The Ponzi Scheme as a Way of Life

From http://sharonastyk.com/:

I’m sorry, I’m having a bit of trouble getting all outraged about Bernie Madoff and his ponzi scheme. Yes, I’m shocked. Shocked and appalled. You mean, someone was offering a scheme in which you pay present day participants with the funds of those who come in later, and then it fell apart. Gosh, that seems so unprecedented.

Yeah, I feel bad for those who were taken in, particularly for charities that lost their funds. But no worse than for those who lost their 401Ks or their pension funds on the stock market, for cities and states that can’t sell municipal bonds, and I feel far worse for the poor, who never had a glimmer of getting to participate in the get-rich-quick ponzi scheme that was a stockmarket that everyone said could have perpetual growth forever.

Madoff may be a criminal, but he’s a criminal in large part because he’s engaging in a particular form of ponzi scheme that we look down upon, one small enough to be called illegal. In general, we’re pretty comfortable with ponzi models -we live, quite happily, in a ponzi economy, one in which the concept of perpetual economic growth is sold, divvied up again and resold. We live in a Ponzi ecology where we borrow constantly against the future to pay for our present affluence.

Is this truly a Ponzi scheme? I think the answer is yes - a Ponzi scheme never really generates new wealth, it simply relies on a constant stream of new money. And since the eco-Ponzi economy relies most of all on reducing the capacity of future generations to live well - because natural resources and associated wealth are already drawn down, I think that it does meet the criteria at both the economic and ecological levels.

Most of us have been putting our money into 401Ks and Mutual funds, and now that money is disappearing - and it is disappearing again, because we live in a Ponzi economy, one in which new funds can, for a while, conceal the bankruptcy of a society that draws down its natural resources and leverages both its ecology and economy past bearing. Thus we get the mantra, as Bob Waldrop wisely observes, investing is saving that we all belong in the stock market:

“Lie the First: Money in the stock market is “savings”.

Reality: Money in the stock market is “speculation”. You buy a stock on the speculation that it will go up and you will sell it later at a profit and in the meantime, maybe get a regular dividend. It can also be considered casino gambling. It is not savings as we generally define the term, since it can be here today and gone five minutes later.

Lies the Second and Third: Everyone should be in the stock market. You can’t afford to NOT be in the stock market.

Reality: The stock market is only for people with money to gamble. People with debts and small savings should not be in the stock market. The former should pay the debts, including their mortgages first. The latter should wait until they have substantial savings before they decide to risk a small amount of their assets in the stock market.

The stock market game is rigged against the average small investor. With the way accounting rules and etc are these days, there are lots of ways that corporations can hide important information. Just ask some of the Lehman’s stockholders about that.

Lie the Fourth: Buy and hold is the smart strategy. Over time, the stock market always goes up.

Reality: That’s not the way the rich make their money in the stock market. They buy stocks when they are cheap and sell them when they are expensive. The “always goes up” comment is usually coupled with a comparison of two dates and the stock market index values on those dates. Compared to the history of economics, there is no way that we can say with total truth that the market over time will always go up. Where are the investments in the stock exchanges of the Roman Empire these days? And a rise in a stock market index may have nothing to do with the performance of individual stocks or mutual funds. Ask the stockholders of Enron about that. Or the stockholders of corporations that made horse-drawn carriages.”

I don’t blame people who were constantly told that they’d need X million dollars to keep living into their old age, and if they didn’t have it, would find themselves freezing and starving for believing this, but it is how the Ponzi economy works. It relies on the idea that you are doing something good by feeding your dollars into corporate coffers, and that your money is still really yours. Those are both false truths. And they are built on ponzi model they pay out to the earliest investors (why, for example, wealth is increasingly concentrated in the hands of older folks) while offering nothing to those unlucky enough to get in late.

I had one of those “duh” moments yesterday as I was doing a radio show - I made a point I’ve made many times before - that growth capitalism in general and the real estate bubble in particular depended heavily on the idea that we can’t live together, that everyone has to own their own separate household. So the rise in average material living space from 250 square feet per person in 1950 to 850 square feet for each warm body in 2000 was in part a product of the constant message that living together with one’s family or friends was a measure of failure.

This point I’ve written about a number of times - but somehow I’d never quite fully grasped the corollary point, which I found myself articulating on the fly - that the Ponzi economy depends on an endless supply of laborers, laborers who wouldn’t quit because they can’t. And that means that the cost of living - of basic needs like housing, food and transportation have to be kept high - because otherwise people might notice that serving corporate masters isn’t the best or only way to live their lives. Those 850 square feet, and the costs associated with them, and the problems of housing the ordinary stuff we “require” for daily life in 250 square feet means that the cost of housing for ordinary people is dramatically high - so high that we must devote most our time to the corporate economy, so high we then have no time to do work in the informal economy, so high that we can never, ever think about whether there are any better choices out there.

We’re going to try and rescue the economy with another Ponzi scheme - with borrowing against our children’s future wealth to protect financial institutions and invest in some good things and some bad ones. This, of course, is the oldest ponzi scheme of all, and you can make the argument that some human societies have been playing this game for a very long time. We’ve been doing it with natural resources and are continuing to do so, and we’re also expanding the share of our children’s wealth we’re willing to borrow against. After all, what have future generations ever done for us? They might as well serve some purpose - to pay off our debt.

And of course we’ve got the best possible reason for this - we’re in a crisis. There’s always a good reason for taking just a little more of what belongs to the future - to bring people out of poverty, to resolve this or that crisis. Of course, the crisis was caused by borrowing against our children’s inheritence of natural resources, but more of the same is now necessary. A good Ponzi scheme always needs new investors - and if none are going to volunteer, well, let’s volunteer them. We’ll use the to prop up the stock market and today’s version of the Roman chariot business.

Our ecology and our economy all fundamentally are built on a Ponzi scheme in which we can never make enough to keep up - we are always losing ground, always having to steal from further down the line of our posterity. At the same time, we justify their forcible participation in this speculation by saying that we are protecting them - we have to protect them from a Depression, so it is worth risking their future. But, of course, if you actually care about your children and grandchildren, you don’t ask them to make sacrifices you aren’t prepared to make. Fundamentally, we’re covering our own asses, and asking our kids to do it for us.

And that’s, well, evil, to put it bluntly. It is precisely the opposite of what parents are supposed to do for their children, and what present generations are supposed to do for the future. As David Orr observes in his superb essay “Loving Children: A Design Problem” living in a world in which we do not act as though we love our children (despite our endless assertions that we do) does them deep, moral harm. It lessens us, but more importantly, it doesn’t just physically impoverish our children, it morally impoverishes them too.