SS: Ponzi Scheme Isn't The Problem

Everyone by now knows what a Ponzi Scheme amounts to. We all became familiar with it when Bernie Madoff was caught using it to amass a fortune at the expense of clients who were unaware that his plan to put away money for them amounted to such a scheme.

The issue in the case of Madoff wasn't actually so much the scheme but the lack of full disclosure about it.

Ponzi schemes are legion around the world and people knowingly take part in them. For instance, most insurance companies use them, collecting funds from new clients and paying old ones in part from the newly acquired cash. Retirement systems make use of the scheme, as well. Those who have paid in are often receiving the funds new clients pay now. And so with the Social Security system. The Social Security system would be no problem if it were voluntary and those who are part of it knew from the start the risks involved.

Fractional reserve banking is like that, too: When people deposit their money in banks the money isn't all left in vaults until they withdraw it; rather, much of it is used to give loans and make investments. And clients of the bank know this but figure the bankers are skilled at what they are doing and will not use the funds recklessly, irresponsibly. But the bankers do not expect all custumers to suddenly withdraw their funds; the banks could handle that. But since it is common knowledge, nothing is amiss in such arrangements.

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