Money Creation Is Not a Pyramid Scheme: Why Is It Okay for Banks to Create Money Through the Process of Holding Fractional Reserves and Lending While It Is Not Okay for Fraudsters Such as Bernie Madoff to Run a Pyramid Scheme?
These types of schemes are better understood by using an example, for instance say you collect $100 from each investor and promise you will double it in a month.
How did incredibly wealthy people fall for such a scheme and lose billions in the process? Madoff conducted something called a Ponzi scheme, an intricate and deceptive pyramid scheme with no good outcome. Like multi-level marketing schemes, Ponzi schemes help those at the very top of the pyramid, while effectively cheating those on the bottom out of their hard-earned money. Unlike pyramid schemes, however, a Ponzi scheme promises and often shows falsified evidence of success in the form of financial returns. To get an idea of how a Ponzi scheme operates from start to finish, the folks at Epipheo.TV created this short, informative video on the Ponzi basics. When you see how a Ponzi scheme works, you’ll know which mistakes to avoid for your own financial security…and maybe even spot a Ponzi scheme in the making. If an investment opportunity sounds too good to be true, it probably is. Making continuous gains despite the condition of the stock market sounds nice, but the market must go down the same way it goes up. If an investor or broker is guaranteeing you returns even if the market goes through a rough patch, you might want to think twice about working with them. They could be setting you up for a Ponzi-like scam.
People invested in Madoff’s Ponzi scheme since they had trust in the billionaire. This provided Madoff with a leeway to con unsuspecting investors. Madoff’s Ponzi scheme is a clear illustration of the extent to which people may go to exploit unsuspecting investors. Madoff may have engaged in the Ponzi scheme to finance his lucrative lifestyle. The Ponzi scheme provided him with easy cash. The Ponzi scheme may have also him with funds to run other businesses that he owned. Early detection of a Ponzi scheme enables the SEC to save investors from huge losses. To detect Ponzi schemes, investors should be wary of investments that offer high returns with little or no risk. Normally, high return investments have high risks.
Arends, Brett. “These red flags can signal Ponzi scheme.” The Wall Street Journal. 16 December 2008. Web. https://www.wsj.com/articles/SB122937799268308369
Benson, Sandra S. “Recognizing the red flags of a Ponzi scheme.” Current Accounts. November/December 2009. Web.
Kovacich, Gerald L. Fighting fraud: How to establish and manage an anti-fraud program. Burlington, MA: Butterworth-Heinemann, 2007. Print.