Madoff clawbacks are a fearful reaction to the angry herd

Generally whenever a scam goes down there are winners and losers.  The winners know that something is wrong (or are in on it) and they bail out before the scam falls apart.  Everyone else is a loser holding an empty bag.

Or so it goes when the social mood is still being juiced by ever increasing credit.  During those times it seems that no matter how unfair something is, nobody really cares.  Everyone is expected to be a "big boy" about it.  Those who got scammed were just fools - walking examples of economic Darwinism in action.  The crooks are rarely even caught and if they are then they end up with light sentences or with simple fines to be paid, often by the company they are the CEO of.

But the mood of the herd has definitely turned south in a way that has not occurred in all of my 50 years and the Madoff proceedings are a great example of that.  Those who managed to skate out of Madoff's scam before it collapsed with all of their principal in addition to some fat Ponzi Profits are finding it all being clawed back for redistribution to the other patsies in the scheme.  So instead of winners and losers there will be losers and losers (and then of course lawyers who are always winners no matter what).

So why is this happening now?  Where was the long arm of government when Enron ripped so many people off?  How about all of the lower level Enron employees themselves who lost their retirement accounts which were funneled, by Enron rules, into Enron stock?  And how about all the people who got screwed by LTCM (Long Term Capital Management) when its scam went bust?  The general feeling back then was "too bad, so sad, start over dude".

The difference is that the social mood has changed and government knows it.  Banks are offering less credit and people are less inclined to accept it, even at record low rates.  This is reducing the money supply which lowers asset values and threatens jobs, marriages, families.  It puts stress on the herd.  These are scary times if you are a bureaucrat or government representative.  I think the following sequence from The Godfather sums it up pretty well:

[about the unrest in Cuba]
Michael Corleone: I saw a strange thing today. Some rebels were being arrested. One of them pulled the pin on a grenade. He took himself and the captain of the command with him. Now, soldiers are paid to fight; the rebels aren't.
Hyman Roth: What does that tell you?
Michael Corleone: It means they could win.
[-----]

Gerald Celente puts it another way.  He says, "When people have lost everything and they feel they have nothing to lose, they 'lose it' ".

The government closely monitors the social mood while trying to control it in exactly the same way that a cowpoke monitors the herd of steers as they are being driven to market.  If you ever watch an old cattle herder western you will see the inevitable stampede scene where someone misreads the herd and does the wrong thing at the wrong time.  The resulting stampede invariably results in personal injury and property damage for the cowboys.

The Madoff claw backs boil down to stampede control and they are being undertaken now because the government recognizes how quickly a seemingly calm country can erupt into a Tunisia or an Egypt.  Government can feel the rage boiling just below the calm façade and they are mighty scared.  You can read it in blogs, in news headlines and in comments to both of these.  All of these things and many more are monitored and aggregated in real time.  The government knows the score.  There is a reason that Obama did not press his gun control agenda and that's because he felt the herd would have felt even more threatened had he tried to do so. 

This fear is not cowardice but rather a display of wisdom.  Call it respect if you prefer.  Anyone who does not respect the threat of a stampede of a million angry cattle is not brave but rather a fool.  In order to calm things down, the government is taking from those few who have a lot and giving it to the many that are on the verge of a stampede.  The GM cash distribution from wealthy bondholders to disillusioned union members was more of the same.  "Spread the wealth around", as Obama put it, really means "rich people have to take one for the gipper".

The fake stock market rally is another attempt to give an appeasing gift to people.  Long term stock market watchers know something is wrong; something is fake.  Take Sam Collins, long time market watcher and technical analyst.  His view is that, "There is just no way to justify the strength of the U.S. markets aside from Fed policy."  In other words, none of the pros are at all confused as to why the market is showing strength at the same time that major sections of the global economy seem to be in such turmoil.  The Fed is in gift giving mode and everyone is living by the old saying "don't fight the Fed".  There is no conviction buying.  It is all low volume action.  But it keeps the herd calm.  For now.  Bob Prechter testified before Congress years ago that the Dow Jones Industrial Average is one of the best indicators of social mood out there.  Thus, the government has taken to manipulating the indicators, messing with the pressure gauge on the boiler as if that actually changes the boiler pressure.

Government will continue playing its game but unless the jobs situation actually gets better soon I think the Fed is going to have to deal with the new threat of inflation as an unintended consequence of holding interest rates down for too long.  Propping up the stock market does not do any good for young people who don't have enough wealth to own stocks.  Sooner or later the stock market game will no longer serve the goal of holding the social mood in check.  Once it loses efficacy, the Fed will stop pulling on that lever.  Either that or the lever will break off in the Fed's hand.  All I know is that none of it is a fix of any kind and all of it is just making the eventual problems worse. 

I suspect that in a few years people will quit saying "don't fight the Fed".  Instead they will be saying "don't factor in the Fed because it has become irrelevant".  Few people reading this today will think that prediction could ever come true but that is because people have been herded into thinking that a con man with a government title and a printing press can actually con the entire economy forever even though it has never been done yet in the history of man.  I am more inclined to side with those who believe that all scams eventually collapse because you can't fool all the people all the time.  I look around and I see a large and growing number of people who are in no way fooled.  As soon as the fed looks like it is losing control they are going to cut and run on the fake stock market and many other propped up aspects of the American economy.  It will be "every man for himself" and "only the paranoid survive".