February 12, 2012 | In: Opinion

Are Banks a Ponzi Scheme?

We use them everyday – we deposit checks in them, we withdraw money from them, we transfer our salaries to them, they charge us outrageous interests and fees and we seem to be always grateful, regardless of how much they’re using us. They are called banks, and their job, apparently, is to facilitate our transactions and our day-to-day monetary activities – but we all know that they solely exist to suck the living blood out of us. The only people that are able to make money from the banks are those that don’t need them as much as the banks need them…

Banks have been in existence for more than 4,000 years now, which probably makes banking the second oldest profession in the world (and we all know what the first one is, don’t we?). Of course, there is no bank that is 4,000 years old, because, as we all know, banks come and go.

So, enough history and philosophy, and let’s get to the crust of the subject. Are banks a Ponzi scheme yes or no? Well, before answering a question, let’s explain what a Ponzi scheme is.

A Ponzi scheme is when you take money from someone, pretending that you are going to invest this money, and give that someone interest on his money every year (until he withdraws all his money). Now, of course, as a Ponzi schemer, you’re not really making money yourself from that person’s money, so, in 20 year years you’ll be out of money if you’re giving him 5% on his money every year (let’s assume that you’re not paying interest on interest to simplify calculations). But just when you thought that you will be caught in a maximum of 20 years (the number of years will be much less, realistically, because you’ll most likely living a lavish life by spending that poor man’s money), another sucker walks to you, and willingly gives you double the amount that the first person invested, in exchange for yearly interest on his money. And then, before you know it, the third sucker comes in with a bag full of money, and then the fourth sucker, and so forth… At one point you’ll be having a steady flow of suckers putting money in and financing all the so called investments of the previous suckers, and, at the same time, guaranteeing you a life full of, you know, life!

Now, all of a sudden, an important media outlet (funded by a rival Ponzi schemer), releases information about your business, and correctly describes your business as a scam. All of a sudden, many of those suckers that invested their monies with you want their investments back. You start giving money back to your “investors”, and then you realize that you’re almost out of money. So you appear TV and reassure everyone that everything’s under control and that all the money is safe, and that everyone is welcome to withdraw his investment but there is no need to, as, again, everything is under control. To your surprise people keep flooding and continue withdrawing their investments. And then you’ll reach the point where you don’t have any money to give, and so you declare bankruptcy, blaming the bad economy, bad investments, and, of course, mismanagement. You fire all your employees, you hide behind chapter 11, and you start “restructuring” (or, in other words, launching another Ponzi scheme).

Now that we know what a Ponzi scheme is, let’s try to find out whether banks run a Ponzi scheme or not… Here’s what we know about banks:

  • They take the money from you and give you an interest on your money (same thing with a Ponzi scheme, although their interest tends to increase with time).
  • Your money is split into three parts: one part to fund your interest, one part to fund loans to other people (at small interest rates at first, but their interest rates on their owing loans tend to increase with time), and one part to fund their stockholders’, as well as their own’s pockets… (also same thing as a Ponzi scheme, with the exception of the loans that are given to other people).
  • They incur too much overhead, such as employee and other operations expenses, bad investments, bad loans, etc… that they will lose all the money that they make from their loans. Which is worse than the average Ponzi scheme, as the overhead of a Ponzi scheme is much smaller than a bank’s overhead.
  • They can invest with more money than they own. Banks have access to money much beyond their current assets in order to make investments and pay other people. In other words, banks can literally create money out of thin air. That money, however, remains in thin air, and this is how a bank is potentially much more dangerous than a Ponzi scheme.

Now, as you can see from the above, banks may be a Ponzi scheme, but an organized and legalized one that is. But, I can’t generalize, there are some banks that are solid, that are actually making profits, and that have low external debt (due to bad investments), and that have a ow amount of bad debt. So, now that we know that there are some banks that are a Ponzi scheme and some that are not, how can we tell one which ones are Ponzis?

Well, one way to tell is to wait until a massive withdrawal happens at that bank (because of bad publicity, for example), and then see if the bank goes bankrupt when the amount of withdrawals reaches a point that is sharply less than the total amount of invested money (the money that people put in that bank) minus the amount of loans. This means that the bank is not able to sustain its business, which means that this bank is just a Ponzi scheme.

Again, there are some banks that employ a Ponzi scheme in order to attract more investors, but, most of these banks were eliminated in the 2008-2009 crisis/recession. There are some banks, however, that are solid – but we all know that no bank is here to stay (except, maybe, for the Monte dei Paschi di Siena bank). Banks existed for 4,000 years now and I can’t see no bank that is 1,000 years old, let alone 4,000 years.

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

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