Tags: bernie | madoff | ponzi

Is the Detroit Bailout Another Ponzi Scheme?

Monday, 15 Dec 2008 08:25 AM

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Bilked investors are aflutter over “the biggest Ponzi scheme ever.” But, at $50 billion, it’s second-rate to taxpayers’ billions at risk in the Detroit bailout.

What has the financial world agog and aghast is the recent revelation that a 70-year-old, affable, former chairman of the Nasdaq board named Bernie Madoff was arrested by federal agents for swindling hundreds of investors out of all those billions in what he, himself, now terms "basically, a giant Ponzi scheme."

Also, basically, he could get 20 years in a penitentiary. Those investors he defrauded could get nothing. Their money “is gone.” Guess where.

Nomenclature gets important here. Investors are people who voluntarily bet money on businesses they think will pay them back with a lot more money. There’s nothing voluntary about taxpayers. They either cough up what’s demanded of them by government or risk going to jail.

A Ponzi scheme is also worthy of definition. According to the Securities and Exchange Commission’s official Web site, “Ponzi schemes are a type of illegal pyramid scheme named for Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s.

“Ponzi thought he could take advantage of differences between U.S. and foreign currencies used to buy and sell international mail coupons. Ponzi told investors that he could provide a 40-percent return in just 90 days compared with 5 percent for bank savings accounts.

“Ponzi was deluged with funds from investors, taking in $1 million during one three-hour period — and this was 1921! Though a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about $30 worth of the international mail coupons.

“Decades later, the Ponzi scheme continues to work on the ‘rob-Peter-to-pay-Paul’ principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses.”

Madoff’s Ponzi scheme was about to do just that when the feds came calling. He is quoted as telling his employees he was “finished,” had “absolutely nothing” left, and it was “all just one big lie . . .”

Why does this seem so similar to a bailout of the Big Three car companies, and thus the United Auto Workers, by the federal government?

Whatever the initial bailout sum, economists who study the automotive industry speculate it could wind up as high as $125 billion — especially under a Barack Obama administration, which will surely be firmly under the spell of the UAW, whose outlandish costs have driven the manufacturers over this cliff.

That makes Bernie’s $50 billion appear in comparison as chopped chicken liver.

In the Detroit bailout scheme, money taken in taxes by the government is “invested” in a known, already-failed business with the assurance that the same business will repay this “loan” at some future, unspecified date.

Bernie’s scam sounds a lot more attractive. No wonder so many suckers pressed money upon him to invest for them. That’s why you can’t honestly call the Detroit scheme a Ponzi scheme.

Under a Ponzi scheme, the sheep get fleeced because they want to play the game. They convince themselves they’ll get rich quickly. Otherwise why part with a single dollar? In fact, the crook running the Ponzi scheme has a hard time beating off the gullible, who can’t wait to be gulled.

Under the Detroit scheme, every opinion poll taken — for whatever that’s worth — shows American taxpayers overwhelmingly do not want their tax dollars spent this way. Apparently, they don’t know what’s good for them.

No, the Detroit scheme is not a Ponzi scheme. In a collapsed Ponzi scheme, the crook in the private sector can go to jail. In a collapsed Detroit scheme, no one in government goes to jail.

John L. Perry, a prize-winning newspaper editor and writer who served on White House staffs of two presidents, is a regular columnist for Newsmax.com. Read John Perry's columns here.

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