Still trying to wrap my brain around the notion that one man can go through $50 billion in a Ponzi scheme without anybody noticing, I’ve been pouring through articles about the Madoff Scandal today.* Reading this stuff is more troubling then I imagined. For example, this intro to a Dec. 15 article describing what made crap finally hit the fan:
The game ended for Bernard L. Madoff when some of his investors finally asked for their money back. He did not have it, and his suspected Ponzi scheme collapsed.
Could someone explain to me how a run on Madoff’s hedge fund investments is any different then a run on the legal institution everyone uses for savings and checking, banks? We all know how banks work: We open savings and checking accounts with them, and then they use our money for loans. They charge interest on those loans, and in turn that interest leads to the money in our accounts (theoretically) expanding. But the fact is that the money isn’t there. My savings has been doled out in loans; the bank doesn’t physically have the money. Sure, there’s no problem when I need to pull a little cash out because it’s just me making a single transaction, but what if everybody tried pulling all their cash out at the same time?
Well, then we have the Great Depression. But that’s besides the point — fact of the matter is that the money isn’t there. And that’s the banking system. It’s legal and this is all general knowledge.
But then we get to this Madoff jerk who burnt through $50 billion, and nobody knew — or would have known — until his investors made a run on him.
Despite the issue of legality here, would anyone care to tell me how Madoff is different from a bank?
* – When not feeding the troll.