Bernard Madoff's Ponzi scheme alledgedly swindled billions out of celebrities and non-celebrities as well and the funny thing is that they were more than willing to give him their money to manage. (Great article here at The Economist). People felt that they were in some sort of elite group to be allowed to enter into Madoff's circle. Everyone was "doing so well" until the economy went south. So I guess that along with the banks and Detroit, all of Madoff's investors will be looking for some sort of government protection. Hey, wasn't the Security and Exchange Commission supposed to be watching out for stuff like this? Looks like someone somewhere in the SEC has some 'splainin' to do.
So what is a Ponzi scheme anyway?
A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns to investors out of the money paid in by subsequent investors, rather than from the profit from any real business. It is named after Charles Ponzi.Raising my hand from the back of the room....
The scheme usually offers abnormally high short-term returns in order to entice new investors. The perpetuation of the high returns that a Ponzi scheme advertises (and pays) requires an ever-increasing flow of money from investors in order to keep the scheme going.
The system is destined to collapse because there are little or no underlying earnings from the money received by the promoter. However, the scheme is often interrupted by legal authorities before it collapses, because a Ponzi scheme is suspected and/or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.
"Excuse me but how is this any different than our Social Security system?"
Oh it really isn't. Money paid into Social Security now pays those who are in the system now. It's not like the money is put away for you when you retire. The system requires an ever increasing flow of money from current participants in order to keep the thing going. The system will collapse as more baby boomers get their benefits and less people pay into it through payroll taxes. That's the problem with Ponzi schemes. (also known as pyramid schemes) Some say Social Security Trust Fund is funded until 2042, others give it until 2017. (Cato Institute says that too)
You see, unfortunately the government has also been taking money out of the Social Security Trust Fund and replacing it with IOU's. It will have to start replacing the money to keep the fund solvent. The only way it can do that is by raising our taxes, increasing government borrowing, or cutting other government programs in order to use that money to pay back the raided Social Security fund.
But who cares.. it's just money, and the government can just print up a bunch more, just like they are doing now to fund all these massive bailouts.
I don't think Madoff should go to jail... they should give him a post in the government. He kept his pyramid going for a long time and convinced everyone - even smart rich people - that all was well. He is a prime candidate for public office, or for a post in the Treasury Department or even the Security and Exchange Commission.