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The elegant mischief of capitalism

Crisis can be fun, says Bill Bonner. It reveals the hideous skinny-dippers as the tide goes out.

Who can honestly say he isn't enjoying this financial crisis? It has unhorsed cavalier fund managers. It has turned the masters of the universe into servile waiters. It has made Nobel Prize winners look like morons. The rich, the proud, the pompous, the vain, the incompetent, the City (pardon the redundancy). Surely there is a God an 'invisible hand' giving them all a whack on the head!

And there are the regulators too! Under their very noses the biggest scams in history went unnoticed. America's Securities & Exchange Commission alone, to say nothing of the countless other cops on the financial beat, had 3,371 employees playing the piano in 2006. If you can believe it, not a single one noticed what was going on in the back room. Even after rummaging through Bernard Madoff's back office twice in the last three years, they still didn't know. They must have been like pets watching an orgy... with no idea what to make of it, but wagging their tails and vaguely wanting to get in on the action.

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Between Tuesday and Wednesday of last week, Madoff's managed accounts were thrown into a "spiral of horror", said one fund manager. Tipped off by his own sons, the feds went to Madoff's apartment. They graciously asked if there was perhaps a misunderstanding. No, replied Madoff, "there was no innocent explanation". So they put the cuffs on him and acted as though they had Lucifer himself in custody. Madoff is a giant in his field. He out-ponzied Charles Ponzi. He out-princed Chuck Prince. He could have taught the Egyptians how to build pyramids. In the history of high-stakes grifting, he out-did them all. A forgetful Robin Hood; he stole from the rich if he'd only remembered to give to the poor, he'd be a hero!

Madoff's charm was that he out-foxed the foxes and out-scammed the scammers. How hard was it to give away new houses to people who didn't have any money, or get people who didn't speak English to sign toxic mortgage documents? Child's play, really. And the executives with their millions in bonuses, and humbuggers like Richard Fuld their marks were mostly ordinary stockmarket investors; low-hanging fruit compared to the coconuts Madoff plucked. Rather than go after the widows and orphans, he swindled the smartest money in the world money managed by family offices, the old Jewish money from New York and south Florida, London's Man Group, Switzerland's Union Bancaire Prive. He even flim-flammed the hedge funds including Fairfield Greenwich for $7.5bn. And Tremont, a fund of hedge funds, put in more than $3bn. How cool is that? And he was remarkably democratic about it; he took money from his own tribe, his own clan, and his own golf club buddies. Billions of it. Even more impressive, he did it not with hyperbole, but with relative modesty. He produced only about 10% a year which didn't seem like much during La Bubble Epoque.

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How could he produce steady 10% per year returns from stocks? Like so many of the conceits and delusions of La Bubble Epoque, it was absurd on its face. How come the SEC, with its legions of accountants, didn't notice that the numbers were fraudulent? And how could the entire financial industry with its Nobel winners and business school graduates not have noticed what was even obvious to us feral economists here at MoneyWeek? For years, we warned that the whole thing was a scam, a fraud and a delusion. And now, historians look back and wonder: how could people have been so stupid? The answer is simple: in a bubble, it pays to be stupid. You buy something at a lame-brained price, and it goes up. Not only did stupidity pay, it paid well. Running a bank paid better than robbing one. Hedge-fund managers got paid more than contract killers or stick-up men. But "when the tide goes out, you see who's been swimming naked", says Warren Buffett. We haven't seen the tide so low in many years; the view is nauseating... hideous... never before have we seen so many skinny dippers, nor had such a laugh. More than $15trn has been lost so much that it threatens to turn the lights out on the entire world economy. The investment banking industry has disappeared. Regular banks have been nationalised. The auto industry is broke. Investors stagger. And mobs break shop windows in protest.

Historians will try to make sense of it. But all historians lie. Not intentionally it's a professional requirement. They look back and think they see a plot. From then on, every circumstance is bent, greased and wedged into the story line. The basic facts are the same any way you look at it; the dramatis personae don't change. But the historian can make readers laugh or cry. He can turn it into morality play or an amoral farce. He can focus on the struggle of the masses or the failures of leaders, the triumph of a caste, the defeat of a class, or the perfidy of an entire profession. Already, they're telling their tale: the system failed now, we need to fix it. We need more regulation. Another Nobel Prize winner, Joseph Stiglitz, says so in the current issue of Newsweek.

They are all missing the elegant mischief of capitalism. In just six months, it has scratched 10,000 Porsches, destroyed more monuments than Cromwell, and squeezed the rich harder than Mitterand. It would have taken an army of dreary Bolsheviks decades to redistribute so much wealth; and it wouldn't be half as much fun.

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