Belmont Club

Smoke and mirrors

A YouTube video showing Bernard Madoff describing, for a talk show, how the stock market works is a hoot. It’s portentous and enlightening in a retrospective way. Like watching the Titanic’s last moments. At one point, one of Madoff’s staffers is asked by the host, “just describe what the heck you do?” The cryptic answer follows and the host nods vigorously. But I wonder if he was ever the wiser?

The host apparently visited the firm’s premises and was surprised to find “it was a very quiet place”. The quiet, Madoff explained, was due to the absence of humans in the process because the execution process was automated. “Ok,” Madoff said, “let’s take the human factor out of the equation”. That was touted as a technological advance though of course that meant that there were fewer people who really understood what was going on. Later he added, “when you take the human being out of the equation you solve your regulatory problems.” But nobody got the punch line at the time.

The place became a palace of mysteries. And sad to say, there’s a section of the public that is much more inclined to believe in what they can’t understand than in what they can comprehend. That’s the allure of revelation.

The real question that strikes you when Madoff explains, in the video, that he didn’t like MIT grads programming his trading system because they “spent too much time thinking” is how the heck anybody who heard this could in their right mind turn over their life savings to him? Yet apparently many smart people did. They took him on trust. The relied upon the man. And once you trust the captain of the ship then you just sit back and relax.

But do we have any choice? In a world as complex and strange as ours has become, we’ve had to entrust many vital activities to people we don’t know and systems we don’t fully understand. We go through life, as people in Manhattan did on September 11, 2001, thinking we’re safe. But beyond that comforting assumtion, how do we know?

Individual lives from the days of Alexander and Genghis Khan were always vulnerable to far away events. Peasants in China and Mesopotamia were surprised by barbarian invaders hailing from a place so distant they did not even have rumor of it.  But today the influences come from every quarter and somehow we think that someone will protect us from them. The really scary thing is that however large we make the regulators, however great the powers we give them it is possible that they cannot protect us from storms at all. Perhaps the downside of an information economy — indeed an information driven world — is that no one really knows what things mean. Perhaps our guardians are just as clueless as the hapless talk show host. He wasn’t a bad guy: just unable to deal with what he couldn’t see.