Friday, July 20, 2012

On Bezzle

In his 1954 book, The Great Crash: 1929, John Kenneth Galbraith observes that commercial morality gets lax during a boom, and tightens up during the bust that follows. This cycle actually exacerbates the bust, because money or wealth that people thought they had turns out not to be there, once auditors and regulators get strict. (Think of Bernie Madoff's investors, or of the fake bank statements and bankruptcy at Peregrine Financial earlier this month.) I like how analysts at Credit Suisse, quoted in this FT Alphaville postrelate the Libor rate-rigging scandal to the cyclical expansion and contraction of what Galbraith called "bezzle."