Monday, December 15, 2008

Mortgage crisis, Madoff madness - so what comes next?

Agreed. Mortgage crisis was because of a complex web of sliced and diced mortgages that escaped instant scrutiny. But how about a ponzi scheme run by an ex-Nasdaq broker dealer?

As a broker-dealer, Mr. Madoff's firm was already heavily regulated, and news reports say the Securities and Exchange Commission investigated him in 1992 without finding anything wrong. The SEC said in a statement Friday that its New York staff also conducted inquiries into Mr. Madoff's firm in 2005 and 2007. Mr. Madoff's separate investment company registered with the SEC in 2006, which is all that hedge funds would have had to do under the SEC's proposed (but failed) hedge-fund rule of a few years back.

The recent spate of scams from the US has made this once famous financial innovation powerhouse a den of con artists and shoddy regulators. Alright how about foreigners that invested so much money?

Without this flow of easy money into the U.S., globalization in its current form would not have been possible. The U.S. was the consumer of last resort, absorbing cars from Germany and Japan, electronics from Taiwan and Korea, and clothes and furniture from China. The earth was flat, and why not? Pluck a laptop from Taiwan and pay for it with a home equity loan, which—if you trace back the connections—was at least partly funded with foreign money, too.

The big unanswered question, for years, was why this money flow persisted. Why the heck were foreign investors willing to lend the U.S. such large amounts of money on such good terms? Economists and journalists spun out hypothesis after hypothesis (we'll see more below), but there was no agreement on why.

What comes next? The fallacy is punctured. Globalization will be seen as what it is—a game with risks that can't be wished away. And U.S. prosperity will depend on the success or failure of its ability to innovate—not its ability to tell an implausible story to foreign investors.

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