The Way We Live Now

Here is an extremely well-written article by a guy who says he was wiped out by the Madoff Ponzi scheme (h/t Megan McArdle). It’s like something directly out of Trollope.

The writer seems like a really thoughtful, balanced person who didn’t deserve to have his life savings stolen. But, like many such stories, you have to ask yourself whether this would ever be a prudent way to manage your finances:

It began when we sold our home at the peak of the market, collected what was left from an old divorce, found other monies and then, with a combination of pleasure and trepidation, handed our bag of cash over to someone named Stanley Chais, the Los Angeles network organizer for a man named Bernard Madoff.

Of course, we never heard the name Madoff … and had no idea how he achieved such fantastic returns over the past 40 years.

Again, I feel bad for the author, and am Irish enough that I figure that just by writing this I am inviting the same thing to happen to me. But I sure don’t think taxpayers should be on the hook to make good any of these losses.

The SIPC is the securities industry body that provides guarantees up to $500,000 for each investment account, but does not appear to have the cash to pay out all claims against the Madoff fraud. There is already talk of a “government infusion” to support it (though the author of the piece does not call for any such thing). Unless this is some pre-existing commitment, my take on this is simple: No Way, No How.

I have written that I think the right regulatory framework for the financial sector is tiers of compartmentalized risk, so that any more less sane adult can choose to squirrel away money in government protected assets with relatively lower returns or invest in speculative ventures with high odds of failure but potentially large payoffs. But to retroactively support somebody who has put $1.2 million in the hands of an unknown investment fund that somehow magically can grow its value by 15% every year, and then lost everything when this was revealed to be (surprise!) riskier than advertised, is to treat adults as children. This is the same basic logic by which I rejected the emotional argument to bailout the much more sympathetic workers of the UAW, and I would therefore surely apply it here.

We use the abstract expression “deleveraging” to describe what’s happening in the economy right now. That’s fine for a textbook or a newspaper article. But what’s really happening is that people are learning that the world is not as benign as many people in America talked themselves into believing it to be. Most middle class Americans are going to drive older cars, live in worse houses and travel less than they thought they would even a couple of years ago. They will be less able to afford to move to the school district that they think will put their kids into the school that they think best for them. They are going to retire later, and have less money to spend when they do. This is painful and dispiriting. It is unequally shared suffering, and much of the distribution of relative pain is driven by luck, which makes it especially bitter to those who have been unlucky.

But the right strategy for dealing with a more unforgiving environment (or, more precisely, one that we now correctly understand to be more unforgiving than we previously thought it to be) is not endless socialization of costs by the federal government, but increasing prudence, innovation and adaptation. A widely-shared feeling of financial security is, unfortunately, a luxury good, and we are about to start living in much less luxurious times.