Bernie Madoff: Frauds, Swindles, and the Credit Cycle

Abstract

The propensities to swindle and to be swindled run parallel to the propensity to speculate during a boom. Some bubbles are swindles; many are not. Fraud and swindles grow with euphoria; demand from those who fear missing out and falling behind creates its own supply. Financial distress leads to more fraud as credit tightens, and prices stop rising and begin to decline. When a swindle or embezzlement is revealed, distress is increased, sometimes precipitating panic. Panic and crash, with their motto of every man for himself, induce still more to cheat by dumping losses onto others in order to save themselves. Panic can also lead to a scramble for cash that reveals a long-running scam like Bernie Madoff’s, which might otherwise have continued even longer.