Bernard Madoff: Scapegoat of an Economic Crisis

Throughout human history punishments have been meted out to people who are not guilty or only partially guilty.  Actions that can invoke punitive action from the authorities include treason, fraud, crime, breach of trust, etc.  Famous examples from recent centuries include Galileo Galilei, Charles Darwin, Bertrand Russell, etc, who were ostracized and punished for expressing their sincere beliefs and thoughts.  Galileo, for example was threatened with torture for openly expressing his views on the cosmos, which contradicted the conventional Christian view of the universe.  Darwin was condemned and treated with contempt by the Church for proposing the theory of evolution that linked all living matter in earth, including humans.  In the case of Bertrand Russell, he was imprisoned as a ‘conscientious objector’, for expressing his opposition to British participation in the First World War.  These are typical examples of people being wrongfully punished, when they were guilty of no crime or fraud or misdoing.  It would be highly improper to associate Bernard Madoff with the aforementioned luminaries, for he was truly guilty of carrying out the biggest financial fraud in modern history.  At the same time, it would be simplistic to classify him a victim of comtemporary judicial system.  The truth, in fact, is somewhere between these two extremes.  It would be fair to say that Madoff was a key participant in the unregulated global capitalist system that led to the present economic turmoil.  This essay will argue that the onset of the latest episode of economic depression is not entirely due to individuals such as Madoff, but rather due to fundamental flaws within the capitalist financial system.

Before we try to understand the real reasons behind the economic crisis, a brief look at the fraud committed by Bernard Madoff is warranted.  The investment scandal perpetrated by Bernard Madoff is the largest financial fraud in the history of capitalism.  It is believed that Madoff’s secretive investment advice firm caused a loss of nearly $65 billions for the 4,000 odd investors who trusted his firm with their wealth.  The investors consisted of several celebrities as well as people from middle and lower classes, thereby making the loss more acute for the latter group.  For example, Madoff’s ponzi investment scheme showed investors double digit annual returns on their investments, when in truth the money went straight to Madoff’s business bank account with Chase Manhattan Bank.  Whenever an investor would request a redemption, Madoff’s firm would pay using funds from new investors, the excess being sent straight to the Chase Manhattan account.  The trouble started when this vicious spiral of new infusions and redemptions went out of control.  (The Washington Times, 2009, p. A12)

As much as it is a case of individual indiscretion, there is a broader systemic failure behind the Madoff Scandal.  A key example of this is the general failure of regulatory bodies and corporate governance agencies in the United States.  Specifically, the Securities and Exchange Commission (SEC), which is an agency of the Federal government that is entrusted with the task of regulating the financial markets is one of the chief culprits behind this failure.  The SEC had brushed aside several warning signals in the years leading up to 2008, either due to the incompetency of their auditing staff or due to collusion with the fraudsters.  Ever since Madoff started his ponzi investment scheme two decades ago, there have been independent reports that questioned the sustained high earnings of Madoff’s investments, in spite of the market downturn.  It was only in 2008 that the truth about the firm’s fabricated accounting practices came to light, following which Bernard Madoff was duly tried and convicted for 150 years in prison. (Parles, et. Al, 2009, p.39)

The market crash of 2008 and the onset of recession since have not lacked precedents.  In fact, the story of unregulated capitalism is one of cyclical booms and busts.  Even as early as the 1920s, the inherent flaw in this system was blatantly exposed by the Great Depression.  In the years leading up to the stock market collapse of 1929, the then President Calvin Coolidge had deregulated the corporate environment, thereby eliminating the necessary checks and balances required for accountability.  This led to a free climb in stock prices purely based on financial speculation, i.e.  the quoted stock prices were much higher than actual values.  At the same time there was a large disparity in income distribution between the top and bottom quintiles of the population.  All these factors culminated in initiating the period of great economic distress, retrospectively termed as the Great Depression.  One realizes that all of the aforementioned factors of the Great Depression, namely corporate greed, financial deregulation and disparity in income distribution are all contributing factors to the present crisis as well.  It then begs the question, why haven’t the authorities learned lessons from the past and attempted to rectify it (Culp & Niskanen, 2003).  This just goes on to show that stringent regulations and controls over the financial markets would have thwarted frauds such as the one perpetrated by Bernard Madoff.

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