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October 14, 2009 -
Ageing Europe's pension bill to 'dwarf' crisis debts: EU - Comment:
Social Security is a failing Ponzi scheme in Europe, too.
What's their solution? Work longer to qualify. |
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The commentary below was written early in 2009, soon
after the Bernie Madoff scandal broke - long before his conviction.
It seemed worth noting that similar logic applies to government pyramid
schemes such as the subprime mortgage mess at Fannie Mae and Freddie
Mac, Social Security, Medicare or proposed national health insurance
schemes in which politicians can bail out their massive failure by
borrowing or printing more money until the fraud is exposed or the
national economy is ruined by debt and inflation.
In summary, those who expect to benefit from government
social programs will all get fleeced in the end. The con is only
sustained by using other people's money - until they run out of more
people to fleece. |
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recent financial scandal involving Bernie Madoff, who allegedly made off
with as much as $50 billion from the investors who trusted him, is a
useful reminder that federal regulators are not forensic auditors.
Now a similar scheme has been exposed in Florida -
perhaps $50 million lost. There will be others. |
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was not a failure by the federal regulators, requiring growth of the
regulatory bureaucracy to scrutinize all other investment programs in
the hope that this will deter or detect other frauds. Even his
family and some apparently smart investment professionals were fooled
out of very large sums of money. On the
contrary, this con was perpetuated more easily because ties to
regulators and industry leaders made it more persuasive. Would
civil servants readily catch a shrewd scheme like this, and then dare to
expose it? How often does that really happen, especially if the
person has strong political connections?
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Even highly trained financial auditors at the major
public accounting firms with extensive access to the records of a
company do not accept responsibility for detecting fraudulent activity
by the executives involved. They test what management has told
them to try to offer reasonable assurance that the financial accounts
are as stated by management, but as various other scandals have proven
over the years, they can still be fooled by executives with fraudulent
intent. They aren't really there to ferret out what they haven't
been told. If they don't really trust a client, they simply limit
their risks by not working for that client. They don't expose
their suspicions. That's why investors are justifiably spooked
when a major accounting firm chooses to drop a former audit client
without explanation. |
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term "Ponzi scheme" is a legacy of what Charles Ponzi did in America in
1919. Ninety years later, the maxim that there's a sucker born
every minute is still proving to be valid. The gist is that
attractive returns are given to early investors by giving them some of
the money brought in by later investors. There need not be any
actual investment activity. The investment profits are illusory.
Eventually it collapses when there aren't enough new investors to
support the expected returns of the existing ones. By that point,
all their money is long gone. Until then, the victims of the con
may suspect nothing. |
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is distinct from the ordinary corporate financial scandals, such as
"cooking the books" in various ways to maintain the illusion of steady
profitability. The recent case of Satyam in India is an example of
this, as are past cases like Enron, Worldcom, and others. It's
ironic that some of the top consulting and accounting firms in the world
have readily praised these firms right up until the time when their
financial scandals were exposed. |
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that context, consider the premise behind Social Security, and what it
has become over time. |
| It is
not an investment fund in which all the money contributed by workers is
deposited and invested wisely for an attractive rate of return.
It's a demographic Ponzi scheme, in which it was basically assumed that
there would always be enough new workers, earning higher wages thanks to
inflation at least, to provide an agreed level of benefits to the early
participants. Over time, those expected benefits increased, and
were adjusted for inflation, so that the unfunded liability has grown.
As people now live longer than in the past, and incur much higher costs
for their care (Medicare, etc.), the group receiving benefits has grown.
The "Baby Boom" of the 1950s has very predictably created a demographic
nightmare of far more retirees than all the new workers can hope to
support. |
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have seen similar logic in recent years as Fannie Mae and Freddie Mac
were used as federal entitlement programs to encourage banks to make
loans on terms which would not normally be justifiable. Instead of
Ponzi scheme payments, the early investors were getting home loans which
put them deeply in debt at unsustainable interest rates. Think of
this as analogous to home buyers borrowing a lot of money to invest in a
Ponzi scheme. When the scheme collapsed, it had a devastating
effect not only on those direct participants in the scheme, but also to
many investors who had trusted banks and investment firms as they traded
these securitized bundles of dubious mortgages as though they were as
secure as other mortgages with normal default rates. In the end,
it was pretty hard to even unravel how much bad debt was out there. |
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point is that government not only can't readily prevent and catch
corruption in the private sector, but also can't readily avoid being
suckered politically into creating federal Ponzi scheme programs of
their own. They haven't even figured out how they are ever going
to meet the growing Social Security obligations, and now they are
already throwing hundreds of billions of dollars (even trillions) at the
latest problem, as though the solution now was to give the poor Ponzi
scheme participants something for having foolishly trusted the
government to be doing them a favor by manipulating the housing market,
loan terms, and interest rates to their advantage.. |
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this logic, the self-evident problems of Social Security will just
continue to be punted politically into the future as somebody else's
problem, just like the victims of Ponzi schemes when the new money flow
dries up. |
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the righteous indignation among politicians about Madoff, or alleged
"Wall Street" greed and corruption, is very ironic. These scandals
pale in comparison to the frauds perpetrated through federal social
programs and other unfunded mandates. Sooner or later, even the US
Treasury has limited resources without driving this country into
unsustainable levels of debt. We are not immune to credit
downgrades as an entire country when our foreign borrowing vastly
exceeds what we can afford. We are not immune to inflation, or
even hyperinflation. Only governments have the financial power to mess
up the economy as much as in the Great Depression. As the economic
power of other countries grows, so does the power of their governments
to screw things up too. Corrupt individuals and
businesses can get away with a lot for a while, but only politicians
have the audacity to hope that they can con us forever with impunity,
and then leave us all stuck with the eventual bill. The only
protection we have is in our own vigilance over the actions of our
elected government officials. Once they set up spending programs
in the bureaucracy, they just keep sucking in more new resources until
they eventually fail. |
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