What would mainstream economists have advised Bernie Madoff to do?

Just over two weeks ago, Bernie Madoff’s accountant finally plead guilty to fraud after six years of defending himself.

He was sentenced to 30 years in prison at the age of 78.

While he admits to falsifying records, to this day he claims he had no idea that Madoff was running a ponzi scheme.

The prosecution has called b.s.

Why?  Because as they noted, you can’t spend your career poring over the finances of a ponzi scheme and not know it’s a ponzi scheme.

Let’s think about this case in the context of a larger fraud:

The US Economy is also a ponzi

That the US economy is also a ponzi scheme, is now plainly visible to anyone who is paying attention.  “Growth” in the centrally-planned, virtual-economy of the USA no longer arises organically through the traditional means of productivity, labor, savings and investment — it comes artificially in much the same way that “growth” was achieved by Bernie Madoff’s now-imploded fund.  “Growth” is goal-seeked by central planners and their foreign cohorts who long-ago abandoned the principals of free-market economics in favor of protecting the status-quo.

This is no secret, of course:  The many exposés of our artificial engines of growth have come thick and thin in the past few years with countless books, articles, documentaries, blog posts and  rants all proving beyond a shadow of a doubt the the US economy is a mirage.  The death of free-market economics, and the rise of our monetary-mandarins has hardly gone unnoticed by the public…

Despite the obvious artifice, countless mainstream economists  (cough, on the fed-payroll cough) spend their days publicly trying to think of some “way out” of the miserable situation the US economy finds itself in — as if the disaster which now looms large on the horizon is somehow avoidable.   To which we would ask:  

Was the final “collapse” of Bernie Madoff’s ponzi scheme avoidable?  

And if not, why should it be avoidable for the USA?

Here’s a thought experiment:  Imagine if you will, that every economist now concocting idealistic “solutions” to our economic woes (or who pretends to see “improvement” in every blip of beta) had been in the employ of Bernie Madoff’s firm back before it collapsed. How would these same economists have advised Mr. Madoff to proceed as his exponentially-smaller ponzi scheme began to teeter under it’s own mass?

If our economic “leadership” had been working in his employ, what would they have instructed him to do about all those  paper claims on assets which vastly outweighed the underlying assets themselves?   How would they have corrected Madoff’s amazingly regular and yet increasingly baseless “performance”?

What possible maneuvers would have undone the fraud-on-top-of-fraud perpetrated on his investors for so long, in which consistent returns were conjured forth from scandalously rehypothecated assets?

Or would they have advised him to come clean?

Economists like Paul Krugman, who now spend their days defending logically-bereft “extend and pretend” QE policies would almost certainly have advised Mr. Madoff to continue his crime.    Giving up the ghost as it were, and coming clean with already-screwed investors would have resulted in instant chaos as they stampeded the gates attempting to pull their funds. Keeping the ponzi going on the other hand (by whatever means necessary) would at least manage to stave off that awful day of reckoning, despite the fact that with every day of extension comes an additional increment of ultimate pain.  One might even imagine Paul Krugman advocating a continuation of the crime as the morally justifiable thing to do.  Pain is bad after all, isn’t it?

“You can’t taper a ponzi”

Our national strategy of “Extend and pretend” is of course no different from what Mr. Madoff himself opted for  – that is, until reality knocked gently on his door, and then kicked it in.

The Federal Reserve clings to it’s baseless philosophy that QE will one day ignite some perpetual-motion machine under our economy.   At the same time, the Fed clings to the equally baseless corollary that all of this QE can eventually be unwound.

As Max Keiser once put the Federal Reserve’s predicament so succinctly: “You can’t taper a ponzi”.    Obviously, Mr. Madoff understood that equally well.

And yet on the grandest-scale possible, that is what our central planners find themselves contemplating.   That “tapering a ponzi” will not work is utterly obvious.  That it would not have worked from day one, should have been obvious.  Long ago before we ever attempted to resist the inescapable “gravity” of economic reality by pulling-forward consumer-demand with giant bubbles of debt, anyone with a vague understanding of economic-history knew that this would not work.

Clear and present danger

The original sin of a ponzi scheme occurs at its outset, from the first moment that a fund’s returns are achieved by consuming its own capital, or when interest on debt is paid with more debt.  The real crime isn’t fully appreciable however until the ultimate implosion.   This is why ponzi schemes are so dangerous:  They begin almost innocently.  But once begun, there is no way to exit.  The vector is unchangeable. Ponzi schemes are boolean things:  You either keep them going, or you implode them.   There can be no middle ground as the preservation of the structure itself requires capital.

And so with every day that goes by our situation becomes more dire.   Because the problem of not dismantling a ponzi scheme ultimately becomes as impossible as the problem of dismantling it.  Given enough time, neither option is an option at all:   To taper is to implode it, but to allow it to reach critical-mass is also to implode it.  Both paths converge at the same point.   “Extend and pretend” is simply a longer route to the same dismal result.

Bernie Madoff and his accountant are criminals.  We put them behind bars not only for initiating their scheme, but for allowing their awful game to continue for so long until the damage done to investors brought the maximum amount of pain.    Our policy makers and the mainstream economists who defend them are not only guilty of the same original sin, but of the same strategy of self-preservation which will ultimately cause the maximum damage to the maximum number of people.

As the prosecution noted regarding Mr. Madoff’s accountant:   You can’t spend your career poring over the finances of a ponzi scheme and not know it’s a ponzi scheme.