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.
I have had a couple conversations about the failing economy with middle-aged women, met in passing here and there, checkout lines, etc. We shared a feeling that the tightening of credit could be a good thing for the young. They’ve become too focused on material things.
We grew up in a time when people and community were more important than the latest techno-toy, and it was a better time.
I heard Derrick Dufresne, an advocate for people with disabilities, say that a tighter economy could lead to a return to our roots, stronger reliance on family, not necessarily a bad thing.
No one wants to worry about where the next meal is coming from, or having a roof over his/her head. However, many of us know that we could be happy with less.
— Julana · Dec 16, 07:54 PM · #
this post reminds me of Andrew Mellon, Hoover’s Treasury Secretary:
****Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”****
what the current financial crash and recession has exposed are a number of structural flaws in the American economy. fundamentally, the economy has been driven by lots of people borrowing money off their credit and then their homes to buy things they can’t really afford. A lot of that stuff is useless shit shipped here from overseas. But a lot of it isn’t—health insurance, rent, utilities, gas and food. Since most people’s wages have been stagnant or falling through the Bush years (and arguably for decades), they’ve been forced to borrow to cover the cost of those necessary goods; when they finally ran out of things to borrow against, the whole house of cards fell apart and here we are.
It’s an hell of an “unforgiving” environment, but contra Mr. Manzi and Mr. Mellon, it doesn’t have to be that way. We can fix our macro structural flaws and lay the foundation for long-term, sustainable economic growth. First, the shadow banking system must be destroyed. Then nationalize the banks and clean up their assets until they are no longer bankrupt. Second, health care. We need universal health care, we need to control costs and take the costs off businesses. Third, massive investment in basic research, alternative energy, mass transit, broadband, power grids, and (my pipe dream) space. These investments will create jobs and spur the formation of new industries, which we desperately need in order to stay competitive with other countries. Fourth, education. I don’t know what to do about this but we must do something. Generally speaking, if Obama manages to deliver on his promises we ought to be in decent shape. If not, well, “less luxurious times” is a very charitable way of putting it.
p.s. i’m with you, Manzi: fuck Robert Chew. I was smarter with my money when I was 6 and had to count nickels to put into my piggy bank.
— raft · Dec 16, 08:46 PM · #
It will be interesting to learn if ‘the rich’ have 6 months expenses saved up like many of us proles.
— Klug · Dec 17, 12:30 AM · #
Today’s news indicates that Madoff probably had about 4000 investors, which, at $500,000 a pop, comes out to $2 billion, which is within SIPC’s capacity.
— y81 · Dec 19, 06:24 PM · #
Isn’t his name (Madoff) appropriate? Honestly, you couldn’t pick a better name if you were going to be a thief.
— Joules · Dec 29, 05:45 AM · #