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Bernard Madoff and the Art of Financial Self-Delusion

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In the aftermath of the Madoff scandal and the implosion of his $65 billion Ponzi scheme, many interpretations have been offered as to its historical significance. The financial establishment and oligarchy will seek to portray the Madoff phenomenon as merely a single bad apple who was appropriately punished for his crimes. More cynical commentators will present Madoff as a by-product of unregulated casino-style capitalism run amok, a harbinger of the credit default quicksand that ultimately sank the American economy and unleashed the Global Economic Crisis. For myself, I find the victims of Madoff more instructive than the sordid criminality of the con artist himself.

Among the multitude of Madoff clients who were literally picked clean of their life savings, I was struck by the contradiction between their apparent intelligence and acute naiveté. Many of those now dispossessed of their lifetime of financial achievement by the sinister chicanery of Madoff were businessmen and businesswomen, accomplished in their respective fields, and apparently savvy at the competitive game of entrepreneurship. Yet, so many of these same admirable human beings literally knocked down the doors to invest with Madoff, in effect throwing almost all their net worth into his hands, without even a modicum of due diligence. This is self-delusion on steroids, a phenomenon not new to the American experience, especially when it involves the rarefied world that comes under the pedestrian rubric of "financial planning."

As the United States evolved into the leading industrial and financial force in the global economy, an ethos with a powerful mythology evolved: invest with a "money manager" with a genius for picking the right stocks and bonds, and one will embark on the true path to prosperity. Among the earliest victims of Madoff's precursors was former President and Civil War hero Ulysses S. Grant, who lost his life's fortune to a Wall Street swindler he had been persuaded to invest with by his son.

In the period leading up to the stock market crash of 1929 and the subsequent Great Depression, the voices of those sober enough to see what was coming were drowned out by the much louder rhetoric of the supposed wizards of Wall Street. Surprisingly, the Federal Reserve, so complicit with our current global financial and economic crisis, was actually a voice in the wilderness prior to 1929, warning of the danger of Wall Street speculation and the looming disaster that would ensue from unregulated purchasing of stocks on margin. An economist at Princeton, Joseph Stagg Lawrence, published a widely acclaimed book prior to the '29 crash, Wall Street and Washington, in which he condemned the Federal Reserve in the harshest terms as a conglomeration of bigoted, illiterate provincials who had the effrontery to question the genius of Wall Street. It was the voices of those such as Lawrence who dominated the conversations about the stock market prior to its collapse. Any dissenting viewpoint was not only ridiculed but also marginalized and quarantined. In the words of Professor Lawrence, "the world's most intelligent and best-informed judgment on the values of the enterprises which serve men's needs" populate the hallowed suites on Wall Street. No wonder so many upper and middle class Americans were so heavily invested in the stock market when it crashed in 1929, destroying much of their accumulated wealth.

Madoff was an accomplished criminal, and probably will not be the last to exist in the field of money-management. However, there also exist many operators on Wall Street who may not necessarily have criminal intent, but who exist within a compensation model that provides irresistibly massive rewards for short-term gains, often at the expense of the long-term financial interests of investors. We have already seen irrefutable evidence of ratings agencies and analysts adjusting their opinions to reflect the interests of their major clients. Among the army of stock brokers and financial planners who rely on such "research," few have demonstrated sufficient independent judgment to preserve their clients' net worth.

Then there are the investors themselves, who all too often have succumbed to the metaphysics of supposedly ingenious money management. The thousands of shattered lives, with their golden years transformed into an impoverished retirement as a result of uncritical trust in Madoff, are another tragic monument to the powerful art of financial self-delusion .