Economics: Boom, Bust and Bezzle

How much American “bezzle” does it take to bring down world share prices enough to buckle business confidence in New Zealand?

The question is raised by the results of the National Bank’s July survey of business opinion. It found general business confidence declined for the fourth consecutive month and net 22 percent of respondents expected economic conditions to deteriorate over the coming year.

According to the bank’s analysts, the faltering level of business confidence reflected falling commodity prices, rapidly appreciating New Zealand dollar, and meltdown in US stock markets after revelations of fraud, embezzlement, defalcation, and similar malfeasance.

Their report explained that the revelation of dubious accounting practices at Enron and WorldCom had changed the course of equity markets and shattered investor confidence. “The exposure of malfeasance had curtailed the willing suspension of disbelief that was required for the ‘irrational exuberance’ to continue,” the report said. “The world now knows that things have not been as they should have been; and it is time to pause and see things how they truly are. It is time to assess the loss and arrest the miscreants.”

In other words, certain quantum of bezzle will bruise investor confidence, but how much?

No, I hadn’t heard of the “bezzle” until WorldCom followed Enron into the domain of corporate infamy. I was introduced to it by James Buchan, writing in The Guardian.

Buchan, the author of Frozen Desire: An Inquiry into the Meaning of Money (Picador), was discussing the sequence of boom and bust that has been the history of financial markets since the 17th century. More particularly, however, he was observing how the boom-and-bust sequence has been accompanied by parallel or underlying process which he described as cycle of crime.

He cited the work of Professor John Kenneth Galbraith, who reckons there is permanent inventory of undiscovered embezzlement in American business.

In many ways the effect of the 1929 crash was more significant on embezzlement than on suicide, Galbraith remarked in The Great Crash: 1929, published in 1955. And to the economist, embezzlement was the most interesting of crimes. “Alone among the various forms of larceny it has time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery.”

This was period when the embezzler had his gain but the victim felt no loss, which meant “there is net increase in psychic wealth”.

At any given time, in other words, there was an inventory of undiscovered embezzlement in – or more precisely not in – the country’s businesses and banks. This inventory – “it should be called the bezzle”, the professor said – varied in size with the business cycle.

In good times, Galbraith explained, “people are relaxed, trusting and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and bezzle increases rapidly. In depression all this is reversed. Money is watched with narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.”

In his column in The Guardian, Buchan said Galbraith’s intuition had been affirmed by the announcement that the US Securities and Exchange Commission, the outfit which oversees American securities markets, had charged WorldCom with fraud for overstating its cash flow by few billion dollars. At that time, the pile of corporate wreckage was mounting: Enron, Tyco International, the research departments of Merrill Lynch and so on. There have been more since then.

Buchan’s column whetted the appetite of this columnist for more information and during an internet search for other references to “bezzle” I tripped into site called “Word for the Wise”, devoted to words, meanings and derivations. In August 7, 1997, the people of Morrilton, Arkansas, had been hosting The Great Arkansas Pig-Out, prompting an examination of the concept of gluttony (which means “excess in eating or drinking” or “greedy or excessive indulgence”).

“Bezzle” was described as mainly British dialect term which means “to drink or eat to excess”, but I was advised it hasn’t seen much service since the end of the 19th century.

The site’s wordsmiths obviously hadn’t been reading Professor Galbraith.

Analyst Wynn Quon is much more savvy. In recent edition of Canadian Money Saver, he said financial mischief is part of the stock market cycle, whether it was the Japanese bull market of the 1980s (which produced dozens of corporate scandals including the Nomura Securities fiasco) or the North American bull market of the early 1980s (which gave us Michael Milken and Drexel Burnham Lambert).

Quon was aware of Galbraith’s word to describe the large amount of undiscovered wrongdoing that accumulates during bull market and advised his readers: “So, if you want to become battle-hardened investor, don’t forget the bezzle!” M

Bob Edlin is regular contributor to Management magazine.

Visited 4 times, 1 visit(s) today
Close Search Window