Rod Blagojevich, Bernard Madoff, Dreier L.L.P and Iraq
I have been busy with scientific work over the last week or so, but yesterday I looked at some news items and came across these:
Rod Blagojevich, the governor of Illinois, indicted for trying to sell Obama’s Senate seat for personal gain, Bernard Madoff, the US financial guru and former Nasdaq chairman, released on bail after having been arrested earlier for decades-long fraud leading to the disappearance of nobody knows how much but estimated at around US$50 billion, US$120 billion spent for reconstruction in Iraq without much success, and - such a small item that it is hardly worth mentioning - fraudulent loss of at least US$35 million by Dreier L.L.P.
In this context, the following excerpts from the autobiography of Alan Greenspan, the former Chairman of the Federal Reserve: “The Age of Turbulence” 2007, page 431, may be of interest. He writes: “Indeed, very few regulators of my acquaintance can give me examples of fraud and embezzlement unearthed by anyone other than a whistleblower.” …… “But in truth, there is no way for an audit committee, new or old, to uncover wrongdoing short of deploying a vast army of investigators who would smother the firm with costly oversight that would likely stifle corporate risk taking and ultimately threaten the viability of the company.”
So, risk taking should not be stifled! We are just experiencing the consequences of excessive risk taking. I wonder whether Greenspan would have written this now, after the big crash has occurred and is occurring.
I recommend to read E.F. Schumacher’s (1973) classic : “Small is Beautiful. A Study of Economics as if People Mattered”. He traces many of our present problems (in 1973 bad enough, but much worse now, because nobody listened) to our “materialistic” philosophy of life, leading to an over-emphasis on large size and simply greed. Among other things, he suggests that personal ownership of means of production is really justified only if the owner actively participates in the production process, and should be restricted to relatively small enterprises (a few 100 people).
If you want evidence for greed and the disastrous effects, consider the present financial crisis with millions losing their jobs, and look at the smallest fish of the few examples mentioned above, Dreier:
according to the N. Y. Times 14.12.08: “Their health insurance is in default and the firm will not be able to make its $2.6 million payroll on Monday, lawyers there say.” However, “Mr. Dreier’s lifestyle includes a waterfront home in the Hamptons, a Manhattan triplex and a place on Ocean Avenue in Santa Monica, Calif. He kept a Mercedes 500 in New York, an Aston Martin in California, and a 121-foot blue and white Heesen motor yacht with a Jacuzzi and a crew of 10 docked in Manhattan or St. Maarten. Associates said the boat, the Seascape, was the site of late-night parties at which Mr. Dreier, who is divorced, was often joined by an attractive young crowd.The law offices themselves at 499 Park Avenue were like modern art galleries. In court papers filed this week, the comptroller for the law firm reported that $30 million to $40 million of the firm’s assets had been spent on art. Among Mr. Dreier’s holdings were works by Picasso and a Warhol depiction of Jacqueline Kennedy Onassis.”"
December 16th, 2008 at 6:51 am
Weiteres darüber hier:
http://www.spiegel.de/wirtschaft/0,1518,596402,00.html
January 21st, 2009 at 10:27 am
…personal ownership of means of production is really justified only if the owner actively participates in the production process, and should be restricted to relatively small enterprises (a few 100 people).
The distributist dream is all very well, but in practice such a decree could only be enforced by a totalitarian state. I would rather live under the invisible hand of the market, with all the turbulence and occasional pain we know is associated with it, then as a class enemy under the iron hand of the Central Committee. But that is just me…
January 21st, 2009 at 10:48 am
I don’t think Schumacher was dreaming the “distributist dream”. If I interpret him correctly, he rather thought that his suggestions would improve the effectivity of a capitalist system of production.
January 21st, 2009 at 1:57 pm
According to Wikipedia:
“Distributism is known to have had an influence on the economist E. F. Schumacher, a convert to Catholicism.”
January 21st, 2009 at 4:22 pm
Thanks for your comments and correction. I admit that I muddled the concept of distributism up. In the book I refer to, Schumacher seems to refer more to buddhism than catholicism. From Wikipedia:
“In 1955 Schumacher traveled to Burma as an economic consultant. While there, he developed the principles of what he called “Buddhist economics”, based on the belief that good work was essential for proper human development and that “production from local resources for local needs is the most rational way of economic life.” ”
I don’t know whether Schumacher wrote his book before or after conversion to catholicism.
“The distributist dream is all very well, but in practice such a decree could only be enforced by a totalitarian state. I would rather live under the invisible hand of the market, with all the turbulence and occasional pain we know is associated with it, then as a class enemy under the iron hand of the Central Committee. But that is just me…”
What about the partial and possible complete nationalization of banks in some arch-capitalist countries right now? And what about the massive cash injection into the car industries in even more countries? Is this the first step to a de facto state run economy? If so, one does not need a central committee.
January 22nd, 2009 at 2:14 pm
As you know, I am employed by the public sector, and I believe there are many things it does better than the private sector. For instance, I think public sector control of banking and insurance would be a good thing.
However- and correct me if I am wrong, for I have been trying not to pay attention to the outside world for some time- is not this partial nationalisation currently underway a mutually-acceptable agreement to preserve jobs and liquidity by rescuing a relatively small number of enterprises that would otherwise collapse in a heap?
“personal ownership of the means of production… should be restricted”, on the other hand, implies that a great number of profitable, job-creating enterprises should be compulsorily acquired or dismantled whether the owners agree or not, and presumably these owners will be fined or imprisoned if they do not comply. To me that is an unacceptable level of government interference. I think history also shows that where it has been tried the economic consequences have been unpleasant.
January 22nd, 2009 at 3:31 pm
“is not this partial nationalisation currently underway a mutually-acceptable agreement to preserve jobs and liquidity by rescuing a relatively small number of enterprises that would otherwise collapse in a heap?”
Yes, of course it is, but as far as the mutual agreements are concerned, one side hardly had another choice.
““personal ownership of the means of production… should be restrictedâ€, on the other hand, implies that a great number of profitable, job-creating enterprises should be compulsorily acquired or dismantled whether the owners agree or not, and presumably these owners will be fined or imprisoned if they do not comply. To me that is an unacceptable level of government interference. I think history also shows that where it has been tried the economic consequences have been unpleasant.”
I certainly would find this unacceptable, and I don’t think Schumacher had in mind getting people fined or imprisoned. As far as history is concerned, I assume you mean the Soviet Union and other eastern European states. These experiences certainly have been unpleasant, but I am not sure that one should generalize too much. After all, with accumulating experience and different historical backgrounds, perhaps other outcomes are possible. But ?????????? And Schumacher’s model, for example, allows for privately run enterprises, as far as they are not too big. Moderate socialists, like for instance Bertrand Russell, wanted key industries only nationalized. And he certainly was no communist who wanted owners fined or imprisoned.
January 22nd, 2009 at 6:03 pm
If you say something should be ‘restricted’, you are supposing some enforcement to penalise people who refuse to abide by the restriction. If laws are made saying these things, and people disobey them, then in Western democracies they are fined or imprisoned. That is what ‘restriction’ means, and so in a practical sense that is what Schumacher *should* have had in mind if he ever wrote anything suggesting we introduce this sort of system from the ‘top down’. On the other hand if individuals of their own free will want to organise into small enterprises and can be economically competitive (like the Amana Colonies and the kibbutzim, perhaps) all the more power to them, let them prove the worth of Schumacher’s ideas.
January 24th, 2009 at 7:07 pm
If you want evidence for greed and the disastrous effects
I object to the continuing reference in the media about the effects of the financial crisis being disastrous. If pre July 08 someone could have thought of a way to dramatically reduce fossil fuel demand at the same time as reducing its cost for dependent users (ie. the poor) without war or killing anyone, they would have been thought a genius! This is exactly what has happened. Very few have lost so much that they are facing life-threatening destitution. The overall amount of money hasn’t changed a great deal but so much more of it is squirreled away in Government treasuries instead of being actively financing commercial enterprise. It is just a sudden retreat from the excesses, including greed, that you have mentioned that have built up over several years.
So greed is good, if one thinks that greed caused this financial crash, and that reduction of greenhouse gases without taxing the poor is good.
Bring on the continuing cycle of deflation!
January 25th, 2009 at 9:52 am
Well, let’s wait and see how things develop. The poor (of which most are in the underdeveloped countries) will suffer most. I wonder what they think of your idea. - But of course, in the Western world the safety nets are better than they were in 1929.
I agree that some cyclic ups and downs are good, but it is all a question of scale.
January 25th, 2009 at 6:04 pm
The poor (of which most are in the underdeveloped countries) will suffer most
This assertion is also very dubious. The poor in underdeveloped countries are quite disconnected from the general economy except for the essential commodities they need, often paid for by aid. Thus the financial turmoil, by reducing demand for energy and food commodities. Thus things like increased unemployment (unemployment is high anyway, many are subsistence farmers) doesn’t affect the poorest like the commodities boom did. The evidence, such that it is, is that very few of the newly unemployed and struggling are destitute in poor countries where they were doing okay before the financial collapse.
I agree that some cyclic ups and downs are good, but it is all a question of scale.
There are winners and losers with cyclical ups and downs regardless of scale. It is just in the large scale, the scale of losses and gains is much more. In 1929 (actually later in the 30’s), the US eventually reacted by raising tariffs (essentially blaming foreigners) which exacerbated the spiralling downward of world trade. This time round the omens are also not good in that regard. Trade and migration is already faltering, and even so, countries are wanting to insulate themselves even further from contagion. Ill effects on the poor from reduced trade should be blamed on the governments that put up, or fail to take down trade barriers, not on causes of the initial financial crash. Not everyone loses in a cyclical downturn, no matter how large. If trade crashes, almost everyone loses.
January 27th, 2009 at 10:21 am
Low commodity prices benefit the urban poor in the underdeveloped world. We don’t seem to hear about them rioting about food prices anymore. As Marco points out, the rural poor are cut off from the global economy and live in a subsistence economy. This is also threatened more by high commodity prices, which lead to the expansion of commercial agriculture at the expense of subsistence.
In the long term, of course, high commodity prices are the driver needed for third world countries to develop their agriculture beyond the subsistence stage: at the moment it makes more economic sense for a dictator to feed his urban poor with subsidised Western foodstuffs and let the countryside stagnate.
It is much too early to tell where we are all going with this. China’s economy has a long, long, long way to fall still. Then the future of the world will be in the hands of the newly impoverished Chinese middle class.
January 27th, 2009 at 10:32 am
[...] a previous post I drew attention to some people exposed by the present financial and economic [...]
January 27th, 2009 at 10:37 am
Chris
“It is much too early to tell where we are all going with this.”
Exactly. As I said: Let’s wait and see.