The Optimal Design of Ponzi Schemes in Finite Economies

Utpal Bhattacharya

Indiana University Bloomington - Department of Finance

Journal of Financial Intermediation, January 2003

Abstract:

As no rational agent would be willing to take part in the last round in a finite economy, it is difficult to design Ponzi schemes that are certain to explode. This paper argues that if agents correctly believe in the possibility of a partial bailout when a gigantic Ponzi scheme collapses, and they recognize that a bailout is tantamount to a redistribution of wealth from non-participants to participants, it may be rational for agents to participate, even if they know that it is the last round. We model a political economy where an unscrupulous profit-maximizing promoter can design gigantic Ponzi schemes to cynically exploit this "too big to fail" doctrine. We point to the fact that some of the spectacular Ponzi schemes in history occurred at times where and when such political economies existed - France (1719), Britain (1720), Russia (1994) and Albania (1997).

Keywords: Ponzi schemes, bubbles, bailouts, moral hazard

Link @ sig

I haven't read the comments, and I'll certainly stop now.

THIS -

I ghost-wrote comments on UT for Zoltan Newberry

was freakin' funny!

I am curious about your Ruby Ridge was worse than Waco comment. Did I read that properly? What am I missing?

...whose sound cut off about 6 min. in, and now the darn thing won't play?

I "solved" my issue by exiting/restarting Firefox.

What happens if McWorse kicks the bucket prior to the election?

http://www.latimes.com/news/local/la-me-pulpit25-2008sep25,0,5235934.story

or click sig

Pastors plan to defy IRS ban on political speech

Ministers will intentionally violate ban on campaigning by nonprofits in hopes of generating a test case.

By Duke Helfand, Los Angeles Times Staff Writer

September 25, 2008

Setting the stage for a collision of religion and politics, Christian ministers from California and 21 other states will use their pulpits Sunday to deliver political sermons or endorse presidential candidates -- defying a federal ban on campaigning by nonprofit groups.

The pastors' advocacy could violate the Internal Revenue Service's rules against political speech with the purpose of triggering IRS investigations.

That would allow their patron, the conservative legal group Alliance Defense Fund, to challenge the IRS' rules, a risky strategy that one defense fund attorney acknowledges could cost the churches their tax-exempt status. Congress made it illegal in 1954 for tax-exempt groups to publicly support or oppose political candidates.

"I'm going to talk about the un-biblical stands that Barack Obama takes. Nobody who follows the Bible can vote for him," said the Rev. Wiley S. Drake of First Southern Baptist Church of Buena Park. "We may not be politically correct, but we are going to be biblically correct. We are going to vote for those who follow the Bible."

Holy Cow! Has that interview aired yet!?

I'd never heard of Genevieve34 until just now.

Pity it couldn't have remained that way.

I'm trying to retool an old joke. Perhaps the Borg can assist.

Barack Obama, John McCain and Sarah Palin went to a fitness spa for some fun. After a stimulating, healthy lunch, all three decided to visit the workout area and they found a strange-looking gent sitting at the entrance.

He said, "Welcome to the Executive Fitness room. Be sure to check out our newest feature, the Wishing Mirror. If you look into it and say something truthful, you will be rewarded with your wish. But, be warned: if you say something FALSE, you will be sucked into the mirror to live in a void of nothingness for all eternity!"

The three quickly entered and upon finding the mirror, Barack Obama stepped up and said, "I think I'm the most intelligent and thoughtful of the group," and was suddenly surrounded by a pile of money to fund his Presidential Campaign.

McCain stepped up and said, "I think when I was a POW for five years, I didn’t even have a kitchen table” and in an instant, he was given a lifetime supply of anti-Alzheimer’s medication.

Excited over the possibility of having her not-so-secret wish come true, Sarah Palin looked into the mirror and said, "I think...,"

and was promptly sucked into the mirror.

Oh, yeah? Well I like, never even heard of, y'know, omooex, until, well, a while ago...

Gonzo: Bush sent me to Ashcroft's near-deathbed.

Condi: Oh yeah, we DID have discussions about torture.

MSM: ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ...

I think Glenn's point is, there have been far less expensive and far more likely to actually be effective plans proposed by those withe the knowledge/foresight to have been warning about this debacle for some time now.

Apologies for the convoluted run-on sentence structure, but you catch the drift... Busy today. I'm out.

Jeezuz, Glenn, it's like a solid blow to the solar plexus when you write these...

Glenn, your link to the Goldman/AIG bail-out connection pointed to the online site for "The Week" mag.

Do you read the print copy? It's the only "MSM" periodical that enters my household. And I give subscriptions to it as Xmas gifts.

To my family, wiseguys, so don't even bother askin'.

Thanks, Glenn, another "learn something new every day" moment courtesy of GG.

The FBI both devises and interprets it's OWN "guidelines" controlling the extent of spying they can perform on the taxpayers. Who knew?