Ponzi Scheme Creates Need For Payday Loans

No Deception Here

There’s nothing secretive or deceptive about payday loans. Terms are listed up front, employees will explain them to customers and the repayment schedule – particularly with the installment loans variation – is flexible.

However, recent developments in the financial headlines have shown that many people – famous people, sophisticated people and organizations, including Elie Wiesel, Steven Spielberg, and the Gift of Life Foundation  – are prone to a scam that’s nearly a century old. A recent Google search even revealed more than 100 such schemes being investigated all over the world. Wall Street money manager Bernard Madoff has fooled investors worldwide to the tune of $50 billion dollars. It is believed to be the largest scam in Wall Street history.

He got them with a modified Ponzi scheme

Named after Charles Ponzi (1882-1949), who raked in $15 million in nine months in 1919 and 1920. Ponzi was considered by those he was swindling as the greatest Italian ever. “You’re wrong,” he said, “there’s Columbus, who discovered America, and Marconi, who discovered radio.” “But, Charlie, you discovered money,” his marks exclaimed.

A Ponzi scheme works something like this

If you go to a friend, let’s say it’s Jeremy Piven, and convince him to invest $500 in a business opportunity, you promise that you will double his money in one month. Next, go to actresses Rachel Weisz and Lisa Rinna and convince them to invest at $500 apiece. Use that $1,000 to pay off Jeremy Piven, and he’s hooked. He goes on to tell all of his “Entourage” friends, and four of them come around and make deals with you at $500 a pop. That $2,000 you rake in is then split between Rachel Weisz and Lisa Rinna, doubling their money as promised.

Now you are the hottest thing since sliced bread and everyone wants a piece. Take money from eight more, then 16, then 32, and so on. Once the pot is thick with cash, run off with the profits instead of paying back investors in the pyramid scheme. You are now Bernard Madoff, you have broken the law and payday loans won’t bail you out.

Not all Ponzi schemes are illegal, however

Social Security, where the younger members of the population pay part of the retirement benefits of the older, is a legal Ponzi scheme. Asset pricing bubbles, where a middle man takes a cut every round, is another type of legal Ponzi scheme. To illustrate how the latter works, people take out mortgages they can’t afford, but assume their home increasing in value will offset this. These homeowners are engaging in legal Ponzi activity.

Madoff’s scheme was a little bit different

According to Peter J. Henning in the New York Times, Madoff “1) preyed exclusively on very wealthy investors and 2) offered steady returns of 10 percent a year rather than a quick, spectacular gain.” But ultimatley, it’s still a Ponzi.

The federal government is going to try to pick up the pieces, in its fashion. They may spend billions to bail out the last-round players in Madoff’s scam to protect the overall economy. Participants will get some of this bailout, but they will still lose significant cash overall. Taxpayers foot the bill for the bailout, which may generate greater net losses than the people who were duped.

Be angry. Be very angry. No more bailouts

Unfortunately, bailouts have a tendency of reinforcing riskier Ponzi schemes. Let’s hope that the $700 billion federal bailout doesn’t create a monster that swallow’s Madoff’s Prometheus Unbound whole. This may not mean much to the average consumer, but it supports our culture of victimization and greed, which is in no way a world in which children should be raised. Payday loans are not to blame for what these game-players have done to the economy.