Ponzi Scheme

Posted by Jacob Johnson on March 14, 2009 under Economics | Be the First to Comment

When the Benard Madoff fraud was exposed (the SEC filed a public statement on 12.11.2008), I heard that Bernard Madoff admitted to the executives of his company (also his sons) that he ran “basically a giant ponzi scheme.” While not all has been unfolded, there has been some light shed on the fact that no investment (in the stock market) was made on a clients behalf for thirteen years. That isn’t “basically” a ponzi scheme, it is.

A ponzi scheme occurs when people provide money, in hopes of receiving whatever is being promised (in Madoff case it was steady returns). However, the only way this is achieved is with subsequent “investors” (soon to be victims) monies. A ponzi scheme can extend beyond the investment community. In starting up this blog, I went to the web to get some advice on blogging, and found many sources on bloggers advertising their ability to monetize blogs…if you pay them they will tell you how. An interesting invitation. Maybe it is legit, but I was skeptical as it seems too easy to turn this into a ponzi-ish scheme.

This occurs because there is no real value (similar to Madoff not investing), the value is in the presentation…and if you want to get your money back, you practice the presentation to give to someone else (duping someone just like you were duped).

In looking at the ex-chairman of the NASDAQ staring at a 150 year sentence, I think we can all agree ponzi schemes destroy lives and the (in general) good intentions of many people…don’t do it. And it wasn’t “basically” a ponzi scheme – it was.