Madoff Ponzi Scheme - It's a Big One, But Not The Biggest

'Tis the time for collapsing Ponzi Schemes.

A Ponzi scheme, purported to be the biggest ever in financial history, was unearthed yesterday. The article states:

"On Thursday, the Federal Bureau of Investigation and S.E.C. said that Mr. Madoff’s firm, Bernard L. Madoff Investment Securities, ran a giant Ponzi scheme, a type of fraud in which earlier investors are paid off with money raised from later victims — until no money can be raised and the scheme collapses."

Hmmm...does that ring a bell? Oh yes! It also describes what we call "the US Economy" to a T. Now THAT is the biggest Ponzi scheme - ever. Both schemes share disturbing parallels too. Let's see:

a) The Madoff scheme, until it collapsed, never defaulted (the US Govt. has never defaulted on its debt).
b) It provided nice and stable returns over decades which made the investors think everything was hunky dory and made them plough in even more of their hard earned money into the scheme (Asian central banks, Middle Eastern sovereign wealth funds, etc. pouring money into Treasury debt and US Financial firms/hedge funds).
c) A few smart people, who knew it looked too good to be true, did their own due diligence and discovered that things didn't add up, smelled a rat and stayed away (Peter Schiff, Marc Faber, Jim Rogers, etc.).
d) Lax enforcement by government agencies such as the SEC (lax enforcement, deregulation, repeal of Glass-Steagall Act., etc.)
e) Hedge funds peddling crap to investors (Hedge funds peddling crap to investors).

It must also be pointed out that these are also exactly the kind of events that Nassim Taleb's "Black Swan" theory warns about. Decades of stable, decent returns followed by a complete wipeout.