Of all the articles and readings we discussed these past two sessions, I found none more interesting than Paul Krugman’s piece, “How did Economists get it so wrong?” In the article, Krugman details the numerous issues that U.S. economists either blatantly missed, or simply ignored, issues that ultimately led to the utter financial collapse we witnessed in July 2008. This crash is widely considered to be the worst economic downfall since the Great Depression. Aside from the deep, long-standing issue I take with economic theory (namely that it’s just that: theory), this article reminded me of a similar financial disaster related to Short Termism: the Bernie Madoff ponzi scheme. While one may initially struggle to see the ties between these things, allow me to share a little information about the Madoff Scheme that some may not know. In a nutshell, Madoff schemed his investors by consistently declaring larger profits than their assets were actually earning. Thus, on paper, all appeared not just well, but fantastic for those from whom he’d taken money.
The weird part of this story comes in the form of New York Mets’ principal owner, Fred Wilpon. Having had nothing but success with Madoff in recent years with his investments, Mr. Wilpon encouraged several people to make the same decisions he had: Invest with Bernie. He’s the best. Several Mets players were reportedly paid, but promised compensations that had been invested with Madoff. As external investors, noone was allowed to speak with Bernie directly. They were shown the extraordinary too-good-to-be-true numbers, told the same would happen for them, but were allowed to ask limited questions regarding the actual investing process itself.
Let’s stop right there, as this is all I need to make my point. How do you blindly invest MILLIONS from your life savings with a man whom you’ve never met, and aren’t ever allowed to question? While this comparison may be a bit of a stretch, I feel that it all falls under the same pervue of Short Termisim. That is, focusing on short-term goals (in this case, earn profits quickly) and ignore potential long-term issues. U.S. economists did it. Madoff’s investors did it. And if this continues to happen, with the heads of this country throwing around billions of dollars without asking the right questions, or making the right insights, we could all be victims of a continuous onslaught of disasters and scandals for years to come.