Things to love about the economy

[andrewducker]

In fractional reserve banking, banks offer interest to customers to invest their money so that they can then lend on more than they have, a situation that's tenable so long as the customers don't require more than the bank has handy at any one time.

In a pyramid scheme, companies offer returns to chumps to invest their money, so that they can use it to pay off money they've already promised, a sitation that's tenable so long as the customers don't require more than the scheme has handy at any one time.

There are two main differences between the two:
1) The bank doesn't offer such stupid rates of return that it can't afford to pay them.
2) The bank actually has some assets in the first place.

Of course, sometimes these differences are more theoretical than actual.

Comments

[princealbert.livejournal.com]

http://online.wsj.com/article/SB122903010173099377.html?mod=testMod

[skington.livejournal.com]

Contrary to what the BBC think, a Ponzi scheme is not the same as a Pyramid scheme. In a Ponzi scheme, investors are paid interest on their "investment", but that interest actually comes from new investors, and once investment dries up, the whole thing collapses. In a Pyramid scheme, investors are promised a share of the profits if they recruit enough other investors to the scheme, but the person who started the scheme, and early investors, get the lion's share of the profits.

[anef.livejournal.com]

How extraordinary! The ex-chairman of NASDAQ. I'm boggled. But, to be fair to banks, this is a hedge fund rather than a bank. And here we have yet another reason not to invest in hedge funds.