A bit harsh, but kind of hard to argue with. The whole thing worked as long as people believed that prices could keep going up. The main difference between Wall Street's financial wizardry and a Ponzi scheme is that the latter is deliberately designed to dupe investors, while the former was based on honest (but ultimately inaccurate) measures of risk. There's a difference in intent, and I think that matters a lot."Consider the hypothetical example of a money manager who leverages up his clients’ money with lots of debt, then invests the bulked-up total in high-yielding but risky assets, such as dubious mortgage-backed securities. For a while — say, as long as a housing bubble continues to inflate — he (it’s almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he’ll keep those bonuses.
O.K., maybe my example wasn’t hypothetical after all."
Arnold Kling adds that Wall Street isn't the only one running a Ponzi scheme:
"Meanwhile, I've been thinking that Madoff is a perfect analogy for the public sector. The government gives people money, which it expects to obtain by taking the money from people in the future. Even the Center on Budget Policy and Priorities, not known as a right-wing organization, sees the U.S. fiscal stance as unsustainable (pointer from Ezra Klein via Tyler Cowen)--in other words, a Ponzi scheme."Social Security is a good example, since it's based on borrowing money from future Americans to pay current Americans. Then again, Social Security is in no where near that danger that some critics have suggested.
So there you have it. We live in a world of Ponzi schemes, some that work and some that don't, at least not for long.
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It's nice and all to look in hindsight at events and label them Ponzi schemes. The difference is not only, as you point out, that of intent, but that of disclosure as well as risk exposure. If Madoff would have explicitly invited investors to bleed each other's principal gradually, he wouldn't be under house arrest right now. I identify with Kling's and Krugman's frustrations; both the credit crisis and the government response to it hinge(d) on the reallocation of existing money as opposed to the growth of asset values. What makes it akin to a Ponzi scheme is the now-apparent widespread ignorance by the public. But individual investors are not a perfect victim in Krugman's case, and it is the responsibility of the supporters of the bailout to realize that it is the people who pay for it, not the government. The investors in Madoff's scheme, by contrast, are near pure victims; their risk exposure should include the risk in investing in a shady hedge fund, not in taking part in a criminal scheme. They deserve to be "bailed out" before the beneficiaries of the $700B package.
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