It’s tough being a grandiose financial criminal these days. Lots of people ran scams that took millions from clients; Allan Stanford even collected a title while allegedly fleecing investors with fraudulent CDs. Bernie Madoff confessed to the biggest crime of all, distracting attention from all of the smaller Ponzi schemes, fund misappropriation, and inflated claims cases that are coming to light. The mini-Madoffs involve financial planners, insurance salespeople, and small-time hedge fund managers. Clients trusted them to generate good returns, usually returns that were better than the market. The problem is that financial markets are mostly efficient, so it is bloody hard to beat them.

In his book The Great Crash 1929, John Kenneth Galbraith talks about how there’s always a “bezzle” being embezzled, but in good times, no one knows what it is. In fact, happiness increases because the embezzler has the money but the victim doesn’t know that it is gone. He says that embezzlement increases in good times because it’s easier to hide. “In depression . . . money is watched with a narrow, suspicious eye,” he writes. “The man who handles it is dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.” Ponzi’s own scheme broke well before the Great Crash, when lots of other scams were exposed. (more…)