| The Ottawa Citizen
Friday, January 30 2009, By Dan Gardner. ©The Ottawa Citizen. |
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A bunch of suckers. Albania once learned the hard way that capitalism can't really make money multiply like rabbits -- so why can't we learn the same lesson? Thomas Friedman owes Albanians an apology. I do, too. Some of you may as well, although you've probably forgotten what you should apologize for. It happened almost 12 years ago. Communism had collapsed all over Europe. Starved of consumer goods, envious of western wealth, Albanians embraced capitalism. Or rather, they embraced what they thought capitalism was -- a get-rich-quick-scheme that churned out money as if by magic. Ponzi schemes spread like a virus. Two-thirds of Albanians had put cash into "investment opportunities" offering returns of up to 50 per cent a month. The schemes collapsed, as they always do, and a whole nation of poor people became considerably poorer. Rioting toppled the government. Thousands died. And we condescended. Albania "has the distinction of being the only country ever destroyed by a chain letter," wrote P.J. O'Rourke. Those rubes! "It was logical that Albania's first post-communist, free-market government was brought down by Ponzi schemes," wrote New York Times columnist Thomas Friedman, who has an unmatched record of seeing clearly what will happen shortly after it does. Albanians were bumpkins. They didn't understand capitalism. And Albania's newly democratic government -- government by the bumpkins for the bumpkins -- didn't help them. "The Albanian government, both because it didn't know better and because many officials were caught up in the Ponzi fever, refused to close these funds before they inevitably collapsed," Friedman wrote. "As one senior U.S. official put it to me: 'People in Albania are dying because of a lack of proper banking regulations.'" Today, people in the United States aren't dying because of a lack of proper banking regulation but some of Bernie Madoff's victims probably wish they were dead.
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Oh, wait. Come to think of it, there was the hedge-fund manager who lost $1.4 billion in Madoff's scheme. He committed suicide. One assumes the two events were related. Another critical distinction between Albania and the carnage in Manhattan is the scale of losses. Albania's Ponzi victims lost a total of $1.2 billion. Bilking Bernie may have looted as much as $50 billion. And Madoff wasn't the only alleged Ponzi man at work in capitalism's homeland. "The number of other people who have been caught running Ponzi schemes in recent weeks is adding up quickly," the New York Times reported this week. "What is causing them to surface now appears to be a combination of a deteriorating economy and heightened skepticism about outsize returns after the revelations about Mr. Madoff." Ah, yes. Those outsize returns. We mocked Albanians for thinking capitalism could make money multiply like rabbits but it seems an awful lot of people born and raised on this side of the Iron Curtain believe the very same. And by "an awful lot," I don't mean only those who gave cash to Madoff and the mini-Madoffs. I mean anyone who invested in stocks or real estate expecting returns that far outstripped real economic growth. That's you. And me. And most of the rest of us, as well. Back when P.J. O'Rourke was chuckling at Albanian rubes, we were pouring our savings into Nortel, Enron, and any stock with "dot com" in its name. The fact that Pets.com didn't actually sell stuff and make money didn't bother us. That stock was hot! We bought with the expectation that someone would later buy from us for much more than we paid. That person, in turn, expected that someone else would buy for even more. And so on. By 2000, the Dow had tripled in five years. Does this remind you of anything? "In a Ponzi scheme," explains Yale economist Robert Shiller, "the manager of the scheme promises to make large profits for investors by investing their money. But little or no investment of contributors' funds in actual investments is made. Instead, the manager pays off the initial investors with the proceeds of a sale to a second round of investors, and the second round with the proceeds from a sale to a third, and so on." Inevitably, the supply of new investors runs out and the whole thing crashes.
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The stock market crash came in March of 2000. But by then, another sucker's game was underway. Real estate values were going up and up. You have to get in now! In a few years, you can make a fortune when you sell to a buyer who is sure that in a few years he will make a fortune selling to ... some other sucker. It's obviously madness. But it wasn't obvious then, was it? If it had been, you wouldn't have bought AOL and you wouldn't have a mortgage worth more than your house. That's something else speculation and Ponzi schemes have in common. "The possibility that the so-called investment payoffs are in fact coming only from new money is typically raised repeatedly and publicly well before the collapse of these schemes," Shiller writes. "The fact that many people continue to believe in the scheme afterward seems puzzling, and to outside observers the believers in the scheme may seem quite foolish. But this only shows the powerful effect on people's thinking of seeing others having made substantial amounts of money." No, I am not going to conclude that capitalism is a giant Ponzi scheme and the workers of the world have nothing to lose but their chains. Albanians know something about that bunkum, too. The problem is speculation. "Nobody was thinking about what these companies are worth," writes American financial journalist Roger Lowenstein, "only about the next quotation on the screen." Capitalism cannot make money multiply like rabbits. It cannot make us rich tomorrow. But it can produce real growth, real profits, and incremental improvements that pay off over decades. "For those who invest with prudence and an eye to long-term values," Lowenstein writes, "the market need not be a Ponzi scheme." We know this, of course. It's what we told the Albanians, Russians, and others who stumbled out of Communism into the bewildering world of free-market capitalism. Forget the get-rich-quick schemes, we said. Work hard, save money, be patient, and have reasonable expectations. Good advice. Now, about that apology. You can contact Dan Gardner at the Ottawa Citizen. |
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Copyright © 2005 Dan Gardner |