For many of us, the financial meltdown has been a wake-up call. A reminder that oftentimes the assumptions we make when times are good do not hold up when the economy falters.
The meltdown has reminded me that just because methodologies and technologies may advance, human nature does not. As a result there is a lot to be learned from understanding history. As someone said, "the past is prologue."
Ten years ago I read a book by John Kenneth Galbraith titled The Great Crash 1929. This book was written in 1954 and was an analysis of the stock market boom of the late 1920's -- leading of course to the crash in 1929 and the Great Depression in the 1930's.
Recently I reread this book.
In a fascinating observation that has amazing relevance today (54 years after the book was written), Galbraith analyzes the commonly-held belief that the U.S. suicide rate increased during the Depression. He concludes that any increase was nominal. HOWEVER, what the Great Depression did cause was the discovery of a whole new slew of embezzlers. Since I can't do better than Galbraith's writing, here is an excerpt:
In many ways the effect of the crash on embezzlement was more significant than on suicide. ... At any given time there exists an inventory of undisclosed embezzlement. This inventory - it should perhaps be called the bezzle - amounts at any moment to many millions of dollars. In good times people are relaxed, trusting, and money is plentiful. ... Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. ... Just as the (stock market boom) accelerated the rate of growth (of embezzlement), so the crash enormously advanced the rate of discovery.
Or, as said by Warren Buffet: "You only find out who is swimming naked when the tide goes out."
In good times like the housing and stock market boom of the last decade, embezzlers work their magic and many of us fall under their spell. But come economic problems and the latest bad boys -- Bayou Capital (Samuel Israel), Marc Dreier (the lawyer to the stars) and now of course Bernie Madoff are revealed as the embezzling frauds that they have always been. The fact is that these guys have been running their bezzle for many years because all of us "smart" people get lazy in our thinking. Not until the jig is up do we ask ourselves "how could Madoff guarantee 10% - 15% annual returns year after year?"
As Galbraith so correctly identified, the bezzle is always in play. And no matter how much money we spend on new government regulators, these police types can never catch all the bad guys. The responsibility is ours to exercise reasonable caution in good times and bad. Israel, Dreier, and Madoff only exist because, as Galbraith said: "in good times, people are relaxed, trusting and money is plentiful."
Jim Randel is the author of the just-released book, The Skinny on Willpower (Clover Leaf, 2008).