We are all Madoff investors

By J Saft
January 2, 2009

James Saft Great Debate — James Saft is a Reuters columnist. The opinions expressed are his own —

It was perhaps inevitable that we ended 2008, the year we learned we were up the creek, with a great financial scandal: the Madoff Ponzi case.

What is even more remarkable is the way in which the alleged fleecing of many billions of dollars from wealthy people and charities — investors who should have known better or employed people who did — serves as a mirror for the broader culture, showing how we went wrong and where we are left now that we realize our errors.

The main difference really is that Madoff’s purported victims, or enablers or co-fantasists, say they found out their wealth was illusory all of a sudden whereas for most people in the English-speaking world, this is happening little by little.

Bernard Madoff, for those of you just waking after a long winter’s nap, is accused of defrauding as much as $50 billion from investors in funds he promised would deliver a steady — suspiciously steady — 12 percent or so a year in good times or bad. But rather than a miraculous hedging strategy, authorities say Madoff has confessed to running a pretty simple Ponzi operation: paying out “earnings” to those who demanded them from new commitments of cash from those who wanted in. And of course, given that the man could “make” heady sums with no risk in all markets, the cash flowed in and the redemption calls were, for a long time, manageable.

Madoff has not appeared in court to formally answer the charges. But that there was one man, or a man with confederates perhaps, who was willing to engage in a harebrained fraud that was mathematically doomed to failure would not be that surprising, sadly. That an army of either rich sophisticated investors or their highly paid advisors played along and, seemingly, genuinely believed that they were growing rich is far more interesting.

One point, highlighted by Tim Lee of consultancy piEconomics in Stamford, Connecticut, is that the $50 billion headline figure is about as inflated as California real estate prices were a year ago. That $50 billion is likely to turn out to be not the amount lost but the amount people wrongly thought they had. It’s likely that the actual strategy followed by Madoff could return little more than Treasury notes minus fees; in other words he could make for you what you could get for yourself with no help but then pay himself handsomely for the gymnastics.

That implies that a lot — for long-time investors the vast majority — of their “money” invested and now “lost” with Madoff was about as notional as a credit default swap contract with a man you met outside the bus station downtown. Much of the money never existed, other than on the attractive and no-doubt glossy statements sent by Madoff. It was simply what people would have had if he’d been a genie.


And it’s in this way that we are all Ponzi limited partners: we too thought our retirement funds and houses were growing miraculously, though ours was an illusion fueled by debt rather than fraud, and we too made plans based on those asset values that now stand in ruins.

“The financial system as a whole has had the characteristics of a Ponzi scheme if we look at it fundamentally,” said Lee, who was very early in warning about deflation.

“By this I mean that we should think about the true value of assets as being derived from the future flow of goods and services that the assets can lay claim to or produce. If market prices of financial and real estate assets rise a lot but there is no increase in the ability of the economy to provide goods and services in the future, then the apparent increase in wealth is illusory.”

That means that savings must rise and expectations about the kind of growth and income that capital can safely command must fall. The process of everyone figuring that out over the next year or so will be a continued hole in the side of the stock market and, despite the risks inherent in Treasuries due to quantitative easing and fiscal stimulus, a boon to holders of government debt.

There are a lot of individuals, pension funds and non-profits out there who have penciled in benchmarks for returns on assets that are probably too high for the coming cycle, irrespective of the losses of this year, and I am talking about people thinking of a modest 8 percent.

Those people and institutions will be forced to take steps to right that, and this time it won’t be by searching for risk or yield, it will be by saving more and cutting back on expenditure.

This will cascade through the economy and until the savings are replenished and productively deployed, higher government spending will be a balm on a burn at best.

— At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click on here. —


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Social Security = Ponzi Scheme. Are they not taking my money to pay off earlier “investors”?

When it’s my time to collect, will this Ponzi still be operating? Probably not!!

Posted by Patrick Fuchs | Report as abusive

This whole affair reminds me of the Hans Andersen story “The King’s new clothes”
All these “Professional” investors who carried out no checks and just believed what they were told. Amazing!

Posted by Brian E. | Report as abusive

““The financial system as a whole has had the characteristics of a Ponzi scheme if we look at it fundamentally,” ”
Thank you, I came to the same conclusion when I looked up “fractional reserve banking”. And that even though – or is it precisely because? – I haven’t been taught economics and finance at the university or some fancy MBA factory.
We might even find – after some careful introspection and reflection – that “growth” itself is a inlusion if not a hoax. Even the “modest 8%” is too much and might turn out to be illusionary.
Good article, congratulations.

Posted by Robynne | Report as abusive

Socialist Security system in America was developed to counter Communist threat.

Americans do not like Communism, but prefer Socialist Security system of paying a few after collecting from a large pool of workers.

If situation reverses itself, which is paying a large number of elderly people after taking from a smaller number of young workers, Socialist Security system will collapse.

In that case, Federal Reserve and the U.S. Treasury will bail everyone out by printing more greenbacks. So, don’t worry!

I hear now that there is a strong possibility of a massive $50 billion Federal Reserve bailout of all Madoff victims too as soon as the new president takes his oath of office.

Posted by Majumder | Report as abusive

The sad truth is that the entire wall street structure has become a legal Ponzi scheme. When the owners (stockholders) pay for stock that contains no assets because of leverage (debt) and managers become rich while leaving investors without equity (value) there is no difference between what Madoff, Fuld, Prince, Wagoner, etc.
It would be easy to write an extensive paper on why there is no essential difference between these players actions. Investor’s trust will be restored by limiting leverage, aligning management pay to the long term performance of the company, making pay levels sensible, and ensuring management is unable to provide misleading statements to investors (owners). Lehman, Citi, Aig, etc all knew they were heading for bankruptcy yet had no plans to carry it out in an orderly manner. That is the height of incompetency, yet they are left with enough money to ensure their entire families never have to work another day for multiple generations. I as a stockholder (owner) am left with nothing. That is the definition of a Ponzi scheme!!!!Can someone please explain to me why their actions are legal, because I can’t see the difference.

Posted by db | Report as abusive

Food for thought, Patrick. I suppose people will save, but maybe not as much as before! It doesn’t pay as well as we’d gotten to expecting. I think there will be an inclination to spend your money for pleasure, and live in a home in which you can survive on Social Security (true of a lot more homes now than formerly), because investing can’t be counted upon to make a fundamental difference. Oh, and of course just plan on continuing to work. Handy, with all those boomers leaving the workforce (and eating their assets). I think Social Security, the eternal Ponzi scheme, will still be with us, but it won’t pay much.

Posted by Pete Cann | Report as abusive

During the Keating S&L bailout,Keating’s Catholic faith was brought into the picture several times.Will Madoff’s Jewish faith be also taken into consideration,or are we to be believe this particular Crook came into being in a vacuum ?

Posted by bruce | Report as abusive

There is less alleged about Madoff’s guilt than about O.J.Simpson’s. His own son’s apparently turned him in as noted in several articles in Reuters alone. And according to several of those same articles he was arousing the suspicions of the Security and Exchange Commission. The SEC blames Bush budget cuts for their inability to prove anything while he was active. That also was mentioned in Reuters and the International Herald Tribune among others.

Speak for yourself when you say we all wanted to believe in the miracle economy. Property taxes in my area went giddy just like the phony economy. The market collapsed but there are still true believers in the bubble cost of housing alive but maybe not so well in the Town Halls of red white and broke USA. Somehow they haven’t got the picture yet.

Posted by pvr | Report as abusive

I am surprised nobody has killed him yet out of anger.

These guys need to know that they won’t get away with these scams…stealing money especially.

Posted by A. Ramsey | Report as abusive

Madoff did replicate the US dollar ponzi scheme. In case of dollar the govenrnment just makes sure that other countries are willing to accept paper dollar first and then just collects those dollars by issuing treasuries.

Posted by Gurgen | Report as abusive

Simple and well written. Funny how simple realities are revolutionary when too many people made money selling other ones. I think PVR captured that “red white and broke” still haven’t understood the fundamental acknowledgement, they’ve yet to acknowledge that the “value” of what they held-real estate, or investments were always variables. When something is pushed for so long as a “sure money maker”, when people finally do invest, they feel entitled to large appreciations or returns. When these numbers arrive it’s not a gift, it’s what the investors feel entitled to. If their investment loses value, the investors feel tricked, wronged, or suckered. The true weakness to investing in our economic system is when investors don’t understand that the “value” they hold is as fickle as the human psyche, since, to the largest extent, that is what drives the market.

Posted by Alex | Report as abusive

Supposing and investor’s statement with Madoff showed a $200,000 gain in October, 2008, and such an investor had spent such an amount from other sources after allowing for taxes, believing he was spending money he had in his Madoff account, it is certainly “lost” to this investor.

Posted by V. Ray | Report as abusive

It’s my understanding that if one seeks a long-term perspective as to real, post-tax returns on capital invested, the relevant number is in the range of 3.0-3.5%. Any projected let alone promised return above that level is suspect. Granted, there will be deviations from the norm, whether due to individual ability or individual fortune. Still, those are the hard numbers. Any expectation of sustained returns above that level entails an accompany expectation of consistently defying the averages. Which seems, in truth, not to happen, at least not for long. Increased return equals increased risk, with no exceptions, Ever.

Posted by Big Al | Report as abusive

To claim that social security is a “Ponzi scheme” is an expression of “simpliciter” If you extended that reasoning, than all government, at every level, from the federal to the town hall, is a fraud. You could just as easily say that all tax colection and expenditure is a “ponzi scheme”. That is nonsense.

Doesn’t the Social Security trust fund have assets in the form of IOUs from the treasury? Of course they lend the fund. What else can an agency do with billions of dollars? Keep it in millions of cookie jars? Those IOUs are evidently more than Madoff’s customer’s got. The government owns billions of dollars of real estate and facilities of all kinds. There are assets behind its debts and it has the ultimate money gathering power, the ability to tax!.

But before even a bankrupt country has to resort to a national garage sale – they have the legislative power to “design reality”; economic, social and political. Even a fraud of a country would never disappear. It would simply create a new one. There aren’t a whole lot of options in that regard.

Posted by Paul Rosa | Report as abusive

Like Paul Rosa said, a “fraud”, is not really a fraud, if it has the ability to go on indefinitely.

If somehow, Bernard Madoff, could keep generating the cash to pay back his investors, using whatever method he could, no one would have found out it was a Ponzi scam. However, he does not control the entire economy, thus sooner or later, he would lack the funds to pay up; that’s the only reason why he was busted in the end.

At present, the government is able to fund its social programs without much trouble, and is likely to be able to do so for a long time to come. If anything happens to those funds, at the very most, we would receive slightly less benefits from those programs instead of getting zero returns in an instant, unlike the victims of the Madoff scandal.

Posted by Maurice | Report as abusive

From the horse’s mouth, to wit:

http://www.ssa.gov/pubs/10055.html#curre nt

“The trust funds will be exhausted in 2041. At that time, Social Security will not be able to meet all of its benefit obligations if no changes are made.”

Posted by Pete Cann | Report as abusive

Dear James

What goes up must come down. Unless, of course, we are outside the earth orbit! In which case we could be floating to anywhere.

A house is not a home. I do not understand why people need to over-eat, over-consume on future income without any saving for the rainy days.

The business model of pursuing growth for growth sake is broken. We need to have sustainable growth and responsible consumption. It will not come naturally as we are brought up to expect ‘growth is a good thing’ and to consume is divine!

Growth in our investment return, growth in our bonuses for a ‘growth performance’ in revene/profit/whatever, drives our behaviors. Sometimes, as in this current financial tsunami brought on after the credit meltdown initially from subprime detbs, our behaviors are reckless and irresponsble due to greed!

Many of the ‘culprits’ are very educated, very articulate, and very smart. Unfortunately, none or most do not have basic integrity. Integrity to admit that they are perpetuating a lie, that property prices can only go up and up and defy gravitational pull, that steady return in the teen is NORMAL, that there is no need to save for rainy days as INFLATION (especially the housing market) will make saving a fairly unsophisticaed and stupid thing to do!, etc…

The USA consumers buy on credit and on future income. The world produces to meet these big spenders. Now, the world smartest bankers, financers,etc are asking the people of China and India to develop the over-eating and over-consuming habits and behaviors of the USA consumers so that the WORLD can spend itself out of recession! How ironical can it be!

I do not have the answer for a ‘responsible sustainable consumption and production’ model, maybe the smartest economists, bankers, regulators, governments, etc can come up with one.

All I do know is that it will get much uglier before we can have ‘normal’ growth with ‘normal’ expectation in quality of living, and work and life.

Best regards
LU Keehong Mr.

Posted by LU Keehong Mr. | Report as abusive

Why don’t we just accept that so long as we keep money as a central organizing principle in our society, then why don’t we just legalize it all.

Ponzi Markets – Imagine it…

…The guy you gave your savings to could be in hand cuffs tomorrow! Unheard of wealth creation!

The best part is – if you ran the best Ponzi scheme (most money) then you could be Ponzi Market Director! Every Ponzi transaction would remit 5% of initial investment directly to you!

Act now, and talk your way to your first million…

…call me when you get a few billion, kid.


Posted by Baron von Lufthoven | Report as abusive

The biggest Ponzi Scheme operators were those people who borrowed money that they can never repay. They took the life savings of retirees and blew it on cars, homes, appliances, etc. As soon as they stopped paying their instalments the Ponzi collapsed

Maybe the current financial crisis heralds the arrival of an era when we can all judge our “neighbours” on the basis of appearances. Gone will be the days that your neighbour can create an artificial aura of wealth by living in an expensive house and drive a top of the range SUV all of which are financed by 100% debt.

Posted by anton kleinschmidt | Report as abusive

Despite all the known things happened, the question here is where and how the money from many people to few people gone.

Posted by farrukh | Report as abusive

This is good reading. It also gives hope that life, in tangibles, won’t necessarily deteriorate mad max style next year. The recession is only a disaster if you invested in loteries of real estate and mind boggling double digit investment return, and weren’t smart enough to cash out before everyone “got it.”

I lived in a house for 10 months, and it was suddenly worth $50k more than I paid, which was rational market price for the community, and it’s product. It’s not like I installed solid gold siding. Or even another bathroom. If someone’s offering you 10% on your money, don’t forget that smart older people have been ecstatic to get 6.5 for the last 10 years.

Geez, why can’t we raise the price of gas $.10. It’s not like the same ding dongs shopping today are going to stop going to Target and Old Navy.

Posted by kelly | Report as abusive

Mr. Saft, thanks again for simplifying what others want to make complicated.The idea of netting debt growth against asset price growth to arrive at real value, however, is not going to sit well in Congress, the Fed or on Wall Street, or anywhere that Keynesian principles are being advocated.
Regarding productivity, I have used the simplification of imagining an economy that had only one product, say pork chops, and then requesting that one imagine the effect of increasing the money supply without increasing the supply of pork chops.Are the holders of pork chops any better off after the price rises?
The obvious and simple must be terribly flawed or we wouldn’t be seeing the measures implemented that we are seeing. I can’t wait to find out what the mystical, magical multiplier is going to be that justifies bailouts and stimulus.

Posted by Gary Leeper | Report as abusive

What about social security, which counts on future
generations’ continue and ever increasing taxes to
promise something no better than ponzi!

Posted by joker | Report as abusive

It is quite easy to say, and it is often said after the crisis began, that all assets should be valued at “fair” value and at what those assets really earn. However, nobody says how to do this. Where is the guaranty, that few years (or decades) after the end of this crisis the situation will not repeat?

It seems more reasonable that fair value of something is not constant and may fluctuate significantly depending on different conditions. When supply/demand changes nobody can say what the real price of something is: low is it is today, or high as it was yesterday.

As to the idea of article, the author is right, yes, we are all Madoff investors.

Posted by johnsilver | Report as abusive

Maurice – Paul Rosa did not say that a fraud is not a fraud until it is detected. And a Ponzi scheme cannot go on indefinitely. Social Security is not a Ponze scheme. Another comment suggested that most government taxation is. But obviously all taxation is dependent on the ability of the economy to withstand it. PVR – also me – said that the rapid escalation of real estate prices also feeds a windfall for the municipalities who rely on real estate taxes. They do that where I live. Within the last few years I saw the real estate assessments on a small house and lot escalated almost $100,000 – the lot alone jumped from a slowly rising (over 20 years) and more sane appraisal of $7500, to $28000 the next year to $75,000 the year after that. Not even the most speculated bubble prices were rising at that rate. I think that assessments were a fraud but not a Ponze Scheme.

Something like carpetbagger taxation in the old south comes to mind for what this town did. But now that the town has those assessments on the record (no change whatever to the physical condition of the property mind you) I think they want to wait and hope that the old bubble reinflates. In as much as we are not an economy that does much of anything that is useful anymore – most of the new products on this house are imports – we really don’t do much more than charge more for less. I think that bubble will be limp for a very long time.

Posted by Paul Rosa | Report as abusive

What is surprising in this entire happening is the role of auditors and madoff was practically running a huge wealth management institution managing billions of dollars of wealth of dubious wealth of wealthy people all over the world . How come auditors not able to check these basic facts and it raises serious credibility issue not only from the point of view of sanctity of audit of such a large firm where such ponzi scheme was being managed for so long . More so it is important to publish the names of all the people whose wealth was being managed by Mandoff as in all probablity Mandoff was providing cover for the black money of these wealthy individual by keeping regulators in dark . In no case auditors were in dark as this cannot happen without auditors giving clean cheat to Madoff . There is serious need to scan the books of all such wealth management institution which gets support of regulatory authorities and in some cases governments as well .But the question remains unanswered as to who will scan the books of such institution and had there not been recent crisis entire world would have remained under dark about the misdeeds of so called high profile wealth management and investment banking institution . Time has come where governments of the world need to unite and form some association with authority to independently question the functioning of all such institution involved in wealth management and other financial dealings .

Posted by sanjay thakur | Report as abusive

I’d been warning people about the illusory nature of the economy and the will-o-the-wisp of nothingness that are their retirement funds, 401k’s, etc., for over 25 years. I’ve predicted an economic collapse for about as long a time. It was obvious to me that you can’t spend your way to prosperity. It certainly didn’t seem quote so obvious to 99.999999% of the rest of the population, though.

Now I read all of the business-as-usual cheerleaders who propped up the debt system act like they knew this was coming all along. (Not sure if this writer is one of them, but this article reads like a lot of them out there now.)

I now will make another prediction that people will ignore and/or scoff at until it materializes: Within the next 5-10 years 90% of the human population will die from starvation (or from disease as a result of such). And due to the human tendency to bask in the comforting waters of denial until things have reached the point of no return, there is nothing anyone will be able to do about it at this point. It’s too late.

Have a nice day.

Posted by John Ludi | Report as abusive

Your statement that we have now learned our lesson , is laughable Mr. Saft. I remember the very same statement being put forth by others. During the 70’s fuel crisis, during the 80’s S&L Debacle, during the 90’s Tech melt down, during the 1999/2000 economic down turn, And now in this 2008/2009 crash and money grab. No lessons have been and will not be learned. Lessons don’t want to be learned as long as Wall Street and the Government can fleece taxpayers and use us as their own private ATM’s. Please don’t insult yours or my intelligance by saying lessons will be learned. It is way past time to rescue this country in the form which we now know it. Both of us can see “THAT” writing on the wall. Have a good and safe year.

Posted by CLARENCE BROWN | Report as abusive

Very good commentary. We are financially illiterate and dsitracted by greed.

Posted by AJ Franks | Report as abusive

“Lee […] was very early in warning about deflation.”
Why do I keep hearing about deflation? It’s defined as (Wikipedia) “a persistent decrease in the general price level […] only when annual inflation is below zero percent.” Our annual inflation rate is nowhere near zero right now. We’re not experiencing deflation. Huge increases in the money supply without a corresponding increase in goods and services means: INFLATION

Posted by whoman | Report as abusive

James: My regard for your oinion has deminished remarkably with this opinion piece of yours. I would expect this kind of juvenile, dilitant style of writing from a neofyte, but from a seasoned professional like yourself, I expect more. In sum, you are doing what seems to be a growing cottage industry in the financial journalism trade….and that: 1. “we”, the collective all of us, are to blame for this, and that, 2. that “we” are all stupid, greedy, uninformed, or lazy not to realized your new-found “truths”. Well, Jim, this collective blame game, of investors in this case, is an old scape-goat tactic that is cheap journalism and demeans you and your criticism of this financial calamity.

Posted by George Kniss | Report as abusive

The Ponzi/casino nature of US economy, so-called laissez fair, is well-known by many including the G8 countries. All past laissez fair have blown up. Have lessons been learned? Well, 2 of G8 countries have experienced their own near-death in the early 90’s and have learned.

After Japan great real estate bubble blew up the country went into a decade-long tailspin. After the usual banking mess and industry slowdown, many in the west say Japan never recovered. Because it did not apply huge stimulus fast enough. Wrong. What happened is Japan did learn the lesson. People and industry refused to play the insane financial leverage games. Growth is slow, but the economy is utterly real.

During the 80’s Canada played the welfare state game and deluded itself into believing it can finance unlimited welfare with unlimited debt. Because such welfare will always create a higher future growth. Of course the whole thing blew up and the country went into a debt black hole. It took a decade of tight-fisted economics to dig out. When, during the go-go 2000’s, tech, real estate and financial boom went into the stratosphere in the US, Canadian steadfastly refused to play along. They have learned lessons. Today, despite big dependency in Canada economy on the US, the ill-winds of the century blows up north and Canadians only sneeze a bit. Canada economy is strong and solidly real. The result of learning lessons.

The big question of 2009 is: Will America learn lessons?

Posted by TomK | Report as abusive

TomK, you are dead wrong. Laisse-fair did not fail. Stop misleading people. The “capitalism failed” precisely because of Government intervention: Fannie Maes and Freddie Macs, Citigroup and Crysler bailouts in the past, Welfare state, Corporate Welfare system, FDIC insure savings – this is not laissez fair at all. This is government meddling into free markets and creating moral hazards. But it does not matter what you think and how much you try to fool people with your arguments about “failed free market”. This time around the Free Market will be so powerful that it will wipe out all these meddling Keynsians. We can hope that they lose power and their heads roll.

Posted by AustrianSchool | Report as abusive

Ponzi operations are everywhere. Most if detected do not make headlines.
The alarming act comes from the investors, especially the last one who gave Mr. Madoff $10 million just few days before the collapse of the alleged Ponzi scheme.

Ask for the audited financials. Check who is the external auditor. Assess the internal controls.
First red flag: it is a “one man show” implies risks are high. Decisions are made by one person.
Second red flag: the external auditor is highly unprofessional (as mentioned in prior related articles).
If I was investing such a large amount, the least I will ask to check the financial statements and request an interim audit. The cost is minimal with respect to the amount to be invested and to the amount of return expected or promised.
Were the investors “shy” in asking questions and getting some answers before putting the money in?
So the Investors share the blame.

Posted by George Rawady | Report as abusive

Good commentary on the illusory nature of our investments, whether they be real estate or other market-driven equities.

There are a few people who made out very well in the past decades: those who sold their homes, stocks, etc., and got out when the going was good. Of course, most people followed conventional wisdom, feared the taxes on profits, and didn’t do that by “letting it ride.”

Assuming investments are continually gaining value is always a gamble. And listening to people in the investment world who are paid to tell us exactly that is akin to holding onto Enron stock when Ken Lay and Jeff Skilling said it was sound.

Posted by Chris | Report as abusive

When the very rich suffer, put the blame to the middle classes and the poor guys. Yes, now, we are told : «We are all Madoff Investors». Shame on us who were just harrassed by phone, mail, e-mails to buy whatever our bank or insurance wanted us to buy eyes wide shut.

And now, yes, we are the guilty party. We are to have to share the part of our poor fellows the wealthy people, we have to be the fellow-sufferers.

This story has been told again and again.
For the same purpose: make the poorer guys compensate for the richers’ losses.

Posted by Jef Tombeur | Report as abusive

No more bailouts!

Posted by Robert Smith | Report as abusive

I would advise everyone to read the Op-ed piece by david einhorn in this Sundays New York Times. It is insightful, and while I won’t go so far as to say there is an active conspiracy it certainly at least points to an unwritten one in which the rules are known by all of the players.

As I have said many times there is too much vested interest money involved in the system to expect any real reform, and I doubt the real causes of this crisis will get much attention in the media. The only way to fix things is by making sure those in Washington know they won’t be elected without reform. Therefore, since we have to depend on the voting public to actually pay attention to such issues I can clearly state the chances of anything meaningful happening is slim to none.

Posted by db | Report as abusive

“We are all Madoff Investors”

Baloney. Speak for yourself. I agree that the value of everything is subjective and transitory, but to suggest that any of the stakeholders in the Madoff mess and, for that matter, the initial housing and credit crises, somehow represent all of us is ridiculous and insulting. I’ve worked very hard and lived on a short string for a long time to have absolutely no debt, never have in fact (except for those student loans.) I earn less than 25,000/year, but I’ve managed to bank nearly 100,000 in cash, so I don’t have to touch the stocks that I have. I can wait until they bounce back. And I’m sipping a very nice bloody Mary as we speak, thank you. I have no pity for anybody caught up in this mess, and I think all the bailouts are a scam in themselves. What an idiotic blog posting.

Posted by Bob | Report as abusive

It is all game and is being played by the high ups who run the governments, how a person like him can go without detection for such long time and more worstly in the USA? A nation claiming is champion of all trades.

Posted by Al Baloushi | Report as abusive

Bravo! I’ve been called everything from unpatriotic to socialist to everything but mister for over 7 ten years for voicing the obvious: starting with the dot com debacle the Dutch reminded us had all the markings of the tulip fiasco in their country centuries earlier, moving on to allwing even people o welfare to borrow for both mortgages and credit cards knowing it couldn’t be repaid, to the common American who just refuses to see there’s no difference between a person running out the door of a shop with a new tv or pretending to pay with credit he can’t repay.

we’ve all been not only wanting, but demanding the right to live like nobility based on income we don’t have, borrowing money we can’t repay, and deluding ourselves from the fact that a share of stock is only worth what you eventually sell it for.

Now, like spoiled children who’ve been told our tummy aches are our own fault, we want to scream at anything sounding like an adult voice, even when the adult voice is saying, “the boat’s sinking, shut up and help bail!”

Banks have traded bad credit card back and forth to pretend profitability for decades hoping the house of cards would never collapse, and we have an economy running wild and driven by college kids who see no harm in driving up the cost of many things under the weight of consumer demand, knowing they have no money…just plastic.

We’ve had years of the “bigger idiot theory”, with everybody hoping a bigger idiot would buy what we bought as a stupid price for a idiotic one.

Corporations got too caught up in making sure to report profit at any price to their future, politicians have juiced statistics and manipulated reality, while American workers can’t compete with somebody making $5 a day.

And American workers who blame everybody but themselves gladly spent the 60s, 70s and 80s refusing to pay for American made products with no regard to lost jobs (until the domino finally fell on their own head).

We have a consumer economy with no consumers, and until we recreate working wages, coupled with corporate AND personal fiscal responsibility, deflation, monitization and public works projects may save the country and government, but we will avoid becoming a second rate nation state by sliding directly into the gutter.

China can’t keep loaning us money to buy their unsafe, cheaply made products forever. Even they will eventually demand cash. And not American Dollars, cash that has value and the ink is dry when it hits their hands.

Posted by Brian Foulkrod | Report as abusive

The simple word for this is “exponents.”

You know, that nasty mathematical concept called “The Power Function”?

The most important mathematical concept in the universe – bar none.

To put this in perspective, 12% a year return means that in 30 years (a reasonable investment horizon) you would have THIRTY TIMES your original investment.

It is this sort of utter nonsense that led to the Internet bubble, the Housing bubble, and now we’re going to do the Treasury bubble!

I wrote about this in my blog (the web site above) this morning and in fact posted several articles on it over the weekend.


If you want to know how bad the exponential function gets, simply figure out how many people you end up with if you start with 1 million in a city and a 4% growth rate over 100 years.

Answer: FIFTY MILLION. Will they fit?

The author is correct in that “we’re all Madoff”, but then again, so is our government and so are our markets.

The ONLY way to clear the market is to force the insoluble debt into the open and DEFAULT IT. Everyone is trying to find a way to avoid this, but mathematics say that it CAN’T be avoided.

We tried in 2000-03 and all we did was make the inevitable crash three times as bad. Now we’re facing it again and EVERYONE wants to put it off AGAIN.

Folks, either we do it this time or, if we keep this up, we will risk destroying not just a lot of jobs and having a depression, but destroying our political system as well.

Let’s not go there, ok? I like my nation and will suffer an INEVITABLE Depression (even if three times as bad as it would have been if we had accepted it in 2000) to avoid political and economic collapse.

Posted by Karl Denninger | Report as abusive

At least regular people can take some comfort in the fact that after 8 years of Bush grabbing all he could to make many of the already wealthy filthy rich, that at least some wealthy folks now have an idea of what it feels like to suffer due to lack of money. Too bad for them, but now they know how many of the lower and middle classes feel for much of their lives. And, none of it is right and should never happen in a right society.

“How does it feel?” (Thank you, Bob Dylan.)

Posted by richard | Report as abusive

I agree with Bob. I make 45K annually and I am debt free. Never had any. Why?… because I always live within my limits and I live quite well thank you very much. Bought some gold and silver stocks though. I also have a small emergency fund in euros deposited overseas… just in case. I feel uneasy about the state of the dollar. Who knows what’ll happen at this point.

Posted by Hans | Report as abusive

How do you make a living smirking at what everyone does, critical of mistakes after the fact and not taking a position on how to fix problems? Where is the value added?

Posted by Steve Sherman | Report as abusive


The desperate nature of your tone makes my day. Thanks.

Let let me clarify. The point of my post is not what economic system fail, but will lessons be learned. I pointed out other countries have learned their lessons and have benefited. The US is nowhere near learning anything yet. But we shall see in 2009.

Oh yes I am a capitalist! But of course there are many forms of capitalism – each nation adjust things to fit their needs. The US adjusted things to fit its needs too – which is now universally recognized as laissez fair casino racketeering for the elites and screw the rest. To correct the USA’s profoundly and systematically corrupted ‘capitalism’ (which suddenly turned into neo-stateism to save the skins of the elites in power) is impossible without a generational national upheaval. It is like: How do you fix a guy like Madoff and turn him into a Warran Buffett, multiplied by a 100 million times? Isn’t that the essence James Saft column?

Posted by TomK | Report as abusive

To any sober and sane investor it has been obvious for well over 10 years that something was very wrong about our US economic system and our economy. McMansions sprouting up everywhere. Real Estate values inflating in some years well into double digits. To me it all seemed absoultely crazy and unsustainable. The #1 red flag was home values becoming so high that only Rich foreigners, Doctors, Dentists and Lawyers and of course wall streeters could ever afford to buy those homes. I said to myself, how on earth can a young family just starting out ever think about achieving the American Dream. I calculated that in a typical household the Husband and Wife would be forced to work at least 1 full time job each and of course do some part time work to supplement their incomes in order to afford the Mortgage and all the other bills that come in the mail. I asked myself “how long can such a family endure all of this work”? without divorcing, burning out etc. It is painfully clear today, we are a nation of people who live way beyond our means, just in order to “Keep Up With The Joneses”. I am originally from New York City, which gentrifieid beyond imagination and has become one of the most unaffordable, places on earth to live. I figured out as I reached retirement age that I must get out. I did and moved to the mid-west where I bought a gret Levittown type home for $114,000. I pay $2,000 a year in taxes. The same house on Long Island is $500,000+ at the very least plus $8,000 a year in taxes. We have done this to ourselves, and if we are not careful we most certainly will be doomed to re-live it over and over.
May God Have Mercy on all of us, everywhere.

Posted by Ron Wagner | Report as abusive

Despite the fact that there are plenty of individual exceptions, I don’t think we should be too hard on James for employing the journalistic “we are all to blame” line to illustrate a more fundamental point (as made by Tim Lee) about the mis-pricing of assets.

Near where I live (Norwich, Norfolk, UK) there is a pleasant village with a pretty decent collection of new homes (the site has been developed over the last 7 years). About 4 years ago, while in the process of selling my London terraced house for a silly sum and moving to the country, I got details on the houses being developed. One in particular caught my eye – it was pastiche vernacular (which, for my sins, I love) and was way out of my league at £480,000. I liked it so much I kept the details (for day-dreaming).

That same house is now on the market for £320,000 (before the buyer starts negotiating) a fall of some 35% (which might indicate how far behind the curve the official figures really are). However , and here’s the kicker,using an online calculator I have tentatively worked out that if you bought it as a buy-to-let investor you would still be losing money because the going rent on similar properties would not cover the mortgage with a 10% deposit (even if house prices were rising by 3% a year).

Which might indicate that prices have even further to fall. In fact, a friend who has been a successful buy-to-let investor told me that she could only make it break even at about £240,000.

Posted by Father Ignatius Brown | Report as abusive

Thanks for another great insight, I hope there isn’t too much more fodder in the system for more… but alas, I expect to read more such articles for the next year, or two, or three…
What I can’t figure out is why are the politicians (I am in the UK, having recently returned from Australia) spending so much effort defending and supporting such an obviously rotten system? Why spend all those public taxes on private companies? The only companies I would support been taken over (and run) by the governments (or newly commissioned tax payer [private + corporate] funded organisation) are the Ratings Agencies who have surely been at the front of the canoe that has lead us all up a smelly creek… and then dropped the paddle.

Posted by Peter H | Report as abusive