[This bit of satire was not sent to any paper.]
Investors! Here is a really golden opportunity! The Institute for Ever More Innovative Banking has invented a brand-new money-spinner that will enrich you in no time. It’s safer than CDOs, and with even higher returns.
CPSs —collateralised Ponzi schemes —are such a brilliant idea, it’s amazing that no one has thought of them before now.
As you know, Ponzi schemes promise much higher than usual returns. And they deliver them, initially: that’s how new investors are attracted. The operator pays “dividends” to earlier investors from the money paid in by new investors; these large profits then attract further investors, and the cycle continues.
Only one thing can halt an ongoing Ponzi scheme: an absence of new investors.* This might come about because investors discover more promising opportunities, such as producing something. That of course borders on the impossible in today’s economic climate. Or the scheme might be denounced in the media by some busybody spoiler —but we have defamation laws to prevent such troublemakers getting out of hand.
Really, there’s no theoretical reason why a well-operated Ponzi scheme shouldn’t continue until the entire human race has invested in it. It might even continue beyond that point, if the initial investors decide to use some of their profits to increase their investment.
While practical difficulties mean that no Ponzi scheme has ever run for that length of time, it should be pointed out that Bernard Madoff’s little beauty went on for almost two decades at a minimum, and possibly for four decades. Furthermore, it survived six Securities and Exchange Commission investigations, and it might still be operating if Madoff’s sons hadn’t turned him in. (Families are unpredictable.)
How do CPSs work?
The structure of a CPS is similar to that of a collateralised debt obligation. In CDOs, different income sources are combined into a single package, and then shares in the package are sold to investors, who receive a part of the total income stream proportional to their investment. Often the package is divided into different types of shares, some that pay a higher return but are more at risk of losing value and some that pay a lower return but are considered more secure.
Similarly, CPSs will bundle together investments in a large number of Ponzi schemes and then sell shares in the income from the overall bundle. Since Ponzi schemes typically pay higher returns than “normal” investments, the income from CPSs will also be high. However, the typical risk involved in investing in a Ponzi scheme, which is high unless you are first in or the child of the founder, will be reduced: it is extremely unlikely that two or more schemes would fail at the same time, if only because regulatory authorities don’t have the resources to deal with more than one or two per decade.
CDOs have received a lot of bad publicity recently because a lot of CDO income sources in the United States were payments on housing mortgages, and many of those mortgages were “sub-prime”, a polite way of saying that there was little chance of the house owners continuing to pay their mortgages for more than two or three months, particularly after house values dropped.
A prosperous future
Collateralised Ponzi schemes eliminate that defect. They don’t rely on poor people paying mortgages that they can’t pay, or on lenders selling foreclosed houses for far more than their market value.
CPSs, instead, are based on people who have money; that’s almost the definition of an investor. Moreover, Ponzi schemes rely, not on fluctuating economic conditions, but on a constant: greed. Moreover squared, money and greed are known to go together: the more you have already, the greedier you are, and thus the more attracted by Ponzi profits. Everything we know about the economy and human nature works toward the success of CPSs.
But if you’re really worried about the security of a CPS, it’s expected that it will be possible to buy insurance in the form of a Ponzi default swap. Indeed, a number of innovative banks are already offering default swaps on Ponzi schemes that haven’t been invented yet.
Furthermore, if, for some unforeseen reason, there is a more general collapse of Ponzi schemes, an obvious remedy is available: C2PSs (collateralised collateralised Ponzi schemes) will dilute the risk to acceptable levels.
Hence there seems no logical reason why CPSs should not become the driving force of the economy for the next few decades, and perhaps indefinitely. If all goes as can reasonably be expected, and regulators behave themselves, it is likely that by the end of this century everyone on Earth will be a multimillionaire, and it will not be necessary for anyone to work.
* Theoretically, financial regulators could stop a scheme by arresting the operator, but in practice this never happens until after the scheme has collapsed.