A propos of which, I offer this quotation from John Kenneth Galbraith:
To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. there is a net increase in psychic wealth.) 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 be called the bezzle. It also varies in size with the business cycle.
This reminds me of the S&L crisis in the late 1980's. The problems with real estate and the economy meant that existing fraud was uncovered. Yet a lot of people believe that the fraud was what caused the crisis.
Interesting. But it definitely should not be called "the bezzle."
"it should be called the bezzle." Looks like John has been spending too much time getting high with Snoop.
Consider just how close Madoff came to dying of old age before having his Ponzi uncovered. But for the financial crisis, it is likely he would have.
In my view, this isn't a very impressive observation by Mr. Galbraith. It's not true that the embezzled "feels no loss" even if he doesn't know he was hoodwinked.
The loss is still real enough; it's less capital than he would otherwise have. It's still felt in the real sense of not having it (along with any associated ripple effects), even if he doesn't know he should have it. There's a "net increase in psychic wealth" only if you discount entirely the (admittedly unquantifiable) "psychic wealth" that would have been felt had the loss not occurred. I don't see how it's all that interesting.
Another great post Megan. You've been knocking them out of the park the past few days.
What is the "multiplier" on bezzle? If you can convince Obama and House Democrats that is high enough, they may pass an Embezzlement Encouragement Act as a way out of the recession.
Nothing to add other than congratulating Megan on some great posting today.
The loss is still real enough; it's less capital than he would otherwise have.
Well - it depends on the kind of embezzlement. Certainly the kind of situations Galbraith posits do exist (Madoff's scheme being a nice example), where people *actually believe* they have more wealth than they do, until some day of reckoning arrives. I can also imagine other forms of petty embezzlement where the victim is under no illusion as to their actual level of wealth, but doesn't have good enough accounting to figure out where the money is being lost; but that is not so interesting.
Or as Warren Buffet put it:
It's only when the tide goes out that you can see who's been swimming naked.
Which is really a double entendre on naked as just about all these dodgy schemes can be described as being ever more complex and indirect methods of selling naked puts on a market.
Clay, you miss the point. The Madoff 'investors' may have had pieces of paper telling them how well they were doing. They may have bragged how great an investment it was. They may have planned on how to spend the money. The returns on the investment could have been withdrawn, which in essence was the latest sucker's contribution being divided up between the original suckers. They may have been wise and careful, only withdrawing a portion of the returns, reinvesting the remaining. No different from when someone invests in a real fund with real returns.
But it wasn't there, and when the scam was exposed, they found out that it wasn't there. Before the scam was exposed, the money for all intents and purposes was there. Psychic wealth.
Derek
Hey, the mortgage bubble bursting and the i-banks going under is what took down Madoff. He'd have gone another decade with no one noticing otherwise. But the collapse scared people into redeeming. That's why all of the crooks are failing now. Blame AIG!
Surely the 'bezzle' (forget what it ought to be called, 'bezzle' is what it is called from now on)is just one more element in the pile of not fully collectable obligations and assets valued at over their realisable prices which accumulate in good times? When a slowdown makes people start to realise on a good few of these, it is the chain reaction of not being able to realise that turns slowdown into recession; isn't it?
(Just a footnote to McArdle on why crises happen.)
Derek, I could very well be missing the point, or at least its significance. I'm still not sure.
Before the scam was exposed, the money for all intents and purposes was there. Psychic wealth.
That's the thing. I don't see how "for all intents and purposes [the money] was there." It couldn't be productively utlized even if investors saw it on paper, so there were real opportunity costs to the embezzlement.
Maybe I just don't understand what psychic wealth really means. If a bank tells someone their account is 10x larger than it really is, you've increased "psychic wealth" in the same way Galbraith is talking about, but so what? The same goes for any fraud until it's discovered. Why is that so interesting for economists?
Think about all those people who had wealth in their houses, until they didn't. Psychologically they felt richer, and practically, they could act richer, borrowing against their equity. The reality check is a bitch, of course. But for a while, for all intents and purposes, net psychic wealth had increased.
Good post. But then I would say that since I made a similar point, using the same Galbraith quote, last December.
I agree that this is a great post, and I'd like to see more about this, because it ties into the whole why-does-capitalism-advance-via-bubbles phenomenon.
A bubble, after all, is a kind of "bezzle" that everyone is in on (or at least is in on if they understand it's a bubble). The wealth isn't real, because bubbles burst, yet while they last everyone behaves as if it is real. I can remember interviews with the dot-com venture capitalists in 1999 where they freely admitted that they expected 19 out of their 20 projects to fail, yet there was enough psychic wealth for them to throw "money" (all on paper) at all twenty projects. The "bezzle" takes the wealth-creation properties of the velocity of money to new lengths, beyond even what the "bubble" does.
Because when people feel wealthier, they spend more, or so it is generally believed (like anything, some dispute its significance). This is called by the prosaic name the wealth effect. So they spend extra now, stimulating the economy, and then when they find out that they don't really have the money they retrench, shrinking the economy.
I suppose that some sort of radical Keynesian could argue that what we need right some is some kind of convincing fraud in order to make us all feel wealthier and stimulate the economy.
Megan, John, sure, I get that. But it just begs that question, again, as to why "embezzlement is the most interesting of crimes" to an economist. It's hardly unique in making people feel richer than they are. Any fraud, until discovered, does the same, no? And using a term like "psychic wealth" doesn't make it any more profound of an observation.
I suppose that some sort of radical Keynesian could argue that what we need right some is some kind of convincing fraud in order to make us all feel wealthier and stimulate the economy.
Isn't that, at the end of the day, exactly what proponents of "stimulus" are already arguing?
Ah, yes, I see your point. Yes, all fraud does in a way fall into that category, not just embezzlement.
I might also argue that blackmail is potentially more interesting as well, considering that blackmail often involves the threat to perform a legal act.
Well, many proponents like to argue that the stimulus is more than just digging holes to fill them in, but extremely worthy projects that were underfunded during the miserly Bush years. For some, such as rail fans like Ryan Avent, the stimulus also fulfills long-held hopes in addition to any stimulating effect.
But yes, some people are find with the digging holes to fill them in for stimulus.