Sunday, January 11, 2009

Times of Crime and Philanthropy

I deliberated recently on an interesting article in the New Yorker by James Surowiecki, which was also referred to on a live mint blog of Sandeep Parekh. It hypothized that financial crimes thrive during economic booms and other property crimes like bank robbery etc thrive during downturns. Below is an attempt at rationalizing this behavior and also drawing parallels with the opposite human act of philanthropy.

Times of Crimes
I believe financial crimes like the Madoffs, the Harshad Mehta and Ketan Parekh stock market scams, ponzy schemes etc are triggered by a drop in diligence levels and increase in risk appetite of the investors and other parties in the financial ecosystem, which happens when asset prices are secularly moving northwards and outlook is very bullish, thereby providing a conducive environment to commit a financial fraud.

On the other hand, other property crimes like theft, robbery etc are more a function of the level of desperateness of the culprits, which is heightened when the times are bad and not necessary result due to drop in guard by the potential victims.

Hence the drivers of the two types of crimes are quite different and there occurrence is aided by direction of economic cycle trajectory.

I thought it would be interesting to see how the opposite human act of philanthropy (giving more to others than you ought to) & its variants work vis-a-vis crimes (taking away from others which never belonged to you) in different times.

Times of Philanthropy
A pure financial philanthropy would be more pronounced in economic booms when money-making is easy and doesn’t cause much pain to part with your wealth and beneficiaries may even be unrelated parties. In boom times, even otherwise not so selfless people are tempted to participate in financial philanthropic activities perhaps owing to peer pressure and to gain social mileage.

On the other hand, not-strictly financial philanthropy (bailing someone out of a financial mess, helping someone find a job etc) warrants itself more in downturns when people are in dire needs. In bad times, while there are more opportunities to be helpful, there are fewer who may be in a position to help and even fewer who would want to. Hence, a larger supply demand gap is created as compared to good times and only the benefactors who genuinely want to be helpful may come into play.

Here again, drivers of the two types of philanthropy are different, the former is driven by abundance and footage factor, the latter is more driven by genuine benevolence and hence the two manifest themselves in different proportion in different cycles.

Keep the faith
Like how most of the financial crimes committed in economic booms are finally uncovered only in downturns when the punishment is meted out, one would hope all kind deeds committed in your good times come back to rescue you in your bad times.

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