Originally published at: Is the UK a Massive Ponzi Scheme? What Madoff Teaches Us
The Netflix series Madoff: The Monster of Wall Street is an excruciating examination of greed, hubris, denial and corruption on a grand scale. Joe Berlinger’s enthralling account of Bernie Madoff’s rise to power, and his spectacular fall that left a trail of destruction around the world, demonstrates how warped and broken speculative finance is. When men like Madoff are unassailable, and we allow them to act without checks or restraint, then we are corrupted simply by standing aside and allowing these charlatans space to act without challenge.
What is clear now that the dust has settled, and the fuller picture of Madoff’s operations have been pegged out for all to see, is that these actions were not those of a single, sociopathic and narcissistic individual. Instead, they were the product of a system that found and allowed men like Madoff to flourish. If you build a sausage machine, then it will produce sausages. If you build a financial system to produce incentive maximisation – greed in common terms – then you get corruption.
Having watched this series, and reflected on a former employer that many people know, I was able to connect some associated issues in a couple of related conversations I’ve had recently. Something has got me wondering if we are finally seeing how speculative finance, as a popular force in our culture, may be coming to an end? Are we reaching a point where we agree that speculative finance needs to be scaled back and reduced in its importance to the international economy? Do we need to see these capricious global institutions restrained, so they can’t do more damage and cause the kind of havoc they did in 2008?
The concentration of so much financial power in so few hands is worrying. But as alarming as my fear is that we are once again putting too much control into the hands of so few, especially those who are perpetually unaccountable, it’s not that which bothers me if I’m honest. Instead, I’m actually worried more about the corruption of our souls that this has resulted in. We should be ashamed of what we have become on the back of an addition with financial speculation.
The penny is dropping – have we actually killed entrepreneurialism, ingenuity and innovation, because we’ve become singularly obsessed with lazy financial speculation. Here’s my case. The UK is in the thrall of a massive wave of multiple social and economic problems. In recent years, we’ve had the global financial crash. We’ve had austerity as a pointless response to that crash. We’ve had Brexit, which has left the UK cut off from our closest trading partner. Not only that, but we’ve also had Covid-19, for which we were badly prepared, and now on top of all of this, we are dealing with the energy price shock from Putin’s obscene war in Ukraine.
What we need to realise, however, is that these are not causes but are, instead, symptoms of a deeper problem – social and economic incompetence!
The problem is that a whole class of middle-managers across the UK are unable to think and innovate themselves out of the trouble we are in. They are stuck with a business model that no longer works, and for which they haven’t yet woken up to its disastrous shortcomings. Let me explain. To become wealthy in the UK, it is now commonly accepted that the best way to build even a modest fortune is to do one of two things. First, focus on assets, such as property and bonds, especially those that the government has been prepared to bend over backwards to protect. If you own a home in the right place, then its value is guaranteed to increase perpetually because the government wants your votes, and will keep interest rates artificially low to do get them. Property ownership is free from market dynamics in the UK.
Second, if you are going to extract value from labour, usually other people’s labour, then you must sweat it and get people used to expecting, as George ‘Slasher’ Osborne once prophetically said, more with less. Basically, you press wages down, and you underinvest in the workforce, leaving employees to do more tasks than they can handle because they were once spread across different roles. Throw in some IT systems, carp on about efficiency, and you can fool people into thinking this is actually good for them. This squeeze can also be compensated by offering people loads of overtime, or by using agency staff who only work on a temporary basis, but get paid well above the staff rate.
The UK has excelled at both of these approaches to the economy. Real wages remain below where they were in 2008, and are well below their comparable European populations. The productivity problem that the UK faces is entirely due to the lack of investment in skills and problem-solving. So many things no longer work properly, in the UK because our middle managers have been found out for what they are – incompetent blowhards, who can manage the paper clips and the processes, but can’t come up with new goods, services or business models to save their skin.
Why are we like this? Well, if all you need to do is buy some property and wait for your pension to increase, why on earth would you want to stretch yourself to try something new? When was the last time one of your colleagues got rewarded for their merit or their industry at work? If they did, and this was the norm, then the trickle-up model would become the incentive structure, replacing trickle-down. But that’s not how our system rewards people.
Instead, sociopathic and narcissistic behaviour at the top is normalised into the structure of companies and institutions, and most other people just give up and serve-out their time, waiting for the day when they are free to retire. There are two big challenges facing the UK economy. The loss of millions of skilled workers with Brexit, and the wave of early retirements that is removing experienced older people from the jobs market. Living off a reduced pension seems preferable to continuing to work for companies and bosses who can only sweat the workforce.
We’ve become so used to this model, where we have normalised and personalised speculation, that the desire to live off unearned and unwarranted income has become totemic. Take for example the shift from universal state support for social care. One of the reasons the NHS is struggling is because families do not want to move their elderly residents into care homes, because it means they will have to sell their properties to pay for this care, and they will lose their inheritance. Old people are being housed in inappropriate accommodation, living in isolation, without the care that they need, because their children are greedy.
What’s the answer? Flipping a few things on their head might help. Social care should be free and universal. It should be paid for from substantial inheritance taxes that are pooled. Second, education and training should be freely available on demand for everyone at all stages of their lives, and it should be paid for by punitive taxes on financial speculation. Third, mortgages should only be available from local mutual societies and cooperative that are heavily regulated and unable to trade on the international finance markets. To invest, they must do so locally within their region and with industries that are bound to those places. Interest rate must be set by the market, and it must be able to go both up and down, with no intervention from the state or central banks.
I’ve come to realise that the corruption of financial speculation runs deep in the UK. We don’t have a housing market here in the UK, we have a state-controlled mortgage system that is guaranteed to increase property values regardless of what people do with the rest of their lives. At work, you can be incompetent and lazy, but all you need to do is serve your time and as long as your property value is increasing, then you can sit back, and you will be comfortable.
I wonder who else made that kind of promise? The lesson I’m taking from watching how Madoff fooled people, is that it wasn’t that difficult. They wanted to be fooled. They fooled themselves. The UK is a massive Ponzi scheme, and we are fooling ourselves if we think it won’t crash around us.