28 Jun 2009

As Mad as Madoff: The Mystification of Money

The curious case of Bernard Madoff has become a symbol for the moral lessons that people are trying to draw out of the recession, in fact it only reveals how esoteric the discussion about the economy has become. We've heard very little so far about the structural reasons behind the recession, but we've been flooded by an outpouring of moralistic 'observations' about greed and excess that are apparently behind the economic decline. The case of Madoff is being used to illustrate all the ills of unrestrained capitalism that put us in this position. All that it reveals in fact is how money has now acquired a mystical status that is divorced from any real economic analysis.

The case of Madoff does expose some of the failures of capitalism, but they have nothing to do with the popular and media perception of what the real problems are. The investors who lost their savings with Madoff, and bare in mind that many of those were large international institutions and banks and not only individual investors, revealed how little they knew about what their money was actually invested in. For conservative banks like HSBC to lose money with Madoff it must mean that all their 'safety checks' had some how failed. But this is not a result of malicious intent or unnecessary risk-taking, although it illustrates how the relationship between actual productive enterprise and generating value has been seriously compromised.

The investors with Madoff were looking for magic, somehow they convinced themselves that it is possible to generate serious returns on their investment through Madoff's talents. There is a serious abdication of responsibility here but more importantly an indication of a symptomatic problem: the correlation between productive economic activity and making money has been suspended in the minds of many to detrimental effect. Of course it is unfair to single out investors with Madoff when Western governments had been promoting this folly for many years now. Somehow, the Gordon Browns of the world had managed to convince themselves that in the 'New Economy' value could be generated through an economy that is disproportionately dependant on services and finance in particular.

When the media interviews Madoff's 'victims' they always reveal a common attitude that drew them to Madoff in the first place. They had been looking for the 'holy grail' of investments and Madoff's clever ploys convinced them that he possessed it. The aura of respectability and exclusivity must have enhanced Maddof's appeal, but the real problem is that those investors were already in the position of looking for this type of investment. To mistake that for greed would miss the point, who wouldn't like to make easy and lucrative returns on their money after all?

There is a much deeper problem that could explain not only Madoff's case but some of the wider problems in the economy: the mystification of money. Ponzi schemes are not a new thing, and people have always looked for magical returns on their investments. But for a Ponzi scheme to trick some of the largest institutions in the world and a multitude of regulators, there must be a deeper problem at work. The symptoms of mystification of money were already apparent after the dot com bubble burst at the end of the 90s, but very few people understood that problem in its proper context. The correlation between productive economic activity and generating value had been so severely eroded and compromised that the whole episode was treated as a passing problem instead of a symptom of a deeper crisis within Western economies.

It's not an exaggeration to say that the delusion still persists today. Many people are pinning their hopes on the recovery of the stock markets as if the market along can stand in for the wider economy. Stock markets are good indicators of the health of certain companies and sectors under normal conditions, but their value has been completely exaggerated and divorced from an understanding of other economic indicators and the productivity of the economy as a whole. Central banks and governments have reinforced these misleading trends with their over-reliance on monetary and financial measures to stimulate the economy, starting with the fiddling with interest rates through to bail-outs.

The lessons that should be learned from the Madoff affair is that money should be demystified, and the esoteric discussion about greed needs to be replaced with a discussion about the structural reasons for economic recession. Moral parables will not provide the adequate framework for understanding the real problems, only a cold analysis of the state of capitalism today could offer a solution.


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Karl reMarks is a blog about Middle East politics and culture with a healthy dose of satire.

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