Mort & Hank Talk Economics #1

My friend Mort and I had coffee together Wednesday morning.
Mort said, "Hank, you know, about current events, here’s what I think it all comes down to—if somebody offers you a deal that’s too good to be true, then it probably isn’t true."
"What d’ya mean?"
"Okay, take a Ponzi scheme—you know what a Ponzi scheme is, right?"
"Refresh me, Mort."
"Well, I was watching the History Channel the other night and they did a piece on a guy name of Charles Ponzi. About a hundred years ago he had this idea where he got a bunch of people to invest with him by promising to pay a real high dividend, say 20% on a 30-day contract. Then he got more people to pay in, and he used their investments to pay off the earlier investors. Then he starts making deals like 50% return—but the period is a year, see? So when the earlier investors get back their original investment in 30-days along with the 20% interest, they naturally think it’s great deal. They go around telling the guys down at the billiard parlor and over at the coffee shop. They tell their slacker brother-in-law and the neighbors, and pretty soon, Charlie has more investors than he can keep track of. The money just comes a-rolling in."
"Wait a second, Mort. Are you telling me I coulda given old Charlie say, a thousand dollars and he’d pay me back twelve hundred in thirty days?"
"Egg-zackly, Hank. So these investors start spreading the word around, right? They tell all their friends, show’em the check, say, ‘Looky here—I found a way to make easy money.’ So the friend naturally says, ‘Wow, how can I get in on this deal?’ and he sells his pinkie ring and his wife’s fur and the kid’s sled and takes the cash to Charlie and says, ‘Hey Charlie, I got a cool grand here—can I get twelve hundred back in thirty days if I invest it with you?’ Charlie says, ‘Sure. Here’s your receipt."
"Don’t the people want to know what they’re investing in?"
"Sure, sometimes. So Charlie tells ‘em some fol-de-rol about ‘arbitraging international reply coupons for postage stamps’ or something, then takes their dough and uses it to pay off some earlier investors, and keeps a nice little chunk to fatten up his own position, too."
"That sounds . . uh . . dishonest, Mort."
"Well, a-course, it is. The thing is, if you’re one of the first hundred investors or so, you can get back some good money at first. But just like when you let your winnings ride at the crap table, maybe you decide to let that twelve hundred ride, and take it back to Charlie instead of thinking ‘I should be getttin’ out of the game,’ that’s gambling, right there."
"Ah! and then, you might lose the whole stake, huh?"
"Yep. That’s how it worked. ‘Course, the end result is that the originator of the plan has to skip town when he’s uncovered, or he ends up in the hoosegow."
"That’s a pretty nifty scheme, alright. Do folks still do that? Run a scheme like that?"
"Sure they do. Now they’ve got it down to a science, though. And nobody goes to jail, either—in fact they can even clear millions before the skullduggery gets found out and the scheme collapses."
"What? Who’s doin’ that?"
"Just look around, Hank. Those mortgage bankers, an’ Wall Street hot-shots that pack-aged up the ‘too good to be true’ subprime loans, the investors that bought ‘em—the whole lot of ‘em was just running a big Ponzi Scheme. But this time, the government was right there to bail ‘em out—and a lot of ‘em took millions with ‘em. Not many of ‘em gonna go to jail, either, I guaran-damn-tee you."
"Well, Mort—who’s gonna pay? Who’s gonna be the ones that lose in the end?"
"Hank—it’s you an’me an’ our grandkids—you an’ me an’ our kids’ grandkids."
I walked to the cashier and paid for our coffee. With his mouth turned down at the corners, Mort stared into his empty cup and slowly shook his head.