Madoff and the Global Economy

[David Farber <dave () farber net>]

Begin forwarded message:

From: dewayne () warpspeed com (Dewayne Hendricks)
Date: December 15, 2008 5:29:50 PM EST
To: Dewayne-Net Technology List <xyzzy () warpspeed com>
Subject: [Dewayne-Net] Madoff and the Global Economy

December 14, 2008, 8:45PM EST
Madoff and the Global Economy
The world was told the U.S. was a low-risk, high-return investment.  
But like the Wall Street trader's victims, we are learning the truth
By Michael Mandel

<http://www.businessweek.com/bwdaily/dnflash/content/dec2008/db20081214_802212.htm 
>

For years, Bernie Madoff, all-around nice guy, pulled billions of  
dollars of foreign and domestic money into his investment fund. His  
lure? He promised the implausible combination of good returns and low  
risk—and people believed him.

Painfully, the allegations of fraud surrounding the Madoff affair are  
also exposing the fundamental fallacy of the global economy. Like  
Madoff's trusting investors, the rest of the world was willing to  
assume that the U.S. economy as a whole was a low-risk, good-return  
investment. This belief drove the entire structure of global trade and  
finance for the past 10 years. And when the subprime crisis showed  
this assumption of low risk to be false, the financial crisis resulted.

Consider this: Since the Asian financial crisis of 1997-98, the rest  
of the world has been willing to lend money to finance the U.S.'s huge  
and growing trade deficit. Not just small amounts of cash either: over  
the past decade, the U.S. borrowed a cumulative total of $5 trillion  
from foreigners at relatively low interest rates.

WHY WERE FOREIGNERS SO GENEROUS?
Without this flow of easy money into the U.S., globalization in its  
current form would not have been possible. The U.S. was the consumer  
of last resort, absorbing cars from Germany and Japan, electronics  
from Taiwan and Korea, and clothes and furniture from China. The earth  
was flat, and why not? Pluck a laptop from Taiwan and pay for it with  
a home equity loan, which—if you trace back the connections—was at  
least partly funded with foreign money, too.

The big unanswered question, for years, was why this money flow  
persisted. Why the heck were foreign investors willing to lend the  
U.S. such large amounts of money on such good terms? Economists and  
journalists spun out hypothesis after hypothesis (we'll see more  
below), but there was no agreement on why.

Now we see what happened. Wall Street firms—big operators like Lehman  
and relatively small fish like Madoff—told foreign investors they  
could put their money into the U.S.—the world's safest economy—and  
still make decent returns. Madoff, of course, appears to have lied. He  
allegedly ran an investment scam that has resulted in billions of  
dollars of losses reported around the world, including $4 billion in  
Switzerland and $3 billion in Spain.

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