Re-evaluating Your Own Private Idaho

Is there no end to this chicanery?  Is there some fairly prominent recessive gene that just needs the right lighting, the right Pinot Noir, and the right blatantly faux promises of undying fidelity to surface in some inbred blueblood?

The footprint of these schemes is growing so wide that I think just about everyone knows at least one person directly affected by Ponzi schemes.  I have a good friend who lost a six-figure chunk of his savings to one of these charlatans.  (I feel like a victim myself, but it’s a bigger challenge to litigate when your grifter was a publicly-traded, federally-regulated financial services company.)

All businesses are Ponzi schemes, of course, to one extent or another.  It’s all about the level of misrepresentation.  The prize winners have no intention of trying to earn their way out of the hole, but I’m sure many of them start with a misstep that puts the proprietors on a slippery slope to felony.  Other businesses put up a tangible attempt at the appearance of enterprise, but in retrospect, I gotta believe that, for example, a lot of GM bondholders feel like they were dealing with Bernie rather than Rick.  Was there ever a credible plan to pay that money back?

Banks take your money, pay you interest, and where is that interest coming from?  It’s coming out of the expectation that the bank will earn enough money in the future to cover the interest.  If they take a big yo with your deposits (on real estate, or credit card loans, or private equity investments) and it doesn’t work out, was that just bad luck or was there something Madoffian in that?  And what if further investigation reveals that this is what Bernie did with most of the money — made huge bets on exotic assets and got crushed?  The differences get subtler and subtler.

I’m not really sure where I’m going with this.  There are a lot of places it could go.  One that interests me is the notion that, in a real sense, most of the world’s companies are insolvent right now.  Their assets, on a dump-it-by-lunchtime basis (i.e. our current accounting system), do not cover their liabilities.  Is it a matter of time before we drag them all into bankruptcy court, or do we come to our senses and let the soft Ponzi scheme that all businesses are based on be re-established?

Food for thought on this last day of a genuinely awful February.


2 Responses to “Re-evaluating Your Own Private Idaho”

  1. Mark Grannis Says:

    I don’t think the distinction between a business and a Ponzi scheme is that tricky. A business intends to use its capital to produce something greater, which can then be distributed. A Ponzi scheme has no such productive intent; it is based entirely on hidden transfers from later entrants to earlier ones. And that, in fact, is the nature of the misrepresentation: The people who supply the capital believe they are investing; only the person running the scheme knows the would-be investors will never truly “invest” in anything.

    At the start of the Madoff revelations, I wondered (as you apparently do) whether Madoff might have been tempted into Ponzifying his enterprise recently, as a result of unexpected reverses. A week or two ago, I saw a news story that said federal investigators can’t find any evidence that he purchased a single security in the last 13 years. If true — and I always question what “federal investigators” tell the press in the course of criminal investigations — I think we can draw a pretty bright line between Madoff’s transfers and a real entrepreneur’s investments.

    The harder question, I think, is whether there is any difference between a Ponzi scheme and the Social Security Administration. In both, the payments to earlier entrants are financed only by the money collected from later entrants. In both, this dependency on later entrants is hidden, so that people are encouraged to think that the money they have handed over is in some sense being invested or at least held for their specific benefit. And in both, the amount of money being taken in must increase indefinitely or else the scheme will collapse.

    Some argue that Social Security is sustainable because population growth and productivity increases make it possible for the amount of money going into the system to increase indefinitely. The SSA itself seems to prefer the argument that Social Security is “pipeline” in which inflows and outflows must be balanced — language that obscures the increasing need for additional funding. But if I were a prosecutor trying to make a case against the SSA, I would make sure the jury reflected carefully on what inferences we should make about the intent of policymakers who pretend to keep individual accounts, pretend to calibrate withdrawals to contributions, and talk of “trust funds” and “pipelines,” when the reality is that the whole scheme depends on taking money from future generations — and involuntarily at that.

  2. Timothy Peach Says:

    Re Social Security, it is a Ponzi scheme only in misrepresentation. What it is in fact is an additional tax, largely on the middle class, redistributed via a heavily regressive formula, to the working class and working poor.

    In other words, a complicated “demogrant” like they have in Canada, disguised as an employee-funded defined benefit pension plan.

    It’s not a bad system. We should just call it what it is.

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