Never Let a Serious Crisis Go To Waste

The first chapter in Never Let a Serious Crisis Go to Waste focused on a critique of modern economists in the frame of the economic crisis of the two thousands. To be honest this reading was very technical and at times I was completely lost in the economics terms and references. Mirowski points to the under-appreciated role of academic economists in the aftermath of the crisis and their confusion and sometimes even mystification about what the reforming actions need to be to stabilize the economy. He compares the 2007 crisis to the Great Depression of the 1930's  and how action was taken to reform the entire banking system to prevent another crisis. Mirowski claims this brainstorming and application of reform has not taken place after the recent crisis. Even economists are seen to refer to the market as an almost mystical being whose reasoning and actions are not something that can be analyzed. Here is where I get confused, he claims a mixing of the neoclassical traditions and the neoliberal economic traditions. How can these traditions be melding together when they are supposedly so separate? Dr. Mirowski illustrates how the entire field of economics is becoming one that is very exclusive and that education taking part in universities is even more exclusive but how does this affect the economic system?

The Culture of Hiding Money

The Culture of Hiding Money

Author: Steven Rhue

Article: Ecologies of Investment: Crisis Histories and Brick Futures in Argentina

            We have all heard the stories from the great depression. The rush on the banks, stacks of money becoming worthless, burning money to keep warm, and the many hardships people endured in this country before it was over. For many it left a lasting impact on their view of money and trust in the banks, many of which I have head of being passed down to children and grandchildren. D’Avellas’s article about the economic crisis in Argentinian details similar stories. Rushing to the bank to take out all of your money before it was gone, and huge downturns in the economy as well as the housing market. However, Those same concerns of trust in the banks arose as well. As a result, both the U.S. Great Depression, and the 2001 Argentine economic crisis, the distrust towards banks changed the ways many saved or “stored” their money. D’Avellas article reports people storing and hiding hundreds, if not thousands of dollars, in all sorts of manners throughout their home. I have heard similar stories from friends and family who have known someone who lived through the depression, and of course the legends of money hidden in walls and buried in the back yard. 

            However in Argentina’s case, it’s not such a Legend, it seems very common place, and the idea of hiding so much money you forget where you’ve hidden stacks of it is remarkable. Again, I have also know others in the states to do similar things.They hide money not just to keep it out of the bank, but just for random occasion of needing it. This practice though, stems from the distrust of the bank and the credit they hold for you. However, in the US, and it seems in Argentina, they are still necessary for basic economic function, so one cannot completely hide their money outside of them. This article made me particularly interested in a study of those who keep their money outside of a bank, how they manage it, and how it impacts their lives. We’ve often discussed how you can’t really just keep stacks of cash around and not use credit, but can you? After reading this article I’d be interested to have another class discussion about it, and perhaps know if others have heard of similar stories from their own families or friends. Can you really trust the banks, or do we have to? 

Neoliberal Barter

The Argentinian financial crisis of the early 2000's created situations not unlike those that I am researching for my project. One aspect of the liberalization of the post-Soviet economy was the increased reliance on (already existing) barter economies. In the Russian sense it was the tightening of the military budget that made it impossible to pay contractors, energy companies, and wages in full with cash that created a cycle in which almost everything was payed in barter. Individuals were paid in food, federal taxes owed utilities were paid in oil, and so on but what is interesting in comparison is how in Russia it is very easy to profit in real money from barter whereas, for example in construction, barter in Argentina included contracts that were still related to foreign currencies. In Russia, an oil company let's say, would pay a middle man in oil which he would then transport out of the country making a fortune due to the price difference and deposit some profit in a foreign bank account while, let's say during a drought, would ship back foodstuffs which the Russian company would make a killing off if trading it locally for more oil. In Argentina, presumably because of the extensive use of the U.S. dollar barter was done with basically quasi-bank notes that circulated in a similar way in the sense of paying salaries and taxes but lacked the profitability of the Russian barter economy.

The Big Short

The Big Short showed a very different culture than the last popular financial movie that I watched, The Wolf of Wall Street. The movie followed the separate stories of individuals and offices that foresaw the collapse of the mortgage market well before it happened. Those that foresaw this collapse were not attempting to defraud anyone, or even partake in shady deals they simply went to the banks and bet against them. It was amazing to me that the banks did not look into the situation after being presented with the bets but that really plays into the idea of being "too big to fail." While I am sure that the movie was fictionalized in some ways the culture of the offices/individuals were really based on honesty, the bank worker who went in to Steve Carrel's office was dishonest to the bank but spoke very plainly to the workers of the firm and saw that there was too much to be made to screw them all over.
Another aspect of this movie was that the individuals who worked for the bank/raters were more concerned with their own wealth/commission than that of the company which really came back to bite in the end. This plays into the shortsightedness of those signing the mortgages who did not understand the terms or even have the intention to pay the mortgage back, not unlike some issues with micro-loans in India.

Pyramid Schemes: A Story Through Caritas

Ioan Stoica was a business man in Romania that most of the country liked and supported. He was a man that wanted to give back to the poor and homeless, assist in his civic duty to the state and to the city of Cluj, and to do what he could for the people of Romania.

At least that's what he wanted everyone to think at the time.

Stoica was a business man, that part is true. But he was a business man out for himself. He started Caritas knowing that it would eventually harm a lot of people. The state of Romania was already in the process of making all pyramid schemes illegal, yet he still made his company in the heart of one of the biggest cities in Romania. Not only did this affect the city itself, but it affected the entire state and sometimes people from other states, i.e. Germany.

Originally, only those people who lived in Cluj or in Romania could deposit money into Caritas. But this later extended to anyone that was a Romanian citizen or had friends who lived in Romania. These people could travel and make deposits on their own in Cluj or they could send the money and have it deposited. The fact that Caritas was far reaching in Europe, especially outside of Eastern Europe, showed how personable Stoica was to everyone. People trusted him to do what was right. After all, they entrusted him with anywhere from 1,000 to 10,000 Romanian leis. This equates to anywhere from $255 to $2,555 USD. That's a large sum of money for many people in Romania.

The people trusted him because they had nowhere else to turn to. They would be turned down by the big banks or the government for services that they truly needed, i.e. a tractor for their farm. This resulted in them having to put in a large sum of money to get it back 8 fold in 3 months. This was a huge gamble that I'm sure not everyone truly understood. They just wanted to live their lives freely without a worry, so they had to trust the one person that would give them what they wanted, Ioan Stoica.

Throughout the history of Caritas, the company wouldn't give back to the people in the order of which they deposited money. They would sometimes give to the politicians much more quickly (sometimes 3 days instead of 3 months) and even more quickly for the people who helped the company start up (sometimes instantly). This would be the one major reason that the company collapsed sooner than it originally planned.

At the fall of the company, Stoica agreed to pay back the exact sum that the first time depositors who had not received money from the company. But this meant that those individuals that continued to invest into the company would receive no money back. In the end, Stoica would be arrested and charged with fraud, fraudulent bankruptcy, and false representation. The people had trusted Stoica with their money and trusted that he could deliver on his promises. These promises were not delivered and the people were angry.

While pyramid schemes initially sound good for people in dire need of money, this story alone shows how quickly fate can change. Some people sold their apartments and houses to entrust such a large sum of money with Stoica with the understanding that they would receive the money back 8 fold, but the people didn't understand the legalities of this company and didn't know that it would end in bankruptcy and eventually legal proceedings.

Too good to be true

The ability of Ioan Stocia to secure "investments" in Caritas relies heavily on the appearance of honesty and virtue kept by himself and the company. Like many who run pyramid schemes an overwhelming charisma masks the age old rule of if its too good to be true than it is probably too good to be true, and like Ben Franklin this appearance was central to his success. Caritas was able to manipulate so many into buying in but interestingly adopted some of the same favoritism that existed within the socialist structure. For instance a receipt was needed for every thousand or so leis that were deposited/withdrawn and therefore limited the amount of transactions per day for the average invester while allowing those with inside connections to bypass the receipt rule and withdraw others money before they were able to. What was interesting to me was how many Romanians reasoned that the money was being made, from shady deals to arms trading the idea of fraud was not present until the collapse of Caritas was imminent. Making money from money was not a part of the socialist manifesto and was a foreign idea to many Romanians. The combination of a good reputation and a foreignness to financial capitalism really allowed Stocia to flourish.
The collapse of Caritas, though like every pyramid scheme inevitable, did seem to be orchestrated by the Romanian government through their interviews on state TV and subsequent investigations. As the payouts rivaled the state budget it would make sense that they wanted Caritas to be shut down. I think that as Caritas grew to be a cult like movement it defiantly rivaled the power of the government and could be a cause for worry. These schemes certainly happen outside the post-communist world but I do not believe they garner such a wide cult like following because mechanisms like community funds are not ingrained in the culture. Where you do see pyramid schemes in the U.S. is in those types of mechanisms like profit sharing schemes as I have learned from watching Stacy Keech on MSNBC's American Greed.