What to be blamed for the current crisis?

Today, Bernard Madoff was sentenced to 150 years for masterminding the largest Ponzi scheme in history, six times longer than the penalties meted out to the chief executives of WorldCom Inc. and Enron Corp.

When this case is finally driven to a close, there is certainly something that we can learn from it, not only the lessons that we should bear in our minds that how obvious the crime can be conducted without being noticed for years before people finally get burned by the burst of the Ponzi scheme; but also the deeper understanding the link between the case of Madoff and the origin of the current crisis.

What causes the current crisis? There could be a number of answers to the above question, such as the home price bubble, the weak transparency of mortage back securities, corporate malgovernance, excessively loose monetary policy, etc. These answers might be good to explain one aspect of the current crisis, however, to my opinion, they are just the apparent phenomeno reflecting a deeper origin of the current crisis - Mistrust.

Why Madoff can conduct the Ponzi scheme for years before being caught? Because most people are relying on the judgements of others when they make their investment decisions. For years, Madoff had been a star in the investment community, and was trusted by so many people, especially by those so-called smart people (celebrities and investment bankers). The more people trusted Madoff, the easier for him to gain the trust of others. It is like a snowball which is intially small in size but grows into a huge size of trust from other people. Most of the trust involved is not based upon the truth, the firsthand information, instead, it is based upon the idendities adn reputation of those people who already trusted Madoff. Yes, it is a Ponzi scheme, but it is not only a Ponzi schme of money making, but also a Ponzi scheme of mis-trusts by so many people.

In the run-up to the current crisis, a similar process of Ponzi sheme related to information cascades, because a great many retailed investors have put excessive trust in highly leveraged banks and other business plans, because the central bankers have put excessive trust in the well functioning of the market economy, because a large number of professional investors (institutions) have put excessive trust in the optimistic expectations of others.

Another classic example of "Greed and Fear"!