The Federal Reserve Flow of Funds Z1 table makes clear that America invested in a Madoff economy. In the 12 months between 4Q2007 and 4Q2008 American households and Non-Profits experienced an $11.3trillion decline in asset value. In one year 15% of the consumer wealth of this country was destroyed. The last three months of 2008 saw $5.4 trillion in asset losses in US households and nonprofit organizations, 8% of wealth. These are mind boggling numbers.
In the last 3 months of 2008 GDP was $3.55 trillion. More asset wealth was destroyed than total income generated in the 4th quarter of 2008. The US economy performed like a giant financial institution with asset write downs exceeding income. Like a grand Ponzi scheme, global imbalance was revealed by the receding credit tide. Everyone hates the banks and screams for Madoff blood. I fully understand the sentiments. However, the greater issue should be the tens of trillions lost not by Bernard Madoff. Lost in the shuffle seems to be that our macro economy looks suspiciously similar to a giant bank balance sheet or a portfolio run by Bernie. Thus, we are mad and off in our narrow anger.
It’s a Madoffed world. The Asian Development Bank (ADB) estimates that global asset losses sit at approximately $50trillion. 2008 global asset losses exceeded 2008 total global product. $50 trillion in asset deflation amounts to losses of nearly $7,150 for every person on living earth. While we are laser like focused on Bernie Madoff, his vile scheme amounts to little more than tears in the ocean. Developing Asia, the engine of global economic growth, was particularly hard hit. ADB estimates suggest that the $7 trillion developing Asia GDP took a $9.5 trillion asset hit. China, a particularly vital growth engine, persists in maintaining 8% growth targets that seem absurd. Electric power demand in China appears to have been falling since June/July2008. This week China’s premiere made headlines talking down China’s trillion dollar US Treasury position and casting doubt on the American stimulus his country badly needs. In a rare departure from sage commentary, Chinese officials seem to have Madoffed into being mad and off this week.
Beyond calls for vengeance and a sudden interest in blaming banks, the real lessons of the last decades sit and wait to be discovered. Transferring bad assets and blame has been the order of the American and global day. This is a serious mistake. Some clamor for nationalization, others blame banks and America. Some still claim markets are functioning acceptably. A passing glance at the opening paragraph should make clear this is a global, structural failure. Nationalizing now makes sense only to save vital firms, sectors and jobs.
There is no reason to believe that government ownership, alone, will radically alter the course of firm or national fortune. True, global disasters always implicate state and enterprise alike. Saving vital social function, jobs and political stability is almost always sage. Games of toxic asset hot potato, firm to state, don’t transform fundamental value. This game is a recipe for drawn out crisis and public anger. Strategic receivership and regulatory reform are pressing essentials. Exchanging blind faith in markets for blind faith in government policy is mad and it is off.
Madoff has become the face of the global crisis- particularly in America. He is a poor choice. His grotesque and larcenous behavior has stripped many worthy causes, individuals and institutions of funds. He richly deserves all the asset seizure and jail time he gets. What the episode teaches is only allegorical. Trust in wealth and power is always dangerous. Massive losses require failures by state and enterprise- think multiple SEC investigations netting no action. When markets were soaring and banks reporting huge profits, we showered them with praise and allowance. Now that markets and banks are laid waste, we rush to castigate and punish. For years we engaged shallow theories that all state intervention was costly and counterproductive.
Now many believe that state intervention can transform asset water into rich wine. So long as we indulge bi-polar oscillation we elide real systemic rebuilding. Excess celebration and condemnation drive some to conjure false triumph to garner great praise and evade hatred. Their frauds may offer precious warning. We have been Madoffed but we don’t have to be mad and off moving forward.