Jon Stewart: “Is our economy Tinkerbell? If we stop clapping it dies?”
April 10, 2009
“You report a lot on Bernie Madoff, who ran a Ponzi scheme which is a fraud: you just continue to get money and promise people returns when you’re not actually investing in anything…(looks down thoughtfully then looks up)…What is the difference between a Ponzi scheme and an investment bank?”
Huge laughter. The lead-up to this moment was Cohan’s critique earlier that banking was based on maintaining confidence–which allowed banks to taking excessive risks but left them vulnerable to the loss of confidence (when banks decided that a collateral put up by a bank was no longer good enough for a loan, they stopped lending to that bank and the investments collapsed), and that it’s “no way to run a financial system.”
Cohan’s reply was essentially that “in investment banking they were playing by the rules” while Madoff was “playing outside the law.” He noted as evidence that there have been only two criminal indictments in the Bear Stearns case.
But this common answer completely eschews the technical and moral core of the question–why? What Jon Stewart got good mileage out of, and what he was dead serious about, is that if technically the two schemes are the same, it’s not clear why we categorize them differently as legal and illegal. What properties (should) make a financial construct legal?
A similar question was raised on this blog in an earlier post about Ponzi schemes, pension systems, and banks. The question seems to be, how is it determined that a financial firm “did not invest in anything”?