive unused resources in the economy, there is no need for consumers to save or borrow to put them to work. The government should increase consumer wealth. First step, eliminate payroll taxes for social security. But, that will not be enough. The Treasury should write everyone a sizable check, especially to the poor. And, there is no reason for the Treasury to borrow either (see earlier blogs on government finance). Writing checks is the civilized way to increase consumer wealth, but to make the point, it cash could be dropped from airplanes. I think Bernake suggested this once and earned the title of "helicopter Bernake."
I have mixed feelings about consumerism, maybe people will learn they do not need a lot of stuff to be happy. The millions of rental storage units across the country filled with stuff people bot, but really do not use, is witness to excess. But, this is a poor time to reduce consumer spending greatly.