The Greatest Ponzi Scheme of All

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Bernard Madoff swindled clients to the tune of $50 Billion in the recently revealed “ponzi” scheme. How could this have happened? How could supposedly sophisticated investors have been duped on such a grand scale?

Bernard Madoff

It seemed that either no one was watching or the warning signs went unheeded. But you couldn’t blame them, nothing like this had ever happened before. Or had it?

Most people understand that a ponzi scheme is when money from new investors is used to pay earlier investors, making it look like they are getting a great return on their money. Eventually there are not enough new investors to pay off the earlier ones and the scheme collapses. It was named after Charles Ponzi, who perpetuated just such a fraud in the 1920s.

Madoff was the former head of NASDAQ and highly respected, surely being scammed by someone like him was unprecedented. Not exactly. In the 1930s the former head of the New York Stock Exchange, Richard Whitney, attempted a similar scam. So it has happened before and will probably happen again. People believe things that they shouldn’t and succumb to greed and then they wonder how it could happen. While Madoff’s scheme is one of epic proportions, there is an even bigger scam being pulled off on a daily basis.

The Big Lie

If there is an even bigger swindle going on, why doesn’t someone tell the Government? They already know. If they already know, why don’t they stop it? Because they’re the ones who set it up in the first place. And no, I’m not talking about Social Security even though you could compare that to a ponzi scheme. I’m talking about fractional reserve banking. Huh?

Federal Reserve
Once upon a time banks would accept money from depositors and pay a certain rate of interest. It would then use the money to provide loans at a higher rate of interest. The difference between the two interest rates, the spread, was the bank’s profit. In fractional reserve banking the bank may, for example, loan out $10 for every $1 deposited with the theory being that not all depositors would demand their money back at the same time. So, in essence, the banks lend money that doesn’t exist. One of the functions of the Federal Reserve is to set the reserve requirements for banks. This is essentially telling them how much “fake” money they are allowed to lend out.

In our system of fiat currency the money has value only because you believe it does. There is no gold, silver or anything else backing the money except for the “full faith & credit” of the U.S. Government. A ponzi scheme falls apart when there is no new money to pay the earlier “investors” and everything collapses and the scam is exposed. A fiat currency collapses when people stop accepting its value, such as in times of hyperinflation.

Keep it Legal

So if you have dreams of running your own ponzi scheme, do it the right way. Get yourself chartered as a bank and lend out money that doesn’t exist. Instead of wearing leg irons and prison stripes you can be called a great bastion of capitalism. Heck, you might even qualify for a Government bailout someday.

Banking establishments are more dangerous than standing armies.
Thomas Jefferson

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1 Comment

  1. I am so glad to see more information about “fractional reserve” squeezing its way through to the surface.
    It was only made legal in the 1700’s using a reserve ratio of 2 to 10 to 1, 20,40 and beyond.
    These “bankey” types cannot be credited for having much in the brains department.
    It seem to be like a disease.
    Since it is Xmas, here is a nice adaptation by a blogger on the Dow, of the a skit called the “dead parrot” skit by the “Monty Python” team.
    This blogger is pretty talented i thought and he does not mind me sharing it…..here is Joel…….
    Ok, I spent way too much time on this. You may be glad to know that I
    did copy the sketch text and edited it. Not like I whipped this up
    from scratch. lol Enjoy!

    US Taxpayer: ‘Ello, I wish to register a complaint.

    US Taxpayer: ‘Ello, Thief?

    Hank Paulson: What do you mean “thief”?

    US Taxpayer: I’m sorry, I had a 401K. I wish to make a complaint!

    Hank Paulson: We’re closin’ for the election.

    US Taxpayer: Never mind that, my lad. I wish to complain about this
    market what I invested in not half an hour ago from this very
    exchange.

    Hank Paulson: Oh yes, the, uh, the DOW…What’s,uh…What’s wrong with it?

    US Taxpayer: I’ll tell you what’s wrong with it, my lad. It’s dead,
    that’s what’s wrong with it!

    Hank Paulson: No, no, it’s uh,…it’s bottoming.

    US Taxpayer: Look, matey, I know a dead market when I see one, and I’m
    looking at one right now.

    Hank Paulson: No no it’s not dead, it’s, it’s bottomin’! Remarkable
    market, the DOW idn’it, ay? Beautiful returns!

    US Taxpayer: The returns don’t enter into it. It’s stone dead.

    Hank Paulson: Nononono, no, no! It’s bottoming!

    US Taxpayer: All right then, if it’s bottomin’, I’ll restore its
    confidence! ‘Ello, Mister Market! I’ve got a lovely investment for you
    if you show…

    (Paulson approves a bailout)

    Hank Paulson: There, it recovered!

    US Taxpayer: No, it didn’t, that was you bailing it out!

    Hank Paulson: I never!!

    US Taxpayer: Yes, you did!

    Hank Paulson: I never, never did anything…

    US Taxpayer: ‘ELLO MARKET!!!!! Testing! Testing! Testing! Testing!
    This is your nine thirty opening bell!

    (Goes out and buys a car and a house to stimulate the economy watches
    the market break support.)

    US Taxpayer: Now that’s what I call a dead market.

    Hank Paulson: No, no…..No, it needs another bailout!

    US Taxpayer: ANOTHER BAILOUT?!?

    Hank Paulson: Yeah! You froze the credit market, just as it was
    recoverin’! Credit markets freeze easily, major.

    US Taxpayer: Um…now look…now look, mate, I’ve definitely ‘ad
    enough of this. That market is definitely deceased, and when I
    invested in it not ‘alf an hour ago, you assured me that its total
    lack of movement was due to it being volitile and scared following
    prolonged bad news.

    Hank Paulson: Well, it’s…it’s, ah…probably priced in.

    US Taxpayer: PRICED IN!?!?!? What kind of talk is that?, look, why did
    it crash the moment I my trade closed?

    Hank Paulson: The DOW prefers to correct every now and again!
    Remarkable market, id’nit, squire? Lovely returns!

    US Taxpayer: Look, I took the liberty of examining that market when I
    got it home, and I discovered the only reason that it had been doing
    so well to begin with was that you had been propping it up.
    Hank Paulson: Well, o’course it was propped up! If I hadn’t propped
    that market up, it would have clobbered the economy, caused massive
    unemployment, and BOOM!

    US Taxpayer: “BOOM”?!? Mate, this market wouldn’t “boom” if you didn’t
    keep interfering! But now it’s bleedin’ demised!

    Hank Paulson: No no! It’s priced in!

    US Taxpayer: It’s not priced in! It’s passed on! This market is no
    more! It has ceased to be! It’s expired and gone to meet ‘is maker!
    It’s a stiff! Bereft of life, it rests in peace! If you hadn’t bailed
    it out it’d be pushing up the daisies! ‘Is economic processes are now
    ‘istory! It’s off the twig! It’s kicked the bucket, ‘e’s shuffled off
    ‘is mortal coil, run down the curtain and joined the bleedin’ choir
    invisibile!! THIS IS AN EX-MARKET!!

    Hank Paulson: Well, I’d better bail YOU out then.

    Hank Paulson: Sorry squire, I’ve had a look ’round the back of the
    shop, and uh, we’re right out of bailouts.

    US Taxpayer: I see. I see, I get the picture.

    Hank Paulson: I got a Treasury bill.

    US Taxpayer: Pray, does it have a positive yield?

    Hank Paulson: Nnnnot really.

    US Taxpayer: WELL IT’S HARDLY A BLOODY REPLACEMENT, IS IT?!!???!!?

    Hank Paulson: N-no, I guess not.

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