In my book, History of Greed I pointed out that at least $11 trillion was lost in 2008 alone.Greed had a lot to do with it. Compared to these cumulative losses, Madoff, causing losses of $64 billion or less, was a piker.Mostly, the huge losses in household net worth are due to the sharp drop in housing prices. To look at why, here is an excerpt from my book, History of Greed, reprinted with the kind permission of John Wiley & Sons, Inc.
Fraud and Greed had a lot to do with it.
In general, pundits, seeking simple answers, blamed it all on sub-prime mortgages, or on credit default swaps, or on auction-rate securities, or whatever, but these answers are unsatisfying. They are at once both too complex and far too simplistic. For the real explanation of what happened, however, we need to look to the experts, to history, to literature and even to my Grandma Rachel.
My Grandma Rachel
Grandma Rachel Leah Horowitz, born on Christmas Day in 1893 at the end of the 19th century, was a very wise lady who lived until the age of 92. Her husband had died young of esophageal cancer when she was only 39, leaving her with nine children and a run-down liquor store. Overcoming many obstacles, she raised her children well, and built up the store into a very successful enterprise where she bought and sold wine, whiskey, liquors, and schnapps. She liked the business, she said, because the bottles were real. You could hold them, smell them, drink from them, and enjoy them.
There were other businesses in London that didn't make anything or sell anything but just traded paper, which turned into more paper. "This is not a real business!" she used to say. "It is luftgeschaeften," which, in German and in Yiddish, means "air business" or "ethereal business." Someone who engaged in luftgeschaeften she called a luftmensch (an "air" person or schemer), whom she would have nothing to do with. My beloved Grandma Rachel Leah lived through the Great Depression, and survived her home being bombed by the Nazis during The Blitz.
Little did she know back then how amazingly prophetic her words would prove to be for the 21st century. What happened in the United States of America was essentially the result of all the luftgescheften run by the luftmensch financial wizards who turned money into paper and then supposedly back into even more money, siphoning off outrageous profits in the process. When the music stopped, the entire house of cards suddenly collapsed, and all that was left, of course, was luft (air) and worthless paper.
Tevye the Dairyman
In her dislike of luftgescheften, my Grandmother, who was steeped in Yiddish literature, was (at least subconsciously) influenced by the Yiddish literary giant, Sholem Aleichem (the literary pen-name of Sholem Rabinovitsh). He, unforgettably, wrote about luftmenschen in his novel, Tevye der Milkhiker (Tevye the Dairyman). First published in 1894, it's known throughout the world, largely because of its adaptation into a play by Arnold Perl called Tevye and his Daughters, which became the famous Broadway musical and film, Fiddler on the Roof.
Menachem-Mendl, a distant relative of Tevye, the (impoverished) dairyman, is a luftmensch sans pareil. He begins talking to Tevye, who made a little bit of money helping out a wealthy lady, about stocks and options in a way that Tevye, a simple man, can't possibly understand. Then, he gets to his point. Menachem-Mendl promises Tevye that he can turn 100 rubles into 1,000, and Tevye would be a fool to forfeit the opportunity. Tevye agrees to give Menachem-Mendl his last hundred rubles in order to enter into a "shutfus," or "partnership," with him--"I put in the money, and Menachem-Mendl put in the brains"--with the two of them splitting the profits (and thereby neatly sidestepping the age-old Jewish prohibition against lending with interest).
You know what happens. It was all lost. Sholem Aleichem also describes in detail Menachem-Mendl's ultimate failure at various other ethereal (luft) money-making schemes--such as his attempt at selling "Londons," an apparent reference to a currency speculation, which Menachem-Mendl describes to his wife as "a very refined substance" in that "you can't see it." Classic luft.
Luftgescheften Then and Now
One of the early documented examples of luftgescheften, which presages many other episodes was recounted by Josseph de la Vega, a Portuguese Jewish trader who emigrated to Amsterdam to avoid persecution from the Spanish Inquisition. He famously wrote in 1688: "This year too was a year of confusion for many unlucky speculators declared in one voice that the present crisis was a labyrinth of labyrinths, the terror of terrors, the confusion of confusions..." He could just as well have been speaking about the state of the national and global economy in 2008.
The value of global financial assets including stocks, bonds and currencies probably fell by more than $50 trillion in 2008, equivalent to a year of world gross domestic product, according to Claudio Loser, a former International Monetary Fund director.
"This crisis is the first truly universal one in the history of humanity," former IMF Managing Director, Michel Camdessus, said at an ADB forum in Manila. "No country escapes from it. It has not yet bottomed out."
Savvy investor, George Soros, said that the world financial system has effectively disintegrated, and that there is as of yet no prospect of a near-term resolution to the crisis. Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union. He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system.
"We witnessed the collapse of the financial system," Soros said at a Columbia University dinner. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom."
Who knows what other "unthinkable" turbulence is yet to come?
The economy collapsed due to derivatives, strips, collateral debt obligations, credit default swaps, auction rate securities and all manner of exotic financial instruments that dominated the financial markets, beginning in the '80s in a feeding frenzy that reached its apex during the two-terms of George W. Bush, the 43rd president of the United States.
What happened is yet another chapter in the sad but recurrent story of greed gone wild. Greedy financial wards, promoters, investment bankers and the rapacity of their cohorts and all-too-willing accomplices were all allowed to run unchecked by a complacent government.
Society apparently forgot the famous words of Hank Rearden, the hero in Atlas Shrugged, the great novel by Ayn Rand (1957), "I work for nothing but my own profit -- which I make by selling a product they need to men who are willing and able to buy it." Instead, of making and selling products people need, we in the United States mostly imported other people's products and we sold luft. Now, we all must pay the price. Selling luft honestly is bad enough. Selling it dishonestly just makes things worse. As an anonymous blogger wrote, "Piracy made lots of money. Slave trading made plenty of money. The Robber Barons made money. The problem is that it's somebody else's money - taken, not made.
As the Financial Times remembered, the famous economist John Kenneth Galbraith once proposed a measure of the economic cycle called the "bezzle"; it is a measure of the inventory that has been purloined from investors. n fat years, the bezzle grows as auditors relax. In the lean years, it shrinks as investors become cautious. The allegations against Bernard Madoff, and now Sir Allen Stanford, suggest the bezzle is large - but shrinking.