Money From Money – Why Its the Big Moneymaker

I was reading DolB’s post on the money from money economy and I’ve been mulling on it. As DolB notes, “Nothing is being added or created.”

And yet, its grown tremendously. In comments to that post, one of the reasons given is that the tax structure favors capital over labor. But I think its actually a different set of laws that are more important… criminal laws.

Consider the total amount of jail time to which all of folks involved in the Enron scam were sentenced. What are we talking about – 50 years? This for running scams for many years. If I had to guess, the total amount of money stolen by all the folks who are currently in jail for any sort of robbery, embezzlement, blackmail, etc., is an insignificant fraction of the theft that was perpetrated through Enron. Spend ten minutes holding up a liquor store and you will spend more time in jail than Andy Fastow will for spending years planning and perpetrating his schemes.

And even if you get away with robbing the liquor store, you’ll never do as well as this immigrant success story.

Now, let me take another step and state this – the financial sector is the only one I know of that can actually benefit and grow from fraud, at least for a very long time. Consider… say I wander over to the dump, select a refrigerator motor, two broom handles, a dead squirrel, a small pile of newspaper, and some rancid cheese. I apply some creativity and some glue and produce… something. No matter what I call it, it ain’t going to sell.

But do the equivalent in the financial markets and you spawn an industry. Maybe your collection of parts will be called a CDO, or perhaps a hedge about as exotic as a variance swap, but whatever its called, it will have a market. Question it, and you get fired by those who have an interest in keeping the market going. By the time someone actually looks at the parts – many, many years later when the promised payoffs aren’t coming in, the folks who came up with the idea will have retired and will be remembered only as success stories. No manufacturing company can get away with producing nothing and selling it as something for very long. Superior marketing may let you sell your inferior product at a premium forever, but it won’t let you call a dead squirrel a Ferrari and find any buyers.

And its not just outright fraud… pillaging also is rewarded in the financial markets. If you take over a company, you can focus on improving their product line or on looting reorganizing the pension fund. Which do you think is going to produce the bigger pay-off?

Anyway, I gotta get back to work, but it occurs to me that if you want to put a halt to this sort of nonsense, its easy. Up the punishment for white collar crimes. A lot. It will slowly work its way up the system.