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Blog of Mass Destruction

The Pyramid That Ate America

By The Reverend Published: December 16, 2008

From Wikipedia.....

Charles Ponzi (March 3, 1882–January 18, 1949) was an Italian immigrant to the United States who became one of the greatest swindlers in American history. His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo. The term "Ponzi scheme" is a widely known description of any scam that relies on a "pyramid" of "investors" who contribute money to a fraudulent program.

The Reverend knows a little about pyramid programs.

We're being told that a highly regarded Wall Street type, Bernard Madoff, was recently arrested for running "a giant Ponzi scheme".....

Bernard L. Madoff, a former chairman of the Nasdaq Stock Market and a force in Wall Street trading for nearly 50 years, was arrested by federal agents Thursday, a day after his sons turned him in for running what they said their father called "a giant Ponzi scheme." Link

Here's Madoff's crime....

"deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars."

I just love the placement of the word "approximately" in that last sentence.

Anyway....let me get out one of my mass destruction assertions and throw it out for consideration.

Every working day Wall Street operates a giant Ponzi scheme.

Years back there was a pyramid program going around called "airplane".....bring thousands in an envelope to a meeting,......hand it in......wait til enough other "passengers" did the same....then cash in exponentially, flying off in your own enriched "airplane." The "flyer" was paid with the cash from new participants. Then the cops showed up.

The concept of Ponzi, or pyramid, entices through multiplication. If I put in $100, and get three people to each put in $100, and then they each get three people to put in $100, the time you go down 7 or 8 levels, we're talking about serious money. The wider, exponentially-more-participants downline sends their money upline to the person at the top of the "pyramid." The idea here is to "get in first" and then take advantage of the cash flowing from the bottom up.

What I've just described is what happens continually in the daily auction-Ponzi that America calls stock trading. It is the job of stockbrokers and stock salespeople to excite their potential buyers about the upside of buying specific stock. If enough customers buy that specific stock, the "value" goes up, driven up auction-like, until the initial buyers can sell, reaping a profit from the increased "value" created by new auction participants who don't want to miss out on an opportunity.

We've seen this happen on a macro-level during the craziness (DOW 36,000 baby), and again last year when Ponzi Pod People went all crazy driving the DOW up over the 14,000 level. The DOW is now just a bit over 8000.

As long as there are new, willing buyers....the Ponzi, or pyramid works pretty well. Money from the downline participants goes to pay the folks on the upper levels of the pyramid. For example, the pyramid program known as Amway has never run out of new bottom level participants. The "products" they sell have no real meaning.....many Amway members in the early days of the Ponzi simply filled their garages up with "products". The point was never the was the money movement, always coming from below and working it's way upline.

The stock market has an advantage over Amway....they don't have to deal with any pesky product at all. They just move with the "airplane" scam. Oh, but the stock broker people are experts....experienced and highly trained economic experts, highly regarded, just like Bernard Madoff of current Ponzi fame. To attract new money, Madoff had to offer high returns for his well-heeled Ponzi participants, just like broker "analysts" do each and every day when they tell us that a stock will reach a certain level. It's all about attracting new money....making it possible for previous stock buyers (or pyramid program participants) to get out with a profit.

Zachary Roth of TPM Media makes my point...

In other words, Madoff got himself into a situation where he didn't have enough money to pay back investors -- jut like those Wall Street banks we just bailed out. That's not to say that the charges against Madoff aren't serious -- it's only to point out that they're not unconnected to the broader economic turmoil.

The blubberings we've been hearing from Knee Pad Media members about Bernard Madoff are just that....blubberings. The real story here, like Roth from TPM says, is that our entire financial system is built on the same principle Madoff got in trouble over.

Wall Street is like Amway.....only without the products.

And one more thing....

During the last 15 years or so the Wall Street Ponzi operators couldn't be

enriched enough satisfied with simple stock "trading" Ponzis. So they invented Serious and Cutting Edge new "market based" Ponzis. That's what the deregulated "credit default swaps" and "mortage backed securities" were all about.

That's worked out real well, don't you think?

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