Madoff & Ponzi Schemes: A Moral Isssue

In a Ponzi scheme, such as that perpetrated by Bernie Madoff, are those investors who withdrew profit before it collapsed obligated to return them to a pool in which the greater number of losers could draw on? Is the claim on any money recovered by the bankruptcy trustee to be prorated to the the owners of false balance sheets at the time the scheme collapsed?

After all, the winners were largely chosen at random so Madoff could point to them to cast luster on his fraud. The "winner" investors did not earn anything and the so-called positive balances were actually other peoples' incoming money.

Regardless of the eventual legal rulings, this is a deep moral problem. What do you think?

The legal issues are described by Diana Henrique in "A Lasting Shadow," in the NYT, Dec. 11, 2011.

Space Tourism

Some mega billionaires use their money to help alleviate poverty in Africa, but Paul Allen uses his to enable space tourism. Grow up, Paul.

Transaction Cost Minimization & the housing crisis

Home mortgage holders and the financial organizations that bundled them for re-sale listed the deed (separate from the promissory note) with a private firm, called Mortgage Electronic Registration Systems (MERS) because it saved the cost of public registration of deeds and promissory notes. The transaction cost economics of Nobel prize-winning Oliver Williamson and others argued that reduction of transaction costs was a clear gain for everyone. But, they forgot that not all affected parties may be party to any given transaction whose costs are minimized. The original mortgagee desires a registration system that is transparent. But with MERS, home owners can't tell who owns their mortgage after it is re-sold numerous times and packaged with others in a bond. This is now being contested in the courts.
Christopher Ketcham, "Stop Payment! A homeowners' revolt against the banks," in the January issue of Harpers suggests that the real estate crisis with its complex highly leveraged derivatives might not have happened without MERS.

Nobel Prize political rhetoric

From a recent story in NYT about the recent Nobel Prize winners:
Mr. Sims and Mr. Sargent "now find themselves thrust into an uncomfortable spotlight. Conservative voices, like the editorial page of The Wall Street Journal, have claimed them as their own. The men’s work on economic cause and effect and the theory of rational expectations — which maintains that people use all the information available in making economic decisions — proves that Keynes had it wrong, these commentators say.
It would be a provocative thesis — if it were true. But Mr. Sims and Mr. Sargent say their work is being misread. Both, in fact, are longtime Democrats who maintain that government can, and should, play a role in economic affairs. They stand behind many recent policies of the Obama administration and the Federal Reserve."
In fact, Keynes with his "animal instincts" had it right. Investors are ruled by their passions and observations of what others are doing. If others are getting rich by investing in sub-prime mortgage bonds, then many will follow suit and there you have a bubble bound to break.
The story in the Wall Street Journal is a good example of how the media shapes policy by lies.

Euro crisis

Quoting Thomas Palley, New American Fund
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The solution is to create a European Public Finance Authority (EPFA) that issues collectively guaranteed debt on behalf of eurozone governments which the ECB is allowed to buy. That would enable the ECB to manage governments’ interest rates via open market operations, as does the Federal Reserve and Bank of England. Proceeds from EPFA debt issues would be distributed to countries on a per capita basis so that national governments would control all spending decisions. Country liability for EPFA debt would also be on a per capita basis, and EPFA decision-making would be governed by member countries with voting rights again granted on a per capita basis. That would render EPFA democratic.

The critical feature is that EPFA’s power to issue debt would be used immediately to finance the rollover of existing debt at lower rates, and it would also be used on a permanent basis to finance current and future budget deficits. An EPFA would therefore be a solution to both the current crisis and to the euro’s design flaw outlined above."
This suggestion is equivalent to my proposed zero-interest public debt issued in severe recessions. If the ECB returned the interest it earns to the borrowers, It amounts to zero-interest debt. I know this is radical, but only a big change will do.

With respect to conflicts within the Euro zone countries, The New York Times reported:
"One dividing line is that the Germans, along with the Dutch and the Finns, remain adamantly opposed to what some consider the simplest solution: allowing the European Central Bank to become the euro zone’s lender of last resort and to buy sovereign bonds on the primary market, in unlimited amounts."
I am convinced that this is the best and only solution. It is a happenstance of history that a German is the President of the ECB and that the German thinking is dominated by a past experience of disastrous inflation. This ghost kept the ECB even from lowering interest rates until recently.
Italian leaders announced an austerity program to ostensibly improve their economic growth. Don't these people learn from experience? The British have been going down this road for some time and their economy is stuck in the mud. Some reductions such as in the very generous Italian public pensions are in order. But, massive reductions in government spending just create more unemployment.