If you’ve heard about the recent Bernie Madoff scheme where over $50 billion has been taken from investors, you know what a Ponzi Scheme is. If not, here’s a brief video for you which explains it:
Basically, the schemer pays returns to investors with money from subsequent investors. Normally, it falls apart and the schemer is exposed. Here are two cases of Ponzi Schemes that are still existent and legal.
Ponzi Scheme #1 – House Flipping
This one is interesting in that it is a distributed ponzi scheme, there are multiple schemers. Think of the recent real estate bubble in the process of correcting itself. All of those people that “invested” in real estate as this bubble grew, flipping houses to make money, were contributing to the scheme. They were all schemers trying to make easy money. (To clarify, by house flipping I’m referring to those people that purchase houses on speculation that the price will increase, slap on a coat of paint and sell it as recently remodeled.) Sadly, the victims in this scheme were those that purchased and still own the homes purchased at over-inflated prices. I’m not currently aware of any legislation or pending legislation that will prevent or even discourage house flipping in the future.
Ponzi Scheme #2 – Social Security
This one is especially disturbing because we are all victims of it and are required by law to “invest” our money. By 2017, Social Security will have to pay out more in benefits than it receives in taxes. Sound familiar? Current workers are paying into a Ponzi Scheme that will not be able to pay them back when it comes time for them to retire. I’m not counting on Social Security funding my retirement and neither should you. I just wish there was a way to opt-out of this one.