What's the difference between an Albanian and a "victim" of Bernie Madoff? Plus, how Britain's politicians are shafting virginsby Jonathan Ford / March 1, 2009 / Leave a comment
Pyramids in Albania
One of the curiosities about finance is our inability to learn from past mistakes. If anything, as time passes we magnify them.
This is certainly true, as we know all too well, of financial manias and bubbles. But it applies equally to financial scams. Take the humble Ponzi scheme, which has been with us for almost 90 years. One might have thought we’d have wised up by now to this pyramid operation—what PJ O’Rourke once called “the old ‘send five dollars to the name at the top of the list, put your name at the bottom of the list and mail copies to future ex-friends’ [routine].”
When Ponzi’s original scheme collapsed, the fraudster had liabilities of just $7m, or a paltry $76m in today’s money. Yet in recent years, frauds have got bigger and bigger—to the point of destabilising entire countries. The MMM pyramid scheme collapsed in 1994, owing $1.5bn and shaking the young (and already dysfunctional) post-communist Russian state to its foundations. In 1997, the five giant pyramid schemes that dominated Albania’s financial sector imploded, taking with them $1.2bn—or roughly half of Albanian GDP—in one fell swoop. In the resulting chaos, the entire state effectively collapsed.
The Albanian schemes offered returns of about 70 per cent per annum, at a time when inflation was low and the country had no productive industry to speak of. They were created shortly after the well-publicised collapse of MMM, of which many Albanians were aware. It has been suggested that Albanians had their brains fuddled by nearly 50 years of communism or were just plain thick, but this doesn’t really stack up. One Albanian offered a different explanation for his compatriots’ actions: “People knew such money could not be made honestly. They thought there was smuggling and money laundering involved to make these great profits.”
So the Albanians didn’t believe that they were victims of a scam—but its perpetrators. How similar this seems to the logic of some of Madoff’s “victims” who jumped on the $50bn bandwagon because they thought the great investor was at the centre of a corrupt Wall Street ring, front-running the stock markets. It was a case of: “They are all at it so why not get a piece of the action too?” These things are not done to us, we do them to ourselves.
Thoughts from the Westminster bubble
It’s well known that…