Ponzi Scheme
 

From Wikipedia:
Today, it was revealed that Bernie Madoff, former NYSE Chair, is the author of a Ponzi scheme that could be "Bigger Than Enron". Of course, the current meltdown causes its demise; like all Ponzi schemes, it has reached the end of its rope.

What boggles my mind about this, however, is the general taint this gives to the entire stock market. Who, in their right mind, would trust any of these guys? I have no doubt, in fact, that when the current crunch eases up a bit, the focus will switch to the executives and directors of several of the failed investment firms. Comeuppance for sure, but in the meantime there really is no market you can trust.

A fool and his money are soon parted.
The only market I trust sells me vegetables.

I'm just as worried about the ones who haven't failed. What kind of person is able to do well in that business? No one I'd be proud to know.

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By the way, I know this sounds like a broken record, but the whole enchilada — housing, bank failures, and the auto industry problems can be traced back to middle class income dropping, and that can be traced back to the stock market's penchant for short term profits at the expense of long term prosperity, or anything else that gets in the way!

Or someone smart enough not to get taken in by all the stupid, short sighted "investments" and business practices that got us here.

The trouble is that my "safe" investments still pay their full dividends, but have lost approximately half their book value. The greedy have dragged the whole market down, not just the bad guys.

More and more, I am coming to think the current situation is not entirely about greed. It is about theft. Maybe not all illegal, but clearly a lot of what has happened is morally wrong and done with the intent of taking other people's money. While an attorney might make the distinction that if it is not illegal it is okay, I would say if it is morally wrong then it is still theft.

The point of deregulation is to make that which is illegal, legal. It has made the last eight years a perfect time to get away with theft.

Exactly so. Gas down to $1.49 a gallon here, making it more and more obvious how badly we got taken by one of those "legal" thefts. I'm ready to regulate the heck out of energy. That would still leave us at the whim of the international bandits, but at least we can control what happens in the US to some degree and punish those speculators who falsely ran up the price for their personal profit.

That's what it had to be too; a "legal" theft. There is no logical explanation for the cost of gasoline soaring earlier this year except that futures players trying to extricate themselves from a dying real estate derivatives market were ratcheting up oil futures. Another bubble until they all lost their shirts. Unfortunately, a lot of the buyers of those future deliveries were oil-fired utilities, so those rates have not fallen with fuel prices at all.

True, but everything is a bubble unless it's accompanied by good jobs that pay well. That's because everything depends on jobs. The thing that scares me most about what's going on now is not the fraud, although there is plenty of it. What scares me is the Republican attitude that workers are making too much money. The problem is that they're not making enough!

Yup. The UAW is about to take another beating on this one. But, what's the alternative? Force BMW, Honda and Toyota to pay higher wages (of course they'd just move the jobs outside the US)?

I'm afraid free trade has come to the US labor market. It's enough to make one rethink everything they learned in Econ 101. In economics, it's all theory. Here in the real world, things are a lot more stark.

edit: I mispoke about the $1.49 gas.... just filled up at $1.36 !!!

1) There is always a regional component to pay scales that depends on relative cost of living and scarcity of suitable labor. That automotive factories in the US South pay less than those in the North isn't surprising. What hurts is what auto workers are paid in Mexico, which is where a lot of those jobs have gone.

2) If you think about it or have actually watched automobile production lines, you'll realize that auto assembly is a hand/eye job - there is not actually a lot of skill involved - that's built into the tooling. If some hand/eye judgement were not required, robots would be doing it. Most trades beat assembly by a mile in terms of training and skills far beyond assembly and yet don't make more money than a GM worker does; carpenters and bricklayers probably make less but should make more because although they are "assemblers" their jobs are not repetitive; they have to adapt to variable conditions.

My point here is that fair pricing for labor is rather nebulous.

The alternative is to base corporate taxes on what they pay (higher for less, lower for more) for labor, no matter where they pay it. Level the playing field so that corporations can no longer steal from labor by paying third world labor rates and charging first world prices.
No, it has not. Corporations have managed to manipulate the markets so much in their favor that the markets are failing. That's as far from a free market as you can get.

Makes me sick to my stomach.

Then there was also the story on Sunday's '60 Minutes' about "Alt-A and Option ARM".

Now they're saying Madoff's niece was married to an SEC inspector. :mad:

Geez that's gotta stink, no matter how innocent (not).

That's a good solution - then the companies move their headquarters to a different country (one that doesn't follow your tax scheme) and you lose more jobs and more tax revenue. Of course, you could always punish them by charging tariffs on their goods. But that would just mean that your citizens pay more for the goods while the rest of the world gets them at a cheaper rate.

Right on -- it is, like it or not -- a global economy.

That is a good solution. They move out completely, not just their headquarters, because taxes can apply if they want to do any business here and are replaced by companies that act responsibly. You're placing no value on our market, which is just what they want you to do, and how they are able to manipulate the market, which destroys a free market.

If they don't want to pay for labor and they don't want to pay their taxes, then they have no value. If they have no value, then we should do what we can to be rid of them.

I will never understand where you're coming from CWT and I have tried.

I think what he is saying ('scuse the paraphrasing CWT) is that if an operator is prepared to walk away from the American market rather than play by the rules then it's their loss not yours.

It's simple really: If you believe in a free market, then you believe that everyone must pay their taxes and everyone must pay a fair market wage. A company that wants to sell at first world prices but pay for labor at third world rates is cheating, just as a company that doesn't pay taxes is cheating. Cheaters should not be allowed to prosper, because they threaten any system, including the free market system.

I understand that. What I don't see is how a fair market wage is to be established and by whom. Labor is a market too; one in which you don't have to take a job whose salary or hourly rate you don't like.

I do understand that. What you don't understand is that cheating corporations are able to manipulate that market. That means that it is not a free market. While you don't technically "have to take job whose salary or hourly rate you don't like," for many (and a rapidly increasing number of) people the reality is that they do have to take one that they don't like. That's because the market is rigged in favor of these cheating corporations.

How is it rigged? A checkout clerk in a grocery chain isn't worth much to the store, so they pay minimum wage or close to it and have a waiting list of people wanting to do it. How did the store rig that given that MacDonald's, Dunkin Donuts, Home Depot, Office Depot, Wendys, Target, etc. are paying the same wage for the same job. We both know that's not a living wage, but it's what that market will bear.

Didn't you answer your own question? If the only job you can get is checkout clerk and they're all paying the same wages what choice do you have?

First, you're looking at the wrong jobs. Look at what's happening to skilled labor rates. You know it's rigged for example, when a publisher is getting away with paying writers $7.50 for a thousand words, and no benefits.

Second, in a free market, no job would pay less than a living wage because that would destroy the market. You can't have a market without trade, and you can't have trade with a massive group that can't afford to trade! The fact that there are so many jobs that don't pay a living wage is in itself evidence that the market is not free.

You're forgetting that families do survive and trade by combining the wages from several workers; by living at home, perhaps; by rooming with others in their boat; etc. Even folks on welfare trade. I understand that the distribution of wealth is screwed up, so don't go there, but you make it sound like a conspiracy that so many are not paid much. The people we're talking about can't even make change without the cash register. Pay scales are based to a large extent on skills and education.

For much too long now we've been content to dumb down what a high school diploma means and have let kids matriculate who can't read, write, or do arithmetic -- can't hurt their little psyches after all. They don't know a damned thing and feel good about it, and what's worse, it's not their fault -- but it is still the case.

Ouch.

There is truth though in these (harsh) words. There is a pervasive PC culture that means a lot of these sort of realities are ignored or glossed over, and not just in education.

But there is the problem! And once again, I'm not talking about the uneducated masses. I made $35/hour programming while still in college, 20+ years ago. Show me a part time programming job for some one with no experience and no degree that pays even that much today, and even without adjusting the rate for inflation.

Meanwhile, we have bank CEOs still making fortunes after running their banks into the ground. How can there not be a conspiracy???

Not sure how a Ponzi scheme got into wages, but here we are.

A capitalistic system is all about competition. Businesses who can compete survive and thrive. Those which cannot compete fail. This is an efficient way to distribute resources to the most productive and efficient. And the same is true with labor.

Workers are not all equal. Like most things in this world, we find a distribution of talent from the extremely gifted to the marginally productive. Obviously, this system rewards the gifted and is most punitive to the those without the tools (whether born that way, failed to develop skills, or otherwise challenged) are punished.

The system is stacked against those who cannot compete. We do, to a degree, compensate for the fixed system by setting a minimum wage, providing food stamps and health care to the poor, and not requiring them to pay taxes. If the poor work, we even provide a negative income tax for them where they can get a refund much larger than what the paid in. Still, it is pretty much guaranteed poverty and a minimal existence. Often, the marginal workers place in life was dictated at birth.

It is not a conspiracy, unless you consider Capitalism a conspiracy.

Have you been sleeping for the past eight years? The system is stacked in favor of those who cannot compete! Unless you think Bank CEOs really compete, in which case this discussion is pointless.
:eek::eek:
Holy ______! Bank CEOs conspired with Congress to get themselves big fat paychecks despite doing terrible jobs. The fact that they did it openly does not make it less of a conspiracy.


Edit: It baffles me that you still have this idea that we live in a Capitalist system. Do you think for one example, that Five Brothers spaghetti sauce really competes with Ragu spaghetti sauce?

conspiracy |kənˈspirəsē|
noun ( pl. -cies)
a secret plan by a group to do something unlawful or harmful : a conspiracy to destroy the government.

It may have been evil, but it wasn't a conspiracy.

Yes, ceo's compete... you're using a couple bad (really, really bad) examples to paint the whole system. Overwhelming percentage of banks are solvent. Just a couple of really big ones went nuts.

Pfft. From OS X's dictionary:No need to be secret. That they managed to pull it off in front of everyone makes it somewhat impressive though.

I've given you two examples of conspiracies to manipulate the markets. One large: the Banks, and one small: spaghetti sauce. We could spend years going over the multitude of other examples.

Oh, and the number of solvent banks is irrelevant because most of the money is controlled by the large ones.

Even the poor have advocates who go to Congress and lobby for better/more assistance for the poor. That does not make a conspiracy as it is neither secret nor evil.

Not familiar with the spaghetti sauce issue, though obviously all businesses try to gain an advantage wherever they can. Again, this doesn't make a conspiracy and at some point the law will kick in to stop some unfair practices.

Being a crook doesn't necessarily mean there was a conspiracy... unless they all worked together to steal from the system. We don't know if that is the case. Same would apply to OPEC, right?

Both are owned by Unilever. By "at some point the law will kick in" you must mean anti trust laws. The same ones that have been ignored for nearly a decade.
Yes, the same would apply to OPEC, which also does not have to compete in the same sense that you use the word when applying it to labor.

I would claim that corporate crime always requires a conspiracy, because it cannot be accomplished by one person alone.

Sure they do, and when they use methods that have nothing to do with production/distribution or honest marketing, they are manipulating the market. When they are able to manipulate the market, there is no longer a free market. Capitalism is dead. It's being replaced by Feudalism marketing itself as Capitalism.

Oh, and here's your couple of big banks:
http://caps.fool.com/Blogs/ViewPost....47316859050979
More like 70.

Almost every human transaction involves some manipulation of the other by both parties. Everybody who sells something attempts to manipulate the market in their favor. It's human nature. Wikipedia gives as good a definition of Capitalism as any: Capitalism is an economic system in which land, capital goods, and other resources, are owned, operated and traded by private individuals or corporations for the purpose of profit.. How does manipulating a market (a universal practice) defeat Capitalism?

Manipulating a transaction is a far cry from manipulating the entire market by deception, for example. When you go to the store and see Five Brothers, Ragu, and several other sauces on the shelf, you only think that you have a choice. The fact is that several of them are made by Unilever, and several of the others are made by one or two other companies. There is very little competition, if any in the spaghetti sauce business. It's a charade perpetuated to defraud the customer. If you define fraud as being acceptable marketing in Capitalism, then I suppose we have Capitalism, or anything else you'd care to call it.

Right.... 70 out of more than 7,500 banks doing business in the US.... less than 1 percent. Plus, many of the banks on the list were forced (intimidated) into taking TARP money so nobody would know for sure which banks really were insolvent. (Govt conspiracy to fool the people, right?)

Selling sauce under more than one label is hardly unusual.... how about Chevy engines and transmissions in a Cadillac? Most of the generic products are the same ones sold under labels, but are cheaper because they don't bear the marketing costs. I buy a lot of generics.

I thought we agreed weeks ago that free markets, pure competition and such are useful "ideas" to strive for, not that they really exist or ever have.

Please, it's well documented that this is a huge problem. Those are not just 70 banks, they're 70 of the largest banks, and the rest of the 7500 combined very likely don't do as much business.
I never said it wasn't a wide spread problem. I was trying to say that it is a widespread problem.
Strive for, certainly. Claim that it exists? No. That would eliminate any reason to strive for it.

Agreed, it is a huge problem. It is not, however, a huge conspiracy of an entire sector of the economy to create a crisis that benefits themselves.


We agree, but again I wouldn't call it a conspiracy. Just marketing ploys to sting the unknowledgeable public.

Then we do agree. They are useful economic concepts, but they are not part of the real world where perfection rarely exists.

CWT, kindly set a different tone, or quit the discussion. I won’t have it.

No one said they conspired to create a crisis. They conspired to make money the easy way (by pushing bad loans on an unsuspecting public) and that worked for a time, but being professionals, they should have known there would be blow back. Being in positions where they don't have to compete, they aren't paying the price for being unprofessional, the rest of us are instead.

I haven't reviewed all the postings here, but these are relevant to this discussion:

The Madoff Economy (New York Times, Paul Krugman)

Hope Amid the Gloom (NYT, Bob Herbert)

Liked this quote:

The Madoff is the worst kind of criminal because he has position, responsibility and authority and abused it to make himself greedy rich.

I am sick of hearing how Congress is working overtime, they are having extra sessions, they will not adjourn until they reach a final agreement on some corporate bailout for these wealthy corporate pirates! Why, they act as if they have to pay some kind of random to these pirates who are hijacking our society. There is no such filibuster about bailing out people who are actually in trouble and have been losing their homes for the last couple of years. These people need their Congress to aggressively represent THEM, not corporations, now more than ever! I personally felt that companies who accepted the bailout money should have been forced to re-negotiate loans at a lower interest rate to keep people in their homes and help stop the bleeding. Instead, these corporations have just took the loan and is hoarding it for something worst to come.

It's easy to see why people are losing their faith in our system of capitalism, free markets and democracy. This crisis has managed to strain the very core vales of our national, political, and economic beliefs as a people. I sure hope we prevail.

Madoff’s Ponzi Scheme -- perhaps really not the excepttion
 

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Nobel Prize-winning economist Paul Krugman has a very interesting take on the Madoff Scheme:

That is a darned good question!

Same link as my first in post 49, ArcticStones.

Well, let's see if Mr. Madoff gets bailed out. I don't think Congress will do marathon sessions concerning Mr. Madoff. Is Mr. Madoff too big to fail? Mr. Madoff was very exclusive about participation while the other investors were very liberal. Mr. Madoff isn't holding the government hostage. Although the victims are screwed, I don't see the victims pumping in money just to keep the ponzi scheme going or the federal government for that matter. These are some of the differences but I'm sure there are others.

I think the nature of crime is different but the same forces of greed, corruption or lack of oversight, and excess drives both the investment industry and the Ponzi scheme.

Has anyone found out where all the $$$ went?

The $$$ went from new investors to the earlier investors to maintain the illusion of "earnings". Undoubtedly there were some earnings, but certainly not up in the 10% range paid out (5% or 6% being more realistic), so the cash flow was from new to old investors with Madoff skimming a very small percentage of a very large cash flow. Since such schemes require near exponential growth, Madoff must have hoped that he would be looking into a booming market for the rest of his life. The crash, of course, brought the scheme to a grinding halt -- his investors needed cash as their other investments tanked, and Madoff couldn't supply it.

Thanks for sharing this. If this crook took the normal 3% financial service fee, he would have pocketed at least 150 Millions dollars.

The scheme depended on two things: 1) That market would steadily inflate at something like 3% and 2) that he could grow his subscribers at something like 3% per year. Invested well, the money would bring in 6%. Inflate that by 4% more derived from new investments to publish an earnings figure of 10% or so and keep 2% or something like that for your company and yourself. Both postulates failed of course -- the market crashed, and his investors wanted to cash out. Doom.

Oh! My apologies. That’s a tad bit embarrassing. :o

Well, at least this is just a regular old ponzi scheme. Nothing fancy or unique. Just write out of of ponzi scheme 101.