Banks Vs Ponzi Schemes

What is the difference between the international banking system and a Ponzi scheme ? This is a serious, non-rhetorical question to which I’d really like an answer. The more I think about it, the only difference seems to be the exact nature of the con, and the honesty of the people running it.
If the owner of the bank/Ponzi is truly honest they’ll admit, to themselves at least, that it can’t work in the long run, and acknowledge it’s just a con. This is when it becomes a Ponzi.
Cowardly, stupid, or dishonest people will just continue to work at increasing the scale of the scheme without thinking about the obvious consequences and the inevitability of collapse. These are the bankers.

Seriously, I can’t think of any other differences. They work in the same way:

  • Firstly they encourage a chunk of investment by producing glossy brochures claiming to be able to increase the value of your investments using some financial magic.
  • Banks then use this money to invest in debts. They offer massive loans to people, in return for massive amounts of interest. Even though they may never get this money back, it is accounted for as a profit. Ponzi schemes don’t bother with the debt selling bit, they just declare the profits. This is actually better for investors because it saves a lot of overhead on selling and administering the loans.
  • Investors receive statements showing how much their money has grown. Everyone’s happy!

In both systems, the numbers on the statements are fictitious. If all investors attempted to withdraw their money, the scheme collapses as the money isn’t there! It’s a con!
All of this stuff about “toxic assets” is a red-herring; they’re all toxic assets. Neither scheme can support itself when everyone is permanently in debt.

Bernard Made-off obviously had enough integrity not to ask for a government hand-out, and instead owned-up. So we should give him a lot more respect than anyone in AIG, Citi or RBS.

As usual, Tom Tomorrow explains it far more clearly.


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