It's amazing how great minds think alike. On November 24, I wrote this:
So is the main difference between a bank and a Ponzi scheme the fact that the bank actually intends to give you your money back, on demand, and the Ponzi schemer doesn't? Because in both cases, when you get money back, it isn't "your" money (in the sense that it's the same dollar bills you gave them earlier). It's money that someone else just deposited, which hasn't been loaned out yet. And when that person writes a check, the money that changes hands came from yet someone else.And today, commenter M W (mrw2day) wrote, on the Planet Money post About that $50 Billion:
I don't understand what all the whinning [sic] is about. Mr. Madoff was conducting business exactly like a bank. Sorta a fractional reserve system of investing. If Mr. Madoff was a bank, the treasury would be bailing him out. Or is it that the banking system is just a giant ponzi scheme?I really am getting kind of a weird feeling about the banking business from all this.
According to today's Planet Money podcast, what brought Mr. Madoff down was exactly what has brought down several large banks and a couple of brokerage houses: more of his customers wanted their money back at once than he had cash in the house to cover. If he'd been investing in actual assets for them, he could have sold some (although at a loss); since he'd just been spreading it around, so to speak, he couldn't cope.
I will never understand the state of mind that gives large amounts of money to Joe to invest, merely because Joe plays golf at the same club as the mark - sorry, investor. Or because Joe has been managing money for the investor's friend Ed and giving him really reliable returns. I've heard at least one broadcast where a fairly well known financial expert (can't recall who) had reportedly questioned Madoff's returns, because they were "too good to be true" (he effectively never reported a down year) - but nobody listened.
When it comes to money, the human race seems to be lacking a "too good to be true" detector.