Madoff and the Fundamental Fallacy of the Global Economy

Posted by: Michael Mandel on December 15

I’ve written a new piece here on Madoff and the “fundamental fallacy of the global economy.” Here’s the beginning of it:

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.

More follows here.

Bloomberg just ran a piece on how much money was being pulled in from oversea by Madoff and his feed funds.

Dec. 15 (Bloomberg) — Walter Noel’s Fairfield Greenwich Group would have collected about $135 million in fees this year for peddling Bernard Madoff’s investing acumen to clients from South America, the Middle East and Asia.

The $7.3 billion Fairfield Sentry Fund invested solely with Madoff, taking a cut of 1 percent of assets and 20 percent of gains, which averaged about 11 percent annually in the past 15 years, according to data compiled by Bloomberg. Fairfield Greenwich is one of at least 15 hedge-fund firms and private banks, including Tremont Holdings Group Inc. and Banco Santander SA, that earned similar fees for sending customers’ cash to the 70-year-old money manager.

TrackBack URL for this entry: http://blogs.businessweek.com/mt/mt-tb.cgi/

Reader Comments

Joe Cushing

December 15, 2008 11:59 PM

The surge in the dollar tells us that people still think the U.S. is a relatively low risk investment.

Rob

December 16, 2008 12:36 PM

Go to the Global Investment Watch blog to read a good article related to this topic...

http://globalinvestmentwatch.com/2008/12/16/why-to-reject-economic-nihilism/

CompEng

December 16, 2008 02:11 PM

Joe, I think the key word is "relatively". That is, I don't think there's a lot of confidence in the US, but there's not much more confidence in anyone else.

Joe Cushing

December 16, 2008 10:01 PM

I almost put the word "relatively" in all caps.

Thank you for your interest. This blog is no longer active.

 

About

Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

BW Mall - Sponsored Links

Buy a link now!