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The Daily Capitalist: The Fed + Easy Money = A Petri Dish of Greed

Why all of the fraudulent schemes? Here's an easy-money theory

This is becoming too much. Yet another fraudulent scheme has been exposed. Paul Greenwood and Steven Walsh were arrested Wednesday for stealing $550 million from clients of their managed funds. Their companies were WG Trading Co. and WG Trading Investors LP in Greenwich, Conn., and Westridge Capital Management, based in Santa Barbara. You will be pleased to know they are out on bail.

According to the Wall Street Journal:

Alleged victims include Carnegie Mellon University, which had invested more than $49 million, and the University of Pittsburgh, which put in more than $65 million, court records show. The Iowa Public Employees Retirement System said it had invested about $339 million, or 2 percent of its portfolio. The Sacramento County Employees Retirement System said on its Web site that it had invested $89.9 million, or 1.6 percent of its total fund.

Messrs. Walsh and Greenwood ran their firm since 1996 and claimed to have beaten the S&P 500 every month. They had very lavish lifestyles. Horses, mansions, farms, cars, rare books and rare teddy bears.

It seems as if there has been an explosion of these schemes. I think I could almost write this script, it’s becoming so familiar. We’ve had Bernie Madoff, Allen Stanford, Marc Dreier, James Nicholson, Joseph Forte and a few others in a relatively short period of time. Why?

I have a theory why they are occurring more frequently: Cheap Fed money creates a petri dish of greed. The Fed causes business cycles by flooding the economy with cheap money. If you are on the right side of these cycles, you can make a lot of money in something. People see “other people” making lots and lots of money (tech stocks, houses, hedge funds, etc.) and they feel they’ve lost out, even been cheated. When the next cycle starts they feel they’re not going to miss it this time. Some people are always looking for an easy path to wealth.

I should say that I live in Santa Barbara, the location of one of Greenwood and Walsh’s companies, Westridge Capital. This is one of the wealthiest areas in the world. The money that has flocked to our paradise is unbelievable. There are lots of investment managers and advisers here because their principals buy homes here. I mention the wealth here because it is stunning. Same with Manhattan, Greenwich, Atherton, and those kinds of places. If you live in or around great wealth, it might appear to you that it’s easy to make money. The worlds of hedge funds, investment banking and real estate development have generated huge profits in recent years.

So there you are, in Montecito or Manhattan, and you see these huge fortunes being made, in some cases almost overnight (hedge funds). Certain people might become envious. Envy can turn to greed and, as we’ve seen, greed turns to larceny. Now you, too, can have the magnificent Park Avenue apartment, the estate on the Coast, the Bentley, the driver, the cook, fine antiques, make generous donations to charity, and be generally admired as being smart and cultured. You figure it will last forever because you show great returns and the money pours in.

But, it always comes to an end. Unfortunately, the other side of the greed coin is that the investors get lazy as well, duped by the seeming ease of making money. As they say, you don’t find out who is swimming naked until the tide goes out. But, for 10 or even 20 years you had a great ride.

Let’s face it, there will always be people like Bernie Madoff out there. But let’s not make it so easy for them. We can do that by stopping the Fed from creating these destructive cycles.

[The Daily Capitalist notes that the individual in Westridge Capital Management’s Santa Barbara office is not implicated in the scandal.]

— Jeff Harding is a principal of Montecito Realty Investors LLC. A student of economics, he has a strong affinity for free-market economics. This commentary originally appeared on his blog, The Daily Capitalist.

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