Beating the System . . . to DeathJuly 10th, 2009

The irony of the Bernard Madoff affair is that the very people who could have been protected from him by responsible financial regulation would have hollered like hell at any move to restrain him. Madoff ’s cutomers, moneyed people looking to double their wealth every ten years without working, banked with him because he was a cheat. Rich people know, better than anyone, that there’s no legitimate way to make that kind of money on an investment.

Madoff’s customers relied on him to evade regulation at every turn and on his friends in government to accommodate him. And so, with a wink and a nod from regulators in the federal government, Madoff’s accountants regularly overvalued his assets in reports to investors. Money kept rolling in from the richest of the rich, and their wealth, at least on paper, grew at a rate double and triple what your savings earn. Government regulators kept their distance, and it wasn’t until markets failed that Madoff’s true value was exposed.

Some of Madoff’s money-making tactics were clearly illegal, and most were morally objectionable. Even so, he and his clients were allowed to trade without restriction, facilitated by the progressive relaxation of laws and standards over the course of the Reagan/Bush/Clinton/Bush regime. When the economy crashed last year, at the culmination of outlaw government, securities trading laws were (and remain) as permissive as at any time since the crash of 1929.

The typical 1929 investor vehemently opposed any sort of governmental regulation–even measures that would have protected him–and that hasn’t changed much over the intervening years. Being an investor in a company with overvalued assets is a good thing until you’re discovered. Our system of unregulated markets encourages the overvaluation of assets. Anything that covers up the truth is a thing of monetary value to investors in such markets. This makes investors, more than other people, tolerant of ethical lapses in business and government. Investors just want to make money, after all, and they don’t want anybody looking over their shoulder or getting in their way. A mandate for legitimate trading and accounting is the last thing these people want, and corporate directors and managers who propose such things don’t last long in business.

When people put money aside to make money in a market corrupted systematically by relaxed standards, they bet against their personal core values and impair their own ethics. Investors seem to be OK with this. They give money to people who will, for money, use it to subvert any value or corrupt any virtue, to the full extent allowed by law and practice. In that sort of market, the value of an investor’s holdings is at all times imperiled by strict standards and honest practices. You can see this today in the government’s refusal to acknowledge the insolvency of the nation’s banks. If the truth were told, investors would get what rich people call a “haircut,” and they wouldn’t need a comb for a good, long time.

It would be nice if business had not become a branch of organized crime and instead remained a collection of corner druggists, independent newspapers, family farms, neighborhood brokerages and agencies, and other first-tier enterprises that trade on integrity and reputation. These sorts of businesses have been eliminated or swallowed up gradually by less scrupulous, (and consequently) more powerful players, and they have become extinct in most places. Conscience, it turns out, is the heaviest burden a business manager can carry in the 21st Century. Conscience is costly, and the costs have changed the basic character of business, so that it’s simply predatory now. Non-predators are prey.

In Madoff’s case, given the permissive atmosphere and its widespread acceptance among capitalists, sound business practice was simply a matter of cashing out in time. Some did and some didn’t, but they should all have known they were dwelling on a bubble. And they did know it. That’s why, corrupted thoroughly by the investments themselves, these people, through proxies in government, rejected measures that could have exposed their investments’ actual value. Their own departure from principle left them unprotected, and some lost everything.

They were treated justly by a market they helped to defile. The rest of us got screwed.