Ponzi's pyramid scheme pales compared to the complexity of the financial shenanigans unraveling

VHeadline commentarist and money market expert Fred Cederholm writes: I've been thinking about Ponzi schemes/pyramids, the press, governmental investigations, the past and our present dilemmas. As the summer of 2008 progresses, there is a growing undercurrent of concern gnawing at the very foundations of our US financial/economic systems. Page one news stories talk of losses and write offs in the mega billions. The investors of the planet played fast and loose with money they had (or money they leveraged).

Their judgment was clouded by visions of easy money and big returns ... now they see mountains of losses, not profits ... they are wary of being bitten or taken twice. Such hard learned caution will prove a major obstacle to any long term recovery or any quick turnaround.

Charles (Carlo) Ponzi -- 1882 to 1949 -- is forever identified with the pyramiding scam which bears his name. Ponzi was a wheeler-dealer from the moment he got off the boat from Italy in 1903. He soon relocated to Canada where worked as a teller at a bank that was growing by leaps and bounds because it paid more money in interest than its competition. He saw that the "premium" being paid was financed by new deposits, not from operational profits. The game worked only as long as a steady stream of new money and customers underwrote any would-be withdrawals of the earlier deposits. Rollovers and continued cash infusions were essential. The Bank eventually failed and Ponzi's boss fled Canada with the remaining funds. Ponzi was apprehended and ended up doing time for an unrelated check fraud rap.

Still ... he had learned much from his former employer!

After his release, he relocated to the US where he was soon arrested for smuggling in illegal immigrants and he served two more years. Upon his release, he settled in Boston where he came up with a money raising scheme involving international postage reply coupons -- effective selling "prepaid return postage stamps." He promised a 50% return on a 45-day investment paying lucrative commissions to his sales force for every friend and family member they enticed into investing. He started his own company, the Securities Exchange Company -- the SEC -- to promote the scheme. (Has a nice "ring" to it don't you think?)

His take in February 1920 was $5,000, by March it was $ 30,000, by May it was $420,000, by July his take was in the millions; by then he was raking in $250,000 a day!

An alert local press and government began to question (and investigate) his money making model. On August 10 the Feds shut down Ponzi's "SEC." August 13 he was arrested and charged with 86 counts of fraud. He plead guilty to mail fraud on November 1 and was sentenced to five years in prison. He served three and a half years only to be sentenced to nine more years on state charges. He was ultimately deported in 1934.

Ponzi's flash-in-the-pan pyramid scheme pales in comparison to the complexity and sums of money involved in the financial shenanigans that are unwinding/unraveling before our eyes some 80 years later. His mess was local to New England. Our messes are nationwide and global.

Still ... there are similarities and two differences to the Hell Ponzi had wrought, and looming crises "we" face. In substance over form, both scenarios necessitate an ongoing and increasing influx of new money and investor/ lenders to keep the "engines" chugging away. This is far more critical than the greed driven quest for easy money and a fast buck. Loss of large returns today is not as devastating as the fear of losing principal (or investment basis) to present and future would-be investors.

http://vheadlinevenezuelanews.blogspot.com/2008/08/ponzis-pyramid-scheme-pales-compared-to.html

:P

Economic bubbles are the best excuse to pretend like there's not a problem so long as we pop it just AFTER we get rich.

In a Ponzi scheme each node in a layer recruits more nodes at a fixed price in a subsequent layer until the pyramid has "saturated" its demographic.

In a bubble, speculation drives growth and prices to exceed the actual value of the underlying asset. The collapse comes when there is no more cash flowing into the bubble and creditors start to call their accounts due or attempt to sell the underlying overvalued asset for pennies on the dollar. Since profitability drives investment, if an organization is posting horrific losses the effects of a bubble collapse extend well past the original market sector.

This is not rocket science - and YET, we pretend to be in denial on the off chance that we too can "get rich" before anyone else really believes it's a bubble.

What Ponzi and Bubbles have in common: they are both fueled by personal greed and irrational optimism.

which leads to the death of the patient.

I bet that's probably 'pretty close to correct', eh?

bubbles are merely sustained periods of overvaluation of an actual asset.
they can end by being popped with the price crashing down, or by gradually easing back to fair value, or by the asset actually rising in value to meet the (previously) elevated price.
they can be sustained and fueled by an investor feeding frenzy, but this sort of "panic" is not an inherent part of bubbles.
they can be sustained instead by market imperfections or barriers or information problems or capital flow.

ponzi schemes, on the other hand, fundamentally rely on the buying panic. there IS not product, or the so-called product is an incidental fig leaf. the real product is a ticket to the buying panic. ponzi schemes necessarily must collapse. not so with bubbles.

known as 5linx. She said it was a pyramid type company and I googled it and the name definition was a VolP Telecommunications Company. They sell different types of phone, internet and cell phone services. Perhaps Direct TV and Dish too. Is this something worth looking into or is it just one of the usual "pyramid" scams? If you know.

Thank you.