One of the curiosities about finance is our inability to learn from past mistakes. If anything, as time passes we magnify them.
This is certainly true, as we know all too well, of financial manias and bubbles. But it applies equally to financial scams. Take the humble Ponzi scheme, which has been with us for almost 90 years. One might have thought we'd have wised up by now to this pyramid operation—what PJ O'Rourke once called "the old 'send five dollars to the name at the top of the list, put your name at the bottom of the list and mail copies to future ex-friends' [routine]."
When Ponzi's original scheme collapsed, the fraudster had liabilities of just $7m, or a paltry $76m in today's money. Yet in recent years, frauds have got bigger and bigger—to the point of destabilising entire countries. The MMM pyramid scheme collapsed in 1994, owing $1.5bn and shaking the young (and already dysfunctional) post-communist Russian state to its foundations. In 1997, the five giant pyramid schemes that dominated Albania's financial sector imploded, taking with them $1.2bn—or roughly half of Albanian GDP—in one fell swoop. In the resulting chaos, the entire state effectively collapsed.
The Albanian schemes offered returns of about 70 per cent per annum, at a time when inflation was low and the country had no productive industry to speak of. They were created shortly after the well-publicised collapse of MMM, of which many Albanians were aware. It has been suggested that Albanians had their brains fuddled by nearly 50 years of communism or were just plain thick, but this doesn't really stack up. One Albanian offered a different explanation for his compatriots' actions: "People knew such money could not be made honestly. They thought there was smuggling and money laundering involved to make these great profits."
So the Albanians didn't believe that they were victims of a scam—but its perpetrators. How similar this seems to the logic of some of Madoff's "victims" who jumped on the $50bn bandwagon because they thought the great investor was at the centre of a corrupt Wall Street ring, front-running the stock markets. It was a case of: "They are all at it so why not get a piece of the action too?" These things are not done to us, we do them to ourselves.
Thoughts from the Westminster bubble
It's well known that most MPs understand little if anything about the mundanities of everyday life, whether it's the cost of a bottle of milk, a bus ticket or the rent on a London flat. But the credit crunch is offering our legislators new ways to out themselves as latter-day Marie Antoinettes, twittering away in the Petit Trianon-on-Thames while the economy slumps.
Take William Hague's ill-judged swipe at credit unions, which he recently bracketed with loan sharks. These institutions—local co-operatives of depositors that lend money to people who have little access to conventional credit—are perhaps among the last outposts of the British financial system in which probity and trust are part of the "business model." Perhaps I have missed something, but no credit union has approached the government for a bailout or paid multimillion pound bonuses to its employees.
Hague claimed that these institutions charged predatory prices for credit. An APR of 25 per cent is not to be sniffed at, of course—but predatory? Most real doorstep lenders charge closer to 300 per cent, and it's not only the muscular end of the business that demands eye-watering rates. Take the case of Argos, a high street retailer, which was so concerned that Britain's hard-working families might not splurge on seasonal consumer durables last Christmas that it offered a store card for the purpose whose provider, Provident Financial, charged an APR of 222 per cent.
Not that these are necessarily predatory rates. They may be fully justified by the risk of default. My point is that, with this level of understanding, is it any surprise that parliament has signally failed to come up with any good answers to the crisis?
Virgins shafted by Brown
The biblical parable of the ten virgins tells us that those who don't prepare for things should take the consequences. Listening to the testimony of RBS's "Fred the Shred" and Andy Hornby of HBOS to the parliamentary select committee on 10th February, it was hard to escape the conclusion that here was a pair of foolish virgins. "It was the market that destroyed our banks," the woeful bosses wailed. "No reasonable man could have foreseen the credit crunch." But when the markets were going up—irrationally as it turned out—neither man was to be heard attributing their firms' financial success to blind market forces or forswearing the extraordinary rewards that went with it. Indeed, underlings that came forward with warnings, if one is to believe Paul Moore at HBOS, were pushed out. In the Bible, the foolish virgins took the consequences. But while Shred and Hornby have lost their jobs, they are still in clover. Shred, for instance, has a pension pot of £8.4m. Meanwhile, we learn from Ros Altmann, the government's former pension adviser, that to save the financial system the income of ordinary pensioners has been cut by 75 per cent due to interest rate reductions. Gordon Brown may believe he has saved the world, but Britain's pensioners could be forgiven for thinking otherwise.
