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Sunday, September 25, 2011

Not everything is a Ponzi scheme

Rick Perry calls Social Security a Ponzi scheme.

The managers of Full Tilt Poker are accused of running a Ponzi scheme.

In both cases, this is wrong. These schemes may be ill-advised, poorly run, or criminally fraudulent,  but they are NOT Ponzi schemes.

Let’s keep our sins straight – much as you had to carefully distinguish adultery from fornication in religion class in Catholic high schools. Winking smile

Who better to know Ponzi schemes than Tim Harford of the Financial Times, who imagines a dialogue between a frustrated Charles Ponzi and his assistant:

A proper, classic, elegant Ponzi scheme is an investment offer that pays investors high returns. You know this.”

“I know this, Mr Ponzi.”

“You know this. The high returns attract new investors – and often the old investors keep their money in too. As long as the money coming in from new investors is enough to cover the occasional investor who cashes out – and of course the dividends taken out by the scheme’s creator – then all is well.

http://www.ft.com/cms/s/0/510c4502-e480-11e0-92a3-00144feabdc0.html#axzz1Z1PyJNNh 

That’s a Ponzi scheme. Bernie Madoff ran a Ponzi scheme. Social Security, Full Tilt Poker, Groupon – whatever else they are, they aren’t Ponzi schemes.