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The legend of Charles Ponzi resonates today
By Wan Lixin |
July 11, 2009, Saturday
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MOST people know something about Ponzi schemes, thanks to the multiplicity of similar scams today that in a sense makes Charles Ponzi immortal.
On June 29, 71-year-old Bernard Madoff was sentenced to the maximum 150 years in prison for masterminding the largest and most sweeping Ponzi scheme ever.
Thousands of victims were wiped out financially in the scam that resulted a loss that the judge conservatively put at US$13.2 billion. Madoff told his sons in December, however, the value was more like US$50 billion.
In a certain sense Madoff is more successful than the legendary Charles Ponzi, but in methodology he certainly takes a leaf from Ponzi's classical get-rich-quick scam.
According to Mitchell Zuckoff in his "Ponzi's Scheme: The True Story of a Financial Legend," Ponzi, an Italian, was a gifted promoter and cheerful dreamer who went to America to take advantage of the high-flying 1920s, when the streets of America was believed to be paved with gold.
"A new ethos was emerging, one that would reshape what it meant to be an American. No more pennies saved and pennies earned," the book summarizes succinctly.
At a time when American attitudes toward wealth were changing, Ponzi's money-for-nothing scheme tapped into the national psyche shaped by the decade-long economic boom that preceded the Great Depression.
A similarly long period of prosperity preceded the current economic meltdown, enabling Madoff to pull off Ponzi's trick on a grander scale.
Similar successes are repeated elsewhere, in varying degrees.
For many Chinese people in the past decade, a revolutionary conceptual leap is gradual acceptance of wealth created through "investment."
Traditionally wealth not created through honest labor was despised, but today those who still cling to such outdated values are punished by lost opportunities, and despised as well.
"For promoters of instant assets, it was a time when it paid to think big," the book says.
About 10 years ago when I visited my native home in north Jiangsu Province, a former colleague urged me mysteriously to attend a gathering that he promised would benefit me greatly.
It turned out to be a chuanxiao (pyramid sales) training session held in another colleague's home. What amused me was that the instructor talked glibly of the spiritual benefits accruing from the holy cause of chuanxiao. He went so far as to cite the great moral precept junzi aicai, quzhi youdao, meaning that while a gentleman craves wealth, he is fastidious about the means of acquiring it.
We are still hearing of crackdowns on pyramid sales schemes, suggesting their vitality and appeal.
Pyramid sales is essentially similar to Ponzi's scheme.
"Ponzi was dependent on new investors to pay old. When the music stopped, there would be no chair on which to sit," Zuckoff concludes.
What helped Ponzi and Madoff to succeed is a kind of exuberance created by prolonged period of prosperity.
It seems the high growth will never end, or the music will last forever.
American housing boom was sustained by this sentiment, fueled by the illusion that the home prices would go up forever.
Buoyed by the belief that the global economy has bottomed out and is entering another bullish run, many Chinese today are snapping up stocks, properties and cars like never before, allegedly in a race against the inflation prophesied by all pundits.
"Human nature was asserting itself; in the absence of hard evidence, too good to miss trumps too good to be true," as the author observes.
Although media finally led to the exposure of Ponzi's scam, media were also accomplices in making Ponzi successful.
Similarly, media-hyped tales of instant riches fill China with ambitious but callow investors in every conceivable kind of asset.
Yes, they have been robbed several times in the past, but they lick their wounds and move on to the next round.
The net result of such game is simply accelerated flow of wealth from the have-nots to the haves, giving our society a facade of vigor and dynamism.
One lesson learned from numerous boom-to-bust tales is that bubbles need to be sustained, or inflated, to prolong the prosperity.
Given the all-pervasive exuberance, it is time to read about Ponzi. As the author observes:
"Finding a balance between the images of the debonair and the debased, the (Boston) Post gave Ponzi a backhanded compliment for the ages: 'Of all the get-rich-quick magnates that have operated, Ponzi is the king'."
On June 29, 71-year-old Bernard Madoff was sentenced to the maximum 150 years in prison for masterminding the largest and most sweeping Ponzi scheme ever.
Thousands of victims were wiped out financially in the scam that resulted a loss that the judge conservatively put at US$13.2 billion. Madoff told his sons in December, however, the value was more like US$50 billion.
In a certain sense Madoff is more successful than the legendary Charles Ponzi, but in methodology he certainly takes a leaf from Ponzi's classical get-rich-quick scam.
According to Mitchell Zuckoff in his "Ponzi's Scheme: The True Story of a Financial Legend," Ponzi, an Italian, was a gifted promoter and cheerful dreamer who went to America to take advantage of the high-flying 1920s, when the streets of America was believed to be paved with gold.
"A new ethos was emerging, one that would reshape what it meant to be an American. No more pennies saved and pennies earned," the book summarizes succinctly.
At a time when American attitudes toward wealth were changing, Ponzi's money-for-nothing scheme tapped into the national psyche shaped by the decade-long economic boom that preceded the Great Depression.
A similarly long period of prosperity preceded the current economic meltdown, enabling Madoff to pull off Ponzi's trick on a grander scale.
Similar successes are repeated elsewhere, in varying degrees.
For many Chinese people in the past decade, a revolutionary conceptual leap is gradual acceptance of wealth created through "investment."
Traditionally wealth not created through honest labor was despised, but today those who still cling to such outdated values are punished by lost opportunities, and despised as well.
"For promoters of instant assets, it was a time when it paid to think big," the book says.
About 10 years ago when I visited my native home in north Jiangsu Province, a former colleague urged me mysteriously to attend a gathering that he promised would benefit me greatly.
It turned out to be a chuanxiao (pyramid sales) training session held in another colleague's home. What amused me was that the instructor talked glibly of the spiritual benefits accruing from the holy cause of chuanxiao. He went so far as to cite the great moral precept junzi aicai, quzhi youdao, meaning that while a gentleman craves wealth, he is fastidious about the means of acquiring it.
We are still hearing of crackdowns on pyramid sales schemes, suggesting their vitality and appeal.
Pyramid sales is essentially similar to Ponzi's scheme.
"Ponzi was dependent on new investors to pay old. When the music stopped, there would be no chair on which to sit," Zuckoff concludes.
What helped Ponzi and Madoff to succeed is a kind of exuberance created by prolonged period of prosperity.
It seems the high growth will never end, or the music will last forever.
American housing boom was sustained by this sentiment, fueled by the illusion that the home prices would go up forever.
Buoyed by the belief that the global economy has bottomed out and is entering another bullish run, many Chinese today are snapping up stocks, properties and cars like never before, allegedly in a race against the inflation prophesied by all pundits.
"Human nature was asserting itself; in the absence of hard evidence, too good to miss trumps too good to be true," as the author observes.
Although media finally led to the exposure of Ponzi's scam, media were also accomplices in making Ponzi successful.
Similarly, media-hyped tales of instant riches fill China with ambitious but callow investors in every conceivable kind of asset.
Yes, they have been robbed several times in the past, but they lick their wounds and move on to the next round.
The net result of such game is simply accelerated flow of wealth from the have-nots to the haves, giving our society a facade of vigor and dynamism.
One lesson learned from numerous boom-to-bust tales is that bubbles need to be sustained, or inflated, to prolong the prosperity.
Given the all-pervasive exuberance, it is time to read about Ponzi. As the author observes:
"Finding a balance between the images of the debonair and the debased, the (Boston) Post gave Ponzi a backhanded compliment for the ages: 'Of all the get-rich-quick magnates that have operated, Ponzi is the king'."
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