Fraud and the Seven Stages of Grief

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During my careers as a fraud investigator and financial counselor, I’ve made an observation.  Whether it’s a victim of a financial fraud or a client with massive debt, both individuals go through the Seven Stages of Grief. These stages are typically felt when losing a loved one to a terminal illness, but I also have seen people go through them when victimized by a con-man or battling bankruptcy.  The feelings of shock and denial are most pronounced, and these feelings typically contribute to the fraud’s progression.  Let’s take a look at a few historic examples to illustrate my point:

  1. In 2000, a man named Harry Markopolous warned the Securities and Exchange Commission (SEC) that well-respected money manager Bernie Madoff was running a Ponzi scheme.  He made several more warnings, but the SEC ignored him. Madoff’s scheme finally collapsed in 2008.
  2. David Walsh, an Irish journalist, made countless claims over a decade that Lance Armstrong used performance enhancing drugs to win the Tour De France seven times.  Armstrong went on the offensive, ridiculing Walsh and anyone else who opposed his narrative. Armstrong eventually admitted to Oprah and the world that he cheated during all of his races.
  3. Retired FBI Agent John O’Neil fought a ten year battle with the bureau over Usama Bin Ladin, but he couldn’t convince his superiors to take the terrorist threat seriously.  He left the FBI to become head of security at the World Trade Center and ultimately lost his life on 9/11. O’Neil’s story still teaches us the ultimate consequence of shock and denial.

As bad as these events were, they pale in comparison to the one that’s coming.  The biggest fraud taking place right now is being conducted by the Federal Reserve. Just like Markopolos, Walsh and O’Neil, several brave heroes are trying to warn the American public of an impending economic collapse. It should come as no surprise that they’re usually confronted with shock and denial.  The most outspoken hero is a man named Peter Schiff, and as you can expect, he receives the most ridicule and disdain by the mainstream news media.

Even an armchair student of history can see that humanity repeats the same mistakes over and over, and it is largely due to the first two steps in the Stages of Grief. America’s Greater Depression ahead is eventually going to leave many citizens angry and depressed, but we will all eventually reach acceptance. My hope is that we can help people reach that final stage before it’s too late.

The Fed & The Challenger

Scott Nations bet.001After the failure to launch in September, I took to Twitter to challenge Fed faithful and Peter Schiff naysayer Scott Nations.  Schiff and Nations got into a heated argument in July over whether the Fed would raise interest rates in 2015.  Nations found it absurd that Schiff could suggest that not only would the Fed not raise rates, but QE4 was still on the table.  Nations asserted that Schiff made “outlandish predictions.”

I reminded Nations that viewers like me had not forgotten what he said, and there would be no rate hike in 2015.  To prove my certainty, I bet him one ounce American Silver Eagle.  Nations, not understanding the value of real money, agreed instead to make a $50 donation to the winner’s favorite charity.  Naturally, I selected a 501(c)(3) called the Ludwig Von Mises Institute.

When December arrived, the Fed shocked me by actually doing the right thing for the first time in nine years and raising the funds rate a quarter point.  But Janet Yellen instructed the public “I think it’s important not to overblow the significance of this first move.  It’s only 25 basis points. Monetary policy remains accommodative.”  Although I lost my public Twitter battle with Nations, it became clear that the Fed and Yellen were not proud or confident in their first step.

With the dawn of 2016, the Fed will need to add more rate hikes to prove that the U.S. economy can withdraw from its long-term artificial monetary stimulus.  I believe that after such a prolonged binge on this financial heroine that our zombie financial markets will come crashing back down to Earth before ever reaching their destination.  Like the Challenger space shuttle tragedy, the liftoff for Yellen and the Fed may have received applause and awe, but these sentiments will be turning to shock when their monetary policy blows up in mid-flight.

It takes character to admit when one is wrong, and I am happy to do that here.  Now that the Fed has finally made a move, the world will get to witness the full consequence of Keynesian monetary policy.  By the Fed’s second or third meeting of 2016, it should be clear that the U.S. economy can’t handle increasing rates anymore than the Challenger could handle frozen O-rings.  My $50 bet with Scott Nations was a small price to pay for admission to this upcoming spectacle.