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“A Fool And His Money Are Lucky Enough To Get Together In the First Place.”

[ 2 ] March 24, 2009 |

I was a little ambivalent about Joe Nocera’s critique of the Madoff investors. In particular, the investors claiming that more regulation was needed may be self-serving but they’re also right; the SEC really should be able to stop a decades-long high-prominence Ponzi scheme. The fact that Madoff wasn’t cold-calling poor, lonely widowers shouldn’t be used to undermine the fact that very real regulatory failures occurred here (this may not be Nocera’s intention, but it could be an effect.)

Still, while where fraud is concerned even suckers deserve an even break, Nocera is certainly right that many of the Madoff investors were, in fact, egregious suckers. This article has plenty of examples, but I think this sums up for me:

If you want to know about Bernie Madoff,” said Mary T. Browne, the renowned psychic and author, who counsels many heavy hitters on Wall Street, “you need to talk to my friend Carmen Dell’Orefice.”

Maybe it was the same physic who told Fred Wilpon to invest some of his Madoff “profits” in a four-year contract with the decaying corpse of Luis Castillo. At any rate, I’m not sure when the “blaming the victim” line is unacceptably crossed, but I have to say that there are pretty distinct limits to the sympathy I can have for Aspen swells who brag about how “Bernie’s in T-Bills!” without ever stopping to wonder about how said investments could be bringing them 12 points a year. For many of the victims, Nocera is certainly right that if they didn’t know they were being scammed it was because they didn’t want to know.

With respect to the regulatory failures, this is equally telling (and scary):

The most relentless skeptic was Harry Markopolos, an accountant and private fraud investigator mostly unknown outside of Boston, who repeatedly sounded the alarm about Madoff to the S.E.C., starting in 2000. When the S.E.C. took no action, Markopolos began a crusade to prove his point. In 2005 he sent regulators a 19-page memo entitled “The World’s Largest Hedge Fund Is a Fraud.” He was referred to the New York branch chief, Meaghan Cheung, who, he wrote in an e-mail to one of her colleagues last year, didn’t “have the derivatives or mathematical background to understand the violations,” much less prosecute them. The S.E.C. eventually opened an investigation into Madoff but closed the matter in November 2007 without bringing any claims against him. Cheung, 37, who left the S.E.C. last September, had difficulty defending her findings in the Madoff case, telling the New York Post after his arrest, “If someone provides you with the wrong set of books, I don’t know how you find the real books.” Markopolos, who lambasted the S.E.C. in a congressional hearing in February, said, “I felt like I was an army of one.”

Yes, if someone lies to you, that’s pretty much the end of it; you certainly wouldn’t want to see if any of the lies check out. In particular, I can’t see the value in, oh, checking with some of the alleged counterparties in the fictitious trades that Maddoff was claiming to make and seeing if they were in fact made. I mean, they were in his books! Evidently, the S.E.C.’s hand were tied.

The Bush years: the catastrophic effects of incompetents regulating frauds who were frequently exploiting the greedy and/or the moronic.

Occam’s Razor

[ 0 ] March 24, 2009 |

I dunno, I also don’t have much trouble believing that Saint Larry does, in fact, sincerely believe in a lot of nutty conservertarian ideas; he certainly wouldn’t be the first talented academic to do so. And in particular, I don’t have a great deal of faith in someone who was still saying that everything in financial markets was just fine in 2005 and his ability take the problem seriously enough now.

Why I Study What I Study…

[ 0 ] March 24, 2009 |

Mr. Trend has a thoughtful post about why he studies military dictatorships in Latin America:

But studying dictatorships has a particular oppression looming over it. Environmental destruction, strike-breaking, and war all have really ugly components. Yet, at least to my way of thinking (and I think a lot of people’s more generally), dealing with issues like methodical torture, disappearances, and murders in lop-sided “battles” is really, really hard to deal with. I’m pretty sure every Latin Americanist who studies dictatorships (not just Southern Cone) passes through a phase somewhere in their professional path where they seriously worry, “is there something WRONG with me for wanting to study this?” At least for me, it wasn’t just some passing question I waived off – it ended up involving some pretty heavy moral and philosophical reflection in my second year of my Master’s. And I’ve known many people who started off wanting to study dictatorships, but once they really got into how awful those governments could be, they opted out, choosing to focus on some other issue either topically or temporally (or both).

Trend’s musings spurred a couple of thoughts. First, I’m quite interested in how academics come to study what they study; my recollection from graduate school is that student’s dissertation topics rarely matched up very tightly with what they had intended to study when they arrived. Figuring out how academics ended up specializing in particular topics and subfields is sort of interesting in and of itself.

This inevitably leads to the second question, which is “how did I end up specializing in security and military doctrine.” This has a relatively straightforward answer; I never really outgrew an adolescent fascination with weapons of war. The fascination slept for a while during undergrad, but awoke when I reached graduate school. Consequently, I focused on security studies, and eventually found enough space in the literature to write about how military organizations interact with one another. I credit Group Captain Lionel Mandrake for providing the proximate inspiration for my dissertation.

Anyone have an interesting story about how you came to study what you study?

The Constitutionality of the Bonus Tax

[ 0 ] March 24, 2009 |

Jack Balkin dismisses the constitutional arguments. Really, although there are serious objections to the bill on policy issues, until (God forbid) Richard Epstein becomes the median vote on the Supreme Court the constitutional objections are not serious.

The O’Reilly Harassment Machine

[ 0 ] March 23, 2009 |

Ew. His moral and journalistic standards rank roughly with his erotic prose.


[ 0 ] March 23, 2009 |

Thank God I read Lord of the Rings…

There are two novels that can change a bookish fourteen-year old’s life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.

Via OJ.

Venezuela Meddling in Cuba?

[ 0 ] March 23, 2009 |

The idea that Raul Castro may have moved against Venezuelan proxies in Cuba is fascinating, but there doesn’t seem to be much to it. That is, I have no doubt that the removal of Deputy Prime Minister Carlos Lage Davila and Foreign Minister Felipe Perez Roque can be understood as Raul consolidating his power, and further that he understands that his most stable support comes from the army. What I don’t see is the Venzuela connection; it’s possible that Chavez was working with Carlos Lage Davila, but there doesn’t appear to be any strong evidence. When dictatorships experience peaceful leadership transitions, these kinds of things happen; Raul’s position is less stable than that of his brother, and consequently he moved early on to consolidate his power and authority by removing potential rivals.

I hasten to add that when we gamed out the Cuba succession two years ago at Patterson, Raul disposed of Carlos Lage Davila and several other competitors on the first day. The circumstances were different, of course, but the point is that you don’t need a conspiracy in order to have a purge.

Yet More On DeLong/Krugman

[ 0 ] March 23, 2009 |

I will say that where I am in agreement with the optimists is on DeLong’s point 2 here — the politics. I don’t think a quickly exhaustible store of “political capital” is the appropriate metaphor here; the financial crisis is not like health care, not least because it’s in the interests of many powerful social and political actors to have the financial crisis solved. If anything, nationalization will be more viable if the Geithner plan fails. (And if Brad is worried that he’s disagreeing with Krugman, what ’till he hears that we’re agreeing with Mickey Kaus. Obviously, I’m missing something.)

The problem is that the political question is less important than the substantive question; even if the better option isn’t foreclosed, it’s still not desirable to do the worse option first unless it’s necessary. So the question then becomes whether or not a Swedish-style nationalization is politically viable right now, and I don’t know the answer to that question. If it isn’t, Geithner may be the worst option except for all the rest, but if it is and Obama just doesn’t want to go to the mat, I still think Krugman is right that it’s a serious mistake.

Trivial Observation of the Day

[ 0 ] March 23, 2009 |

There are currently 10 living Secretaries of State of the United States, active or retired. Unless I’m terribly wrong, this is a new recordties the old record, set between 1993 and 1994.

Now you know.

Response to Brad Delong

[ 0 ] March 23, 2009 |

Earlier today, Brad Delong observed:

At the moment “Fear of Reese Witherspoon Look-Alikes on the Pill” has 116 comments, while “The Geithner Plan FAQ” has only 89 comments. I confess this leaves me somewhat disappointed: I thought money would be dominating by this point…

It’s a fair point. The mockery of Douthat’s all too public sexual peculiarities is a grand internet tradition, but at the end of the day, we all knew that Bill Kristol’s slot would be filled by a ridiculous person, and the particular nature of that ridiculousness is pretty inconsequential. The current ongoing collapse of the global economy is a much more serious matter. As someone who has little economic security to speak of, I’m particularly concerned. Obviously, I very much hope that Delong’s apparent relative optimism about Geithner’s plan is warranted. But I must register some frustration with this part of his FAQ:

Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn’t make back its money?

A: Then we have worse things to worry about than government losses on TARP-program money–for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.

On one level, this is a fine example of Delong’s well known dry wit. On the other hand, it’s a somewhat disturbing evasion. The possibility that the assets in question are not fundamentally undervalued seems like a very serious possibility to me (I’d say a likelihood). Indeed, if one makes the seemingly plausible assumption that property values will continue to decline until they reach something in the neighborhood of pre-bubble trendlines, they’ve got a fair amount left to fall, which is one of several reasons the ‘undervalued’ assumption looks potentially suspect. So what I’d ask for from Delong is a more serious answer to the “what if the assets are not currently undervalued?” He’s got a number of readers who probably don’t know whether they should actually be investing in bottled water, sewing needles and ammunition. Delong should give a more direct account of how he sees things playing out under Geithner plan under the less than optimistic scenario, because I have no idea how tongue-in-cheek the above response is.

A More Optimistic Take

[ 0 ] March 22, 2009 |

From DeLong. Krugman, conversely, remains skeptical. Critics were right to note below that the epistemic uncertainty here demands more modesty than I showed; this crisis has so few even close precedents it’s hard to now anything. So let’s say that I remain much more convinced by the latter position. This is the key point:

If you think it’s just a panic, then the government can pull a magic trick: by stepping in to buy the assets banks are selling, it can make banks look solvent again, and end the run. Yippee! And sometimes that really does work.

But if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money. To keep the banks operating, you need to provide a real backstop — you need to guarantee their debts, and seize ownership of those banks that don’t have enough assets to cover their debts; that’s the Swedish solution, it’s what we eventually did with our own S&Ls.

Now, early on in this crisis, it was possible to argue that it was mainly a panic. But at this point, that’s an indefensible position. Banks and other highly leveraged institutions collectively made a huge bet that the normal rules for house prices and sustainable levels of consumer debt no longer applied; they were wrong. Time for a Swedish solution.

Particularly with real estate prices still falling, I think Krugman is correct that the idea that this is just a bank run as opposed financial institutions suffering from extremely bad bets is extremely implausible. And if this is true, then Geithner/Summers strikes me as nearly indefensible.

Deflation Now!

[ 0 ] March 22, 2009 |

It doesn’t quite pack the immediate punch of the “morans” sign, but this — from one of those planet-quaking tea parties — is also made of awesome.

No word on whether the sign-holder was named Alan Greenspan.