Shit Shares and Wind Trade, or Why Madoff is not Law

If, in the rarity of quasi-scientific historical frivolousness, one tries to assign specific cause, or 'blame,' or simply 'a major contribution' for such a complex event and with such profound implications for the posterior evolution of Europe, and indeed the world, as the French Revolution of 1789, neither Voltaire nor Rousseau can top the unintended consequences from the grandiose ambitions of the Scottish financial jack-of-all-trades John Law. When his financial adventure for selling shares of what appears to be among the biggest financial enterprises in the beginning of the 18th century - la Compagnie d'Occident - came to an end, the French treasury, and indeed the French crown, were plunged into deep financial recession, which culminated with a spontaneous social revolution.

No one really expects that one such contemporary collapse of another financial empire built on lies and avarice that of the American jack-of-all-trades Bernard Madoff, will cause a social revolution commensurate to the French one. But, there is something intriguingly common between the two events, regardless of the time and space difference. The consequences, or what economists would call 'externalities' for the respective financial systems of the two countries were affected by the collapse of these risky entrepreneurial enterprises are as damaging and troubling, as they are also healing. In fact, both served as a form of social catharsis, a purgatory of the social naiveté and apart from the unfortunate loss of the duped investors, one can find a healing, hence positive, externality. No longer will a word of mouth pronounced in surreptitious gatherings be taken for its face value, even when the outrageously expensive membership in exclusive country clubs serves as a screener. In fact, precisely this screening process of in-group trust allowed for the prolongation of the Ponzi scheme for so long.

Informal conversations among 'trusted' members of what they believed was a 'covert' strata of the society, coupled with supercilious attitude towards the more traditional risk assessment which many of Madoff's investors most certainly were enforcing rigorously in other aspects of their personal or/and private lives, led to blind trust and egregious folly of mad investment. Had these people spent some of their wealth on basic research, perhaps funding a couple of graduate students in economics and investment, to research the sustainability of claims made by Madoff's company for return on investment, perhaps many would have changed their minds. Yes, there are always such that are willing to believe that the window of opportunity has opened, and the invisible magic bless of financial abundance has touched their shoulder, so they will worry no more. There will always be. John Law's shares in Compagnie d'Occident is one, but certainly not the only example of such behavior. When the day of truth comes, however, all one can do is to side with the Dutch investor in Law's mega Ponzi scheme, as reported by Neil Ferguson, and vehemently to utter "Shit shares and wind trade."

Yet, where John Law left to the world the printing of paper money - a concept without which the contemporary financial system would not have been here at all - Bernard Madoff has invented the disappearance of these printed money. One cannot help but wonder how much are sixty five billion dollars and what it takes to physically move them from one place to another, let alone conceal their traces between banks. May be just like in Law's case, today too many important people have been duped to invest by word of mouth during cocktail chatter in the local yacht club, to find the answer to this question. But not all is bad. It seems that the society is, perhaps, better off without this habit of 'financial chatter' behind closed doors for selected ones.

After all, there is something profoundly wrong in the fact that there are two venues for acquiring investment wealth: one by being let in the secret circles of the selected ones, and the other by following the advice of Jim Cramer on CNBC's Mad Money. Now they both seem equally ridiculous, except that Cramer's performance is many times more entertaining than that of Bernard Madoff. For what I am concerned, purgatory of 'shit shares' requires deep cleansing from shitty entrepreneurs, and pissed (off) investors. Not pissing against the wind seems to be a matter of practical intelligence.


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