Madoff scam is part of "the bezzle"
With the dust settling from the Madoff scandal, Harvard professor Richard Parker tells Tess Vigeland that more scams may yet be uncovered during this downturn. It's part of what economist John Kenneth Galbraith called "the bezzle."
Richard Parker (Courtesy of The Harvard Citizen website)
More on Investing, Wall Street, America's Financial Crisis
TEXT OF INTERVIEW
KAI VIGELAND: The reach of the Madoff scandal is so vast that today the FBI set up a special hotline for investors who think they're among the victims. The agency may want to keep that line open even after the dust settles. Because history teaches us that it probably won't be the last scam of this economic cycle.
There's a name for the part of the cycle we're in -- It's called the "bezzle."
Richard Parker of Harvard's Kennedy School knows all about it. Professor Parker good to have you with us.
PARKER: Delighted to be here.
VIGELAND: So, tell us. What is the "bezzle?"
PARKER: The "bezzle's" a term that was coined by the American economist John Kenneth Galbraith in a book called "The Great Crash: 1929" which he wrote in the middle of the 1950s. What he recognized was that at any given time there is a certain amount of embezzlement going on in the economy. Now this falsely inflates the sense of the total wealth of the economy at that moment. Because, not only does the embezzler now have substantial resources under his control but the embezzled does not yet know that he or she has lost those resources. And so there's, in effect, a kind of double counting of wealth of both the victim and the victimizer. And the inventory of that duplicity is what Ken called the bezzle.
VIGELAND: And at another point in time, then, all of that comes to light, is discovered?
PARKER: Yeah, what happens is that the bezzle varies in size with the business cycle and with the financial cycle. And so, what we've had in the last few years, presumably, is a run-up in the bezzle in conjunction with the run-up in the value of the markets. So that more and more people were drawn into the markets. Money was being made. More and more people came in, threw more money at the market and, as long as the markets kept rising and a new round of investors kept coming in, older investors kept getting good returns on their money and spreading the news that this was a great, sound and high-returning investment.
VIGELAND: So, how does Bernie Madoff fit into the bezzle and particularly within the context of the entire financial crisis?
PARKER: Bernie Madoff is a representative of the species of the bezzler, if you will. And he's by no means unique. This pattern of behavior can be traced back to that famous South Sea Bubble, or the Dutch Tulip Mania. It was a prominent feature in the crash of 1929, and is always present in the run-up in these financial cycles. And then, as the top of the market is reached, and we tip over and start sliding downward . . . of course, new money stops coming in and the game is over.
VIGELAND: So, now that we've entered this bezzle phase, is it safe to assume that there are more Madoffs out there?
PARKER: Oh, I think it's very safe to assume that there are more Madoffs out there.
VIGELAND: Will they be as bad -- $50 billion worth?
PARKER: Oh, I think they could be much worse. I mean . . .
VIGELAND: Oh, geez.
PARKER: Again, what you have to remember is once one or two of these start to tip over, confidence in the market slips. More people begin to pull their money out of various investment vehicles in a rush to get to the door and put it in CDs or cash or whatever. So, we're very likely to see many more of these and larger ones as well, too. I mean, we just don't know what's out there. That is a dark and scary forest to go wandering in in 2009.
VIGELAND: Richard Parker is a senior fellow at Harvard's Shorenstein Center and the author of "John Kenneth Galbraith: His Life, His Politics, His Economics." Thanks so much.
PARKER: Thank you, Tess. I really enjoyed it.
VIGELAND:
PARKER:
Comments
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From Chicago, IL, 03/09/2009
When the full extent of the Bezzle is revealed, our country and our economy will have collapsed. AIG is only the tip of this iceberg...wait and see what will come in the next eight weeks. (3/10/09)
From Animal Farm, DC, 03/05/2009
Matteo Cenciago > George Orwell wrote a book about greed - Amimal Farm.
Well, it was not quite about greed.
03/02/2009
Animal Farm was Orwell's critique of communism and the genocide of 10 million in Ukraine.
01/27/2009
Is this really a 50 billion dollar Ponzi scheme? I know there are people who lost money but if the Feds. can't find the 50 billion, then I want to sugjest. That maybe for a fee or just for a favor to his friends, Madoff just typed up statements saying a person or orginazation had x amount of millions. Then those people could go to real banks and borrow against those fake assets or then Madoff could pay those people for the fake stock suposably sold with money given to him by the real suckers.
From bklyn, NY, 12/19/2008
our justice system is great steal big a.nd you get your butt kissed. steal a lil get punished big time. start locking wall street crooks up in real jail like bklyn house of detention or the tombs in nyc. wall steet would clean up its real quick.no more fed country clubs.
From Vancouver, BC, 12/19/2008
George Orwell wrote a book about greed - Amimal Farm.
How depressing to realize that it is the truth.
From Pequea, PA, 12/17/2008
I tuned into the the "bezzle" story just in time to hearthis: "What he recognized was that at any given time there is a certain amount of embezzlement going on in the economy. Now this falsely inflates the sense of the total wealth of the economy at that moment. Because, not only does the embezzler now have substantial resources under his control but the embezzled does not yet know that he or she has lost those resources. And so there's, in effect, a kind of double counting of wealth of both the victim and the victimizer. And the inventory of that duplicity is what Ken called the bezzle."
I thought it was a story about the biggest bezzle of them all: our fractional banking system and fiat money base! Nope, just a story about some small time crook named Madoff.
From South Pasadena, CA, 12/16/2008
Dear Marketplace,
You and your comentators have repeatedly claimed in recent days that the Madoff Scandal is "the biggest Ponzi scheme in history." Not even close! With an estimated $ 50 billion lost, it pales in comparison to the Russian government's own Ponzi scheme whose collapse triggered the default and devastating financial crisis of August, 1998.
The Yeltsin government's frantic sale of securities at ever-higher interest rates to pay off previous investors inevitably collapsed, taking with it well over $50 billion (including at least $2 billion from George Soros' Quantum fund alone). But that doesn't count another $ 20 billion in depositor's savings lost in less than a week as banks froze accounts while the ruble plummeted in value. Then there was over $ 20 billion in IMF loans that was squandered in a fruitless attempt to prop up the ruble and stave off collapse.
And so on, when you add up the losses in Russia's 1998 Ponzi scheme it totals well over $ 100 billion.
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