Guest post: The bezzle is shrinking

Submitted by Edward Harrison of the site Credit Writedowns.

“In many ways the effect of the crash on embezzlement was more significant than on suicide. 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.”

John Kenneth Galbraith, The Great Crash

Well, it seems history is repeating itself because the bezzle is shrinking again as many frauds are now uncovered. Witness the latest in South Africa:

Hundreds of investors have been fleeced of up to 10 billion rand ($1.5 billion) in what could be South Africa’s biggest corporate fraud, a private investigator and lawyer said on Thursday.

Barry Tannenbaum, a South African businessman living in Australia, lured investors with the promise of 200 per cent annual returns linked to pharmaceutical imports, and forged AIDS drug orders to reassure funders when money started to dry up.

The scheme is still unravelling but lawyers and investigators believe hundreds of investors including top businessmen from South Africa, the United States, Germany and Australia, were involved, losing up to 10 billion rand.

To my mind, the fact that so many frauds are being uncovered speaks to an economic climate of laxity of regulation which was not only manifest in the U.S. This was a global phenomenon as the above story attests. Paul Kedrosky has a nice post out called “More Good News: A Bear Market for Ponzis.” Definitely worth a read.

My question is this: now that we see what kinds of blatant thievery was being perpetrated while regulators were sleeping at the wheel, do we have enough political will to make the necessary changes?

To date, the answer to this question seems to have been no. The Obama Administration will tell you the answer is yes because they are making sweeping regulatory changes – in part, by giving the Fed more power as the systemic risk regulator. But, as I see it, the Fed hasn’t really been knocking the ball out of the park. Why would we give them more power? A gift to the Fed – To “SiRR,” with love?

Here’s the video:

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. DownSouth

    This issue of giving the Fed more power is an interesting one. The Fed is supposedly immune from politics. That means it is also immune from what Cornel West calls "accountability from below," or democracy. It falls within a Marxist/Leninist concept of government, not unlike the rule of the "Talented Tenth" envisioned by W.E.B. Dubois:

    Could this also have something to do with Hugh's comment yesterday about how bureaucrats aren't held to the standard of accountability as private economists?

    I'm not really sure that making bad predictions in economics is a reputation killer. Look at Summers, Rubin, Bernanke, and Geithner. They have made very successful careers in economics despite being almost always wrong.

    Hannah Arendt summarizes the Maxist/Leninist political theory as follows:

    His adherence to tradition is also the reason for the even more fateful error of Marx as well as Lenin that mere administration, in contrast to government, is the adequate form of men living together under the condition of radical and universal equality. Administration was supposed to be no rule, but it can actually be only rule by nobody, that is, bureaucracy, a form of government without responsibility. Bureaucracy is the form of government in which the personal element of rulership has disappeared, and it is of course true that such a government may even rule in the interest of no class. But this no-man-rule, the fact that in an authentic bureaucracy nobody occupies the empty chair of the ruler, does not mean that the conditions of rule have disappeared. This nobody rules very effectively when looked upon from the side of the ruled, and, what is worse, as a form of government it has one important trait in common with tyranny. Tyrannical power is defined by the tradition as arbitrary power, and this originally signified a rule for which no account need be given, a rule that owes no one any responsibility. The same is true for the bureaucratic rule by nobody, though for an altogether different reason. There are many people in a bureaucracy who may demand an account, but nobody to give it because nobody cannot be held responsible. In the stead of the tyrant's arbitrary decisions we find the haphazard settlements of universal procedures, settlements that are without malice and arbitrariness because there is no will behind them, but to which there is also no appeal. As far as the ruled are concerned, the net of the patterns in which they are caught is by far more dangerous and more deadly than mere arbitrary tyranny. But bureaucracy should not be mistaken for totalitarian domination. If the October Revolution had been permitted to follow the lines prescribed by Marx and Lenin, which was not the case, it would probably have resulted in bureaucratic rule. The rule of nobody, not anarchy, or disappearance of rule, or oppression, is the ever-present danger of any society based on universal equality.

  2. kackermann

    I've said this before, but it can't be hammered home enough…

    If you Google "Citi Fined", you will scratch the surface of what is obviously a habitual criminal enterprise.

    There is simply so way to pass off their volume of crimes as accidental oversights, or the actions of a couple of bad apples.

    Letting them deal with money is like rehiring someone convicted on 50 counts of child abuse to run a day care center.

    Here is a good rule: instead of a 1-time fine, if a company commits fraud, they should have to forfeit 5% of their gross for each conviction, and the duration will by for 5, 10, or 20 years, depending on the severity of the crime.

    Something like that might wring some efficiency out of internal controls.

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