Is there a bit of Bernie in all of us? - How Madoff Conned his Palm Beach Socialites

Is there a bit of Bernie in all of us?
By Jacob Berkman · December 30, 2008

Eugene Robinson writes in the Washington Post that, while 2008 was the year of Barack Obama, it was also the year of Bernard Madoff – because we all have a bit of Bernie in us:

In a sense, we're all Bernie Madoff. We've been running our economy in accordance with his accounting principles for a generation -- and now we face a most unpleasant reckoning.
As everyone knows by now, Madoff -- once one of the most respected financiers on Wall Street -- stands accused of being perhaps the biggest swindler in history. Before his arrest this month, he reportedly told his sons that he had defrauded investors of up to $50 billion. He allegedly followed the playbook written more than eight decades ago by the elegant grifter Charles Ponzi, who used money from new investors to pay juicy returns to old investors. That works fine for a while, but every Ponzi scheme eventually collapses in ruin.

He adds:

But not all of Madoff's investors could have been in the dark. Some must have realized how unlikely it was that he had found some sort of magical strategy or technique that would always make money, no matter what the financial markets were doing. Some investors, I would wager, must have calculated that they could get in, get their return and get out before the whole thing fell apart.
Which makes me wonder how many of us had our eyes open when housing prices were soaring in Ponzi-like leaps -- by 10 percent or more a year, in some parts of the country -- while middle-class incomes were largely stagnant. How many of us stopped to ask just who was supposed to be able to pay $1 million for a standard suburban split-level, even if it had an upgraded kitchen with a Sub-Zero fridge?

The whole subprime mortgage industry was based on the idea that housing prices would always rise. Given that assumption, it was perfectly rational for first-time homebuyers to sign up for adjustable-rate mortgages that they couldn't really afford. From the moment they signed the loan papers, they would be building equity -- through appreciation -- that soon would make it easy, and lucrative, to refinance or sell.

In other words: Get in, get their return and get out before the whole thing fell apart.