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Saturday, December 13, 2008


Ponzi schemes - illegal and legal

The news is that a prominent Wall Street trader, Bernard Madoff, has been indicted in connection with $50 billion (!) in losses from what is described as a "Ponzi scheme of epic proportions."

A Ponzi scheme involves paying off earlier investors with money received from later investors. Isn't that the entire basis of the stock market? When people "make money" on the market, they don't do so because they (or the companies they invested in) actually made anything. They do so because people who bought after they did are convinced to pay a higher price for the stock. And those people are just hoping that other people will in turn be convinced to pay a still higher price for the stock. Sure sounds like a Ponzi scheme to me. A Ponzi scheme of really "epic proportions."

Ponzi? No, Fonzie!

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