Ponzi Scheme: Revival of an old trick (CultureCast #042)

The news has been a buzz with the Bernard Madoff investment scandal. Media describes this as the largest Ponzi scheme and largest investment scheme of all time.

But what is a Ponzi scheme? Why is it named so? What goes into a Ponzi scheme?

Find out by listening to the CultureCast above (by pressing the little blue play botton), or by clicking through and checking out the transcript and further sources.

Ponzi Scheme: Revival of an old trick (CultureCast #042)

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Transcript

Hello CultureCats, this is Joshua Hwang distributing interest from another 90 Seconds to Culture podcast.

Ponzi Scheme: Revival of an old trick

Named for its creator, or at least the con man that made it famous, Charles Ponzi, the Ponzi scheme is a type of investment fraud where investors into the scheme are paid not from the profit of the investment but from the money of future investors.

For example, I say that I have some insider knowledge of valuable coins, but I need some investors to finance the buying and trading of these coins. You knowing what an upstanding citizen I am offer to give me 1000 dollars, with the promise that I will pay you back 1500 dollars. Another investor hears of this opportunity, and decides to invest. I use this new investor’s money to pay you back with interest, while I pocket the rest.

The problem here is that this isn’t sustainable. The persons who most recently invested always need to wait until another person buys in. Usually though, investors get suspicious and ask for their money back, or the government intervenes, or the founders of the scheme just run away. In any case, the scheme falls apart at this point.

Most recently, as of this recording, Bernard Madoff has been arrested and charged in one of the largest securities (stock) frauds of all time. This was a Ponzi scheme where up to $50 billion dollars worth of losses occurred, fooling both big companies and celebrities, like Steven Spielberg.

Sources / Further Reading:
Wikipedia: Ponzi Scheme
Wikipedia: Charles Ponzi - They should make this man’s life story into a movie. Quite the character.
The Brokers with Hands on their Faces Blog - This scheme just reminded me of this site.
Wikipedia: Bernard Madoff - By the way, his sons tipped off the authorities to their father’s scam. Thanksgiving is going to be AWKWARD next year.

[tags]economics, popular culture, ponzi, scheme, culture, podcast[/tags]

(image from The Brokers with Hands on their Faces Blog)

Tagged as: Economics, ponzi, Popular Culture, scheme