Sesame Street explains the Madoff Scandal

[jducoeur]

Thanks to Between the Lines for the pointer to this lovely little video about economics. Okay, it's probably not really from Sesame Street, and it's not in any way accurate.¹ But regardless of correctness, it is rather viscerally satisfying...

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¹ I find most of the "Madoff is Evil Incarnate" hype to miss the point: the scary thing is that I suspect he simply fell into an easy trap of his own making, and that most people, after the first few steps, would have made just the same decisions he did. The thing about pyramid schemes is that they are easy to start, and *very* hard to stop. You get deeper and deeper so fast that all you can do is keep feeding the monster until it eats you. Indeed, it wouldn't surprise me if it started the same way as the Satyam mess: cooking the books just a little to smooth out a glitch, and then covering over each successive layer until all you have left is the fraud...

Comments

[umbran.livejournal.com]

The real losses here are somewhere between what they gave him, and what he pretended they'd earned. If you take their investments, factor on top a realistic rate of return in sensible investment strategies, rather than the exaggerate and falsified rate he promised, you come up with a more accurate number.

It goes well beyond the difference between what he said you had, and what you should have had if you invested in someone else...

People make plans based upon their assets. Have a tidy sum tucked away for retirement in Madoff's offering? Good, you can use the rest to risk on a business venture! Suddenly, the Maddoff money is gone, and you are operating without a net. Or maybe you were expecting to pay your mortgage out of some of those investments.

Basically, the sudden loss of expected funds can lead to nasty crash and burns that would not happen if they hadn't been lied to - they'd have planned otherwise, this amplifies the effect and impact of the losses significantly.

[laurion]

Oh, I agree that there's more to the loss than just money; but this is true whenever a financial instrument collapses. I was just saying that if people are going to boil it down to a number, they should be aware of which number they are using, and why.