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Is the Bernard Madoff Financial Fiasco Tied to the Global Economic Meltdown?

Name: Stephen Spitler
City & State: Sneads Ferry, N.C.

Question/Comment: How is the Bernard Madoff financial fiasco tied to the global economic meltdown? Is it just a timely coincidence? The thought of a connection somehow seems important.

Paul Solman: Let's see if I can resist the urge to make more of a connection than may be warranted. As it happens, when I received this question a few minutes ago I was reading about a Florentine businessman of the Middle Ages, Francesco Datini. Known as "the Merchant of Prato," he's famous because his correspondence, discovered in the 19th century, ran to 140,000 letters, most of them about his business. Here's the extract I came upon, moments before your email:

"The greater part of mankind," he wrote to one of his managers, "is evilly disposed; the earth and sea are full of robbers."

And Datini, invested accordingly: with great caution and scrupulous investigation. Unlike Bernie Madoff investors Steven Spielberg or Mort Zuckerman, say. In short, like the poor, the corrupt we have always with us.

That said, there is a connection to the current crisis, I think - in the MAGNITUDE of what Madoff made off with.

How could it be that so MUCH money was entrusted to him? Because there is now so much more wealth sloshing around the world. And it's been created quickly: most notably, by the advent of enterprise in Asia and the former Iron Curtain countries. As author Clyde Prestowitz put it in the title of a book a few years ago: "Three Billion New Capitalists."

These people (though not all of them, of course) had for the first time entered the world economy. They were producing goods and services for which other people were willing to pay. They thus produced MORE. And that, friends, is economic growth, for better and perhaps worse. More economic growth = more wealth. All there is to it.

This resulted in what was referred to, up until recently, as the "global savings glut." That is, there was SO MUCH new wealth it couldn't find enough opportunities for investment. (You can see where I'm going with this, I trust.) If too much wealth is chasing too few opportunities, it's a seller's market. If what you're selling is an investment opportunity for which you want someone to loan you the money, you might call it a BORROWER'S market.

And indeed, interest rates plunged as lenders competed with one another. The Federal Reserve, famously and now notoriously, had helped encourage it all by driving interest rates down in the U.S.

Steven Spielberg is, by all accounts and evidence, a remarkable man. He has been selling into the global economy throughout its unprecedented 30-year boom. He has given pleasure to millions (billions?) and they've paid him for so doing. He has thus amassed great wealth. SOMEONE has to manage it for him. He hears of (or meets) a money manager with an apparently superb track record whom many wealthy people trust: a guy who pays 10 percent a year when the "risk-free" rate is around two percent (what you get on T.I.P.S. - U.S. Treasury Inflation-Protected Securities).

At this point you could say: Spielberg (and investors like him) were fools. Who can promise to deliver eight percent above the risk-free rate without taking crazy risks? It's pure greed. Or you could say, quite plausibly: eight percent is no big deal, given the returns of the past. Not greedy at all. Especially since Spielberg is GIVING THE MONEY AWAY.

So Spielberg hands over the Spielberg savings glut to a money manager, as do countless others. In an era of extravagant growth and burgeoning wealth, it was to be expected, as was the fact that this one: Bernie Madoff, little by little and perhaps quite innocently at first, became "evilly disposed."

Editor's Note: You can watch the NewsHour's most recent coverage of the Madoff fraud scheme below.

-- Posted December 17, 2008 | Comments (2) | Permalink