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

[jducoeur]

Sir, respectfully - $50 billion dollars, over more than a decade, and skimming off the top all the while is not "an easy trap". It calls for way too much calculation and planning to get that big. Nothing easy about it.

Honestly, I disagree. Or, at least, I think it was easier for him than the alternative.

Mind, I'm not defending Madoff here: he's a crook, a cheater and, especially, a coward. But as I responded to goldsquare above, I find it unlikely from what I've been able to find that he set out initially to commit a massive fraud. Rather, the signs point to an initial fraud that probably seemed easy to rationalize at the time -- "Oh, I'll just smooth the books a little, to make the investors happy" -- and then didn't have the nerve to own up to it while the fraud was still small.

Seriously, I suspect many people would fall into the same trap in the same way, after the initial crime. It's simply a matter of waking up, every morning, and asking the same question: "Do I own up to this, go to jail for probably a decade or more, and ruin the lives of my family? Or do I smile blandly, keep defrauding more people, and hope for a miracle that will fix this mess?" It's pretty clear that by the last few years he knew he was doomed, but I'd bet that for quite some time he was rationalizing that It Would All Get Better if he could just hold on long enough -- most fraudsters of this type hold out that hope.

There's an important point here. It's very easy to assert "I'd never do something like that". But if you think answering that morning question is easy, then I submit you haven't really thought about it. You might well do the right thing -- certainly I hope that I would -- but the question is a terrifying one, and simply keeping on going *is* the easier option. For most people, there is very little harder than saying publicly, "I have done wrong".

And the most important point is that great crimes often grow from small ones. This looks to me a *lot* like the Satyam debacle (as well as several other major financial frauds of the past few years), of someone in power convincing himself that cheating just a *little* won't hurt anybody, and then being forced to commit ever-greater crimes in order to cover up the previous ones. The moral of the story is that you have to be especially vigilant to be honest about the little stuff, because it *is* easy to cheat just a little, and it can destroy you in the end...