Corrections to the blogosphere, the consensus, and the world

Friday, December 19, 2008

Ponzi

There is a theme in the articles on Madoff of people asking where the 50 billion went to. With no actual knowledge on the details, isn't a classic Ponzi scheme largely redistributional, the money from new customers going out to old customers? You get the finagler's cut not so much by taking a percentage off the top as by heading off to Rio in the middle of the enterprise. A quick Excelling of a scheme where investors are paid 10%, there are no investment profits, there are no administration costs, and there's a constant flow coming in every year shows that the business goes into deficit in year 20. Anybody who's been in Madoff's funds for more than ten years has already broken even.

And on the financial front, isn't the problem with the boom pundits the same problem that comes up with Rudd's climate plans - the systematic downplaying of the possibility of low-probability catastrophic events in the belief that any such catastrophe is most unlikely to come along before the manager has taken his rewards and moved on? The chance of a total wipeout isn't factored in to anybody's structure of incentives.

Melbourne and Sydney may be lucky: we can always put a dyke across the heads. If we were Dutch we would have done it already.

1 comment:

John Hannoush said...

Breaking even after ten years, you call that good...?

Your climate change analogy (Chris, you are truly a believer, aren't you - what happened to that skeptical streak?): it doesn't really work. Collapse of a Ponzi scheme or a bubble is not low probablity - it is certain. The analogy is more like the way you downplay the low - probability catastrophic event of being killed crossing a street, driving in a car, or flying in a plane. Unless you have decided to stop doing these things...
Anyway Rudd hasn't been downplaying anything much - didn't he say that unless Australia cut deeply we could kiss goodbye to the Barrier Reef's arse?

Cheers

J

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