Scene 1: We are buying an apartment in Warsaw, Poland, sometime in the early 1990s. At every stage of the transaction, both my husband and I have to show up in person, stand in line, and present identity cards. We appear at the notary's office more than once. We appear at the tax office more than once. Finally, we are asked to hand over a briefcase full of dollars. The seller will not accept a bank transfer and does not want to be paid in his country's currency, either.
Scene 2: We are buying a car in Washington, D.C., sometime in the early 2000s. We test-drive a few and tell the dealer which car we want. We hand him a personal check, which he accepts without asking for an identity card. My husband asks if he isn't worried the check will bounce. The dealer laughs, and we drive out of the dealership in a brand-new car.
Two different times, two different places, but above all, two different kinds of capitalism: If Francis Fukuyama, the author of Trust: The Social Virtues and the Creation of Prosperity, were writing this article, he would describe the Warsaw of the first scene as a "low trust" culture and the Washington of the second as a "high trust" culture. One could also call them a "place where financial transactions are irritating and time-consuming" and "a place where financial transactions are easy," respectively. Such labels do not last forever, though. In the nearly two decades that have passed since the early 1990s, bank transfers, telephone transactions, and the use of the local currency have all become the norm in Warsaw. The question now is whether American capitalism will also change over the next two decades—and for the worse.
Reading the accounts of the collapse of Bernard L. Madoff Investment Securities, it is impossible not to conclude that it will. The scale of this fraud stretches far beyond anything a car dealer or even the purchaser of an apartment might commit, of course: Among the victims of Madoff's extraordinary pyramid scheme are major banks (BNP Parisbas, Nomura Securities), famous people (Mort Zuckerman), and Madoff's friends from the Palm Beach Country Club. In the wake of Madoff's arrest, charities are going to close, and previously rich people will become poor. Worst of all, everyone who invests anywhere will think just that much harder, take that much longer, demand that much more documentation. And they will do so not only because of Madoff, but because of the subprime lenders, Wall Street investment banks, and Enron fraudsters who have worked so hard to erode our faith in the reliability of our system.
The deeper irony here is that all these schemes were only possible in the first place precisely because we have, until now, lived in a culture with such extraordinarily high levels of trust, a culture in which a customer's bona fides are accepted without question and wealthy people are thought to have earned their money. In our culture, someone like Madoff was trusted precisely because he was rich; because he was a member of the Palm Beach Country Club; because his company worked out of expensive Manhattan offices, most of which were occupied by people doing real jobs. It occurred to no one that a small group of select insiders was also operating a massive fraud scheme on the 17th floor.
In other cultures—maybe most other cultures—very rich people are suspect by definition. Recently, I met a wealthy Russian and automatically assumed he was the beneficiary of some shady scheme: How else would someone from that part of the world get rich? In fact, he turned out to be the CEO of a Western-owned company in Kiev, Ukraine, and totally above board. But I know why I made the mistake: I still remember—and Russians still remember—the fraudulent "privatization" deals and complex money-laundering operations that created so many Russian billionaires over the last two decades. I also remember the extraordinary saga of the MMM company, which in the 1990s defrauded some 2 million Russians of $1.5 billion, using what will now surely be known as the second-largest pyramid scheme of all time. Back then, we thought such blatant fraud could only take place in the lawlessness of the post-Soviet world.
We were wrong. Madoff's pyramid scheme, far broader than anything MMM dreamed up, was made possible by our own tradition of lawfulness. And now he will help bring that tradition down. Here's a prediction: In the coming years, American capitalism will become slower, more cautious, less productive, and less entrepreneurial. We're still a long way from Eastern Europe of the 1990s or from the Latin America or Russia of the present. But maybe not as far as we think.