“The Mini-Madoffs” (NYTimes)

Or As the WSJ Put It  (January 28): “Ponzi Cases Proliferate”

It is beginning to appear that the Ponzi scheme is the defining scandal of our time. The Journal noted that a “recent review of Securities and Exchange civil actions shows an increase . . . in Ponzi schemes. . . .  at least 23 cases last year, up from 15 in 2007.  It has already filed four in 2009.”

Why would this be so?  Of all the forms of fraud and corruption available to financial manipulators, why choose the scheme that is inevitably doomed to fail?  Insider traders can hope to escape detection, and no doubt many embezzlers get away with their thefts before their victims uncover their losses.  But a Ponzi scheme has no chance to succeed indefinitely.  At some point the funds will run out.  There is no alternative.

There are many interesting dimensions to this, not the least of which is what the perpetrator thinks as he propels his scheme forward at the expense of friends and colleagues.  Madoff may have been sociopathic, as the Times suggested recently, akin to a serial killer motivated by the thrill of getting away with it again and again.  But it will be some time before a credible psychological profile emerges from interviews and the recollections of those closer to the action.

The profiles of the gullible may be somewhat easier to discern.  A steady and strong return on investments is desirable, to be sure, though the ups and downs of our financial system make it unlikely to be consistent and hard to explain when it is.  Still people have hopes and project their faith into the most unlikely vessels — and Madoff certainy pulled off a very respectable image.

What interests me is the collective dimension now emerging.  Why now?  Why so many? What does it say about us?

There is an element of magic in the promises of a Ponzi scheme, just as there appeared to have been an element of magic in many of our dazzling financial successes over the past several decades.  Bill Gates became the world’s richest man in the space of a couple of decades, and his partners also made tens of billions of dollars as well.  So many young kids, fresh out of college, have made huge profits from their technology innovations, then cashed in on IPO’s or buy-outs.  Retailing innovations produced WalMart and other box stores like Costco, Best Buy and Home Depot that didn’t exist several decades ago, creating many personal fortunes in the process. More recently Amazon, eBay, Google and others have dumbfounded conventional  expectations on the internet.  The rise of hedge funds has been explosive, and international currency speculators, like George Soros, have captured the public imagination with billion dollar gambles.  CEO’s have become celebrities and billionaires.  These have been amazing times — almost magical in their production of wealth.  To be sure, there have been reverses, but it does seem that something unprecedented, dizzying, almost crazy has been going on in the marketplace.

As a result, traditional values of fiscal prudence, balance and caution have come to seem outmoded.  People acting in accordance with such logic can look like timid losers.  Our technology and housing bubbles have contributed to this, illustrating how virtually everyone can become wealthy as prices for a time have seemed to go nowhere but up — until they don’t.

In this context, a Ponzi scheme doesn’t look so implausible.  It can easily mimic the appearance of a normal investment, since the investor knows as little about how his profits are to be made as does the typical investor in a hedge fund.  It is only in retrospect that the putative source of profit is exposed as bogus.

In a sense the only difference between a Ponzi scheme and any other scheme for enrichment is the absence of a basis in reality.  It is a perfect symbol for any extraordinary, implausible investment, an alluring appearance that can correspond to almost underlying reality because it is thoroughly uncontaminated with reality at all. Completely self-referential, it is infinitely expandable, endlessly adaptable to suit every hope.

In a world that has come to seem to shower riches on so many, so lavishly and indiscriminately, the Ponzi scheme is the disturbing dream that tells us what we are about.