17 December 2008

Madoff: Not the Biggest Ponzi Scam Ever

Sure Bernard Madoff ripped people off for more than $50 billion. In one of the largest Ponzi schemes to date Mr. Madoff bilked investors ranging from individuals to charities (yes, even charities – what a scum bag) out of large sums of money. The losses which will likely be more than $50 billion, are more than the MCI Worldcom and Enron debacles.

But Madoff’s Ponzi scheme is not the largest, nor the most nefarious scam ever. I would argue that the largest, most expansive Ponzi scheme is the United States of America. That Ponzi scheme will cost trillions upon trillions of dollars. Why do I say that? Quick answer: TARP (isn’t it funny how something like a blue piece of plastic used as a temporary measure to keep water out after roof damage is used to name the bailout plan?). Long answer: Deficit spending – taking money from others (children and future generations of Americans in the form of debt) to pay for current programs.

The United States has been unsustainable for some time. Many financial bubbles have been created in the past, only to burst or slowly deflate. I contend that each bubble is a sort of Ponzi scheme. The credit bubble has been one of the worst and the resulting “rescue” plan will only make matters worse. The invented money (speculation on real estate and bad loans) led to more invented money etc. We have seen the effects of that now. All the building and real estate speculation was not sustainable. So now the federal government will “stimulate” the economy to create (invent) jobs and consumer demands etc. in an attempt to keep the bubble from deflating even more. Eventually the bubble created by that will also burst. It seems that the majority of pundits, politicians, and economists fundamentally do not understand or want to accept that there needs to be a severe retraction before everything can start again (even now they are scratching their heads wondering why the infusion of hundreds of billions is not helping – silly humans). Maybe there a good automotive analogy would be flooding the car – you have to wait a bit before trying to start the car again.

By trying to reverse something that was invented we are just setting the system up for yet another failure. Mr. Madoff could not reverse his Ponzi scheme unless he actually invested that money and had real returns on that investment. The federal government will not get away with its own Ponzi scheme unless it rights the fiscal ship. We simply cannot continue to borrow heavily against the future to pay for the present.

Other good reading: Congress in a Glass House

Photo by KCThinker, Blue Door, San Juan