Ponzis: The Science and Mystique of a Class of Financial Frauds

Abstract

Ponzis are among the most ubiquitous and least understood phenomena of economic life. They acquired a certain salience with the global financial crisis of 2008 and the crash of Bernie Madoff?s celebrated Ponzi scheme. This paper explains the structure of Ponzi schemes and goes on to argue that what makes this such a troubling phenomenon is its ability to be camouflaged amidst legitimate practices. It is shown, for instance, that the common practice of giving stock options to employees could be a potential Ponzi that allows corporations to flourish for a while by borrowing from its own future. The paper goes on to discuss the need for intelligent regulation to incise harmful Ponzis (not all Ponzis are harmful) while taking care not to damage other legitimate activities that surround them.

Keywords: National Governance, Non Bank Financial Institutions, Judicial System Reform, Social Funds and Pensions, Social Policy, Corruption and Anti-Corruption (Superceded), Legislation, Capital Markets and Capital Flows, Government Policies, Legal Products, Corruption & Anticorruption Law, Public Sector Economics, Public Finance Decentralization and Poverty Reduction, Youth and Governance, Legal Reform, Regulatory Regimes, Capital Flows