Paul Krug­man sug­gests an answer to an “obvious question” that I’ve been won­der­ing about: “How dif­fer­ent, really, is [Bernard] Madoff’s tale from the story of the invest­ment indus­try as a whole?”:

Con­sider the hypo­thet­i­cal exam­ple of a money man­ager who lever­ages up his clients’ money with lots of debt, then invests the bulked-​up total in high-​yielding but risky assets, such as dubi­ous mortgage-​backed secu­ri­ties. For a while—say, as long as a hous­ing bubble con­tin­ues to inflate—he (it’s almost always a he) will make big prof­its and receive big bonuses. Then, when the bubble bursts and his invest­ments turn into toxic waste, his investors will lose big — but he’ll keep those bonuses.

O.K., maybe my exam­ple wasn’t hypo­thet­i­cal after all.

So, how dif­fer­ent is what Wall Street in gen­eral did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply steal­ing his clients’ money rather than col­lect­ing big fees while expos­ing investors to risks they didn’t under­stand. And while Mr. Madoff was appar­ently a self-​conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same (except for the house arrest): the money man­agers got rich; the investors saw their money disappear.

What’s inter­est­ing about Krugman’s non-​hypothetical hypo­thet­i­cal is that it’s awfully close to a schematic view of how cap­i­tal­ism as such car­ries on.

Yves Smith, God bless her right­eous soul, is in high dud­geon this morn­ing over a New York Times story about exec­u­tive compensation:

Why is no one will­ing to call things by their proper names, and instead resort to euphemism and double-​speak?

A New York Times story today, “On Wall Street, Bonuses, Not Prof­its, Were Real,” makes its most impor­tant point in its head­line, and man­aged to get some good data points on how rich invest­ment bank com­pen­sa­tion was in the peak years, but oth­er­wise glosses over the fun­da­men­tal nature of what went on.

It was loot­ing, and it is high time the media starts describ­ing it in those terms.

…Read More…

From Bloomberg yesterday:

Gold­man Sachs Group Inc., which got $10 bil­lion and debt guar­an­tees from the U.S. gov­ern­ment in Octo­ber, expects to pay $14 mil­lion in taxes world­wide for 2008 com­pared with $6 bil­lion in 2007.

(H/t TPM)

I’ve men­tioned my appre­ci­a­tion for Yves Smith’s naked cap­i­tal­ism blog often, but for those of you who haven’t been fol­low­ing along at home, here’s a selec­tion from her com­men­taries on recent eco­nomic events.

+ On Obama’s appoint­ment of Tim Gei­th­ner as Trea­sury Sec­re­tary (Smith wanted Paul Vol­cker for rea­sons she explains here):

The prob­lem is that the Bush Admin­is­tra­tion has so low­ered stan­dards that some­one who is com­pe­tent is applauded as a good choice, as in ide­ol­ogy and past record are ignored if you have a respectable back­ground and are not a patron­age choice. Com­pe­tence is a min­i­mum stan­dard, folks. What does the can­di­date stand for? The MSM ducks that issue, choos­ing to char­ac­ter­ize Gei­th­ner as a tech­no­crat. That is incom­plete and inaccurate.

+ On the pos­si­bil­ity of a default on U.S. debt or a deval­u­a­tion of the dollar: