This recent story of a $ 50 billion pyramid scheme that duped supposedly competent investors and banks is just another symptom of the moral hazard that has dominated economics for the past decade.
All of these banks and investors that lost millions fooled themselves. They are supposed to be competent fiduciaries, and were paid for expertise and integrity. But when they were offered something that was too good to be true they believed it.
This scam is just like the sub-prime mess, except that it is even simpler. At least with the sub-prime pyramid people knew they didn’t understand what they were buying into, and that was their error. In this case, they were told we’ll give you consistently high returns for low risk. That just doesn’t happen. Never has, never will. It is natural for things to even out, even in an inefficient human financial system.
These banks pay people lots of money to ask simple questions like “how?” and then to be skeptical when the numbers don’t fit with reality. These investors, banks and advisors have only themselves to blame, even if the regulators did mess up. And the higher they are in the pile, the more blame should stick to them. It’s like a tragic fairy tale of greed, except the evil, greedy merchants are not going to suffer much because the peasants will take the brunt of the pain.