Bernie Madoff - In Prison

Interviewed in prison, Bernie Madoff asserted that banks and hedge funds were “complicit” in his elaborate fraud. Diana Henriques, writing in the NY Times, 2/15/11, (here) said “Madoff described as ‘willful blindness’ their failure to examine discrepancies between his regulatory filings and other information,” Quoting Madoff, “They had to know. But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’ ”

Look at this in the context of the the Financial Crisis. The bi-partisan committee on the financial crisis, FiscalCommission.Gov,  released its findings on Thursday, 27, January, 2011.  The Commission, I think, got this one right. The financial crisis could have been avoided.  This thirty-year economic experiment in de-regulation, which started under President Reagan, has proven that self-regulation doesn’t work; the government must regulate the financial industry. The foxes can’t guard the henhouse.

Just as with the State of the Union Address, Tuesday, January 25, 2011, there were two Republican responses, a dissent from the official findings, and a dissent from the dissent. The dissent, by three of the four Republicans, stated that “There was a financial crisis in Europe, it’s therefore normal.” The dissent from the dissent, given by Peter Wallison of the American Enterprise Institute, and a “Thought Leader” for the Tea Party, blamed the crisis on government regulation, and said the government forced banks to lend money to poor people.

Peter Wallison of the American Enterprise Institute - Enables people like Madoff

Wallison misses the fact that poor people did not buy credit default swaps or McMansions. People with high incomes – by definition “not poor” – buy McMansions in the suburbs, and bankers at institutions like AIG, Bear Stearns, Citi, Goldman Sachs, Lehman Brothers, etc, traded credit default swaps. Those bankers may have exercised poor judgment, but are not poor. By blaming the crisis on regulation Wallison of the American Enterprise Institute  actually enables criminals like Madoff.

The explanation that “There was a financial crisis in Europe, financial crises are therefore normal” is, in a word, stupid.

After the Great Depression of the 1930’s, Hitler, Stalin, and Hirohito launched World War II.  There were two American responses to the Great Depression, one by President Hoover, followed by a second one, by President Roosevelt. Hoover’s failed. Roosevelt’s succeeded. Who would prefer Hitler, Stalin, or Hirohito to Roosevelt?

Writing in the NY Times Op-Ed page (here) Frank Partnoy, University of San Diego law professor says: “The confusion only continued during a press conference … in which the commissioners had little to show and nothing to tell. There was certainly no Richard Feynman dipping an O ring in ice water to show how the space shuttle Challenger went down.” He concludes, however, “There is still hope. Few people remember that the early investigations of the 1929 crash also failed due to political battles and ambiguous missions. Ferdinand Pecora was Congress’s fourth chief counsel, not its first, and he did not complete his work until five years after the crisis. Congress should try again. ”

Physicst, Nobelist

The Challenger exploded 73 seconds after takeoff on a January 28, 1986. The weather had been cold. At Congressional hearings on the Challenger explosion, Richard Feynman,  physicist and Nobelist proved that O rings lose their elasticity when cold. He dipped a deformed O ring in ice water. He took it out. It remained deformed. (Youtube).

And now Bernie Madoff, convicted felon, of all people, is playing Feynman’s role. “Banks and hedge funds were ‘complicit.’ ” They should have known. They turned a blind eye.  “Their attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’ ”

We need to know. Law enforcement needs to enforce the law. Legislators need to develop the law … “to secure these unalienable rights” … “of life, liberty and the pursuit of happiness” … “to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity.”