One Benefit of Recessions: Exposing Madoffs of the World

Il Dopo Madoff potrebbe avere anche degli effetti positivi secondo Phil Izzo

«One Benefit of Recessions: Exposing Madoffs of the World

The financial crisis may get to take credit for the downfall of Bernard Madoff, and more scams may come to light as some of what John Kenneth Galbraith called “the bezzle” works its way out of the system.


A bigger contributor to the bezzle than Galbraith could have imagined. (European Pressphoto Agency)

In his 1954 book “The Great Crash of 1929,” Galbraith wrote, “At any given time there exists an inventory of undiscovered embezzlement in — or more precisely not in — the country’s business and banks. This inventory — it should perhaps be called the bezzle — amounts at any moment to many millions of dollars. It also varies in size with the business cycle.”

Galbraith said that in good times (he was discussing the 1920s but it applies in the case of Madoff in the early 2000s) the bezzle grows by a combination of greed and more lax oversight. But “In a depression all this is reversed. Money is watched with a narrow suspicious eye,” he said.

Diminishing trust is bad for bank lending and the movement of credit in the economy, but it is a boon for ferreting out embezzlement and other financial crimes. “Should the American economy ever achieve permanent full employment and prosperity, firms should look well to their auditors,” Galbraith wrote. “One of the uses of depression is the exposure of what auditors fail to find.”».

WSJ.com