By Chet Yarbrough
The Big Short & No One Would Listen
By Michael Lewis By Harry Markopolos
Narrated by Jesse Boggs Narrated by Scott Brick & Others
There are lessons to be learned from Lewis’s and Markopolos’s books that are forgotten in the pending impeachment trial of President Trump.
Both Adam Smith (the father of economics) and Thomas Hobbes (author of “The Leviathan”) argued self-interest is a universal human characteristic.
Smith argued that capitalism takes the essence of human nature’s self-interest to advance civilization. He noted-the advance of capitalism is not a smooth upward curve but an improving trend. Smith was not saying that bad things do not happen in a capitalist society but they bend toward the good of society.
Hobbes would take issue with both of Smith’s assertions. Self-interest would not advance civilization unless it was regulated. Hobbes insisted on government control through “rule of law” to mitigate non-virtuous self-interest.
Hobbes feared unbridled self-interest in any form of government. Hobbes viewed human nature as brutish and unfair unless ruled by a Socratic philosopher king or, in a democracy, by tightly regulated and enforced “rule of law”.
The forensic reports of Michael Lewis and Harry Markopolos show what happens when efforts to regulate human nature are abandoned. One concludes from their books that Thomas Hobbes’ “Leviathan” wrecks havoc on society when “rule of law” is either not present, or unenforced.
Inept management by Fannie Mae, and Freddie Mac offered mortgage insurance for grossly over-leveraged mortgages. Companies like AIG removed investor risk by insuring banks against bad investments.
All of these foolish actions coalesced to bankrupt companies and families around the world. Individual lies, bungles, and missteps in the real estate industry created the worst recession since the 1929 stock market crash.
While this real estate debacle was developing, Bernie Madoff built a 50 to 70 billion dollar empire by making fools of the U.S. Government, European royalty, world wide charities, and working families. Madoff lied, cheated and stole billions of dollars from wealthy investors, charities, and mom and pop businesses with offers of bogus investment returns based on buying from Peter to pay Paul. He paid dividends to earlier investors by taking money from newer investors.
As long as people believed in Madoff, or deluded themselves, his wheel of fortune continued to roll. As the real estate market collapsed, old investor money was recalled and new money became unavailable. Madoff’s failure was inevitable.
Michael Lewis identifies seers that recognized “Quants” were packaging doomed mortgages into re-salable financial instruments called derivatives. These astute observers of the market, knew mortgage backed securities were at risk.
How could these things happen in a 21st century, democratically elected and governed society? Hobbes would say “how could these things not happen”?
Madoff’s investment lies were exposed by Harry Markopolos in a “red flag” report to the Security Exchange Commission in the year 2000; way before the 2008 economic catastrophe.
The title of the book “No One Would Listen” tells the story. This book is an indictment of democratic government in free society. Markopolos’s story exposes an inept and failed SEC, an agency created by government to protect investors–when, in fact, it protected corporate interests.
The irony is that Madoff did not get caught by the SEC. He confessed in 2009 because his Ponzi scheme fell apart. along with the collapse of the real estate industry.
Lying is part of being a human being. That is a fundamental reason for government to have “rule of law”. It protects people from the abhorrent self-interest of the few from the many.
President Trump is impeached by the House of Representatives. It is the moral responsibility of the Senate to have a trial.
Hiding behind a loose interpretation of the rules of the Constitution is a disservice to the people. Guilt or innocence should be proven by the facts; not the parties of interest.
Regulation is not a perfect solution for control of bad actors in a free society. However, no regulation is worse.