I had swapped the mugshot of Charles Ponzi on the sidebar for mine, when I put up an earlier post.
The mugshot is from the Wikipedia entry, for Ponzi, and the opening image above is for his investment opportunity vehicle, taking advantage of prepaid postage arrangements, when mail is exchanged internationally.
You can get detail from the links - here is the executive summary; while in Boston, Ponzi noticed, after time in jail in Canada before ending up in Boston, that he received mail from Italy with a postal-reply-coupon he could exchange for US stamps allowing him to mail a prepaid return -AND- that the US stamps were worth more, money-wise in US currency, than the prepaid coupon price in Italy, in Italian currency.
His approach was to arbitrage the difference, in volume, and to make a profit.
This lured investors, just as Madoff was arbitraging the spread between bid and ask pricing for shares traded via NASDEQ, a spread which was becomming ever narrower via SEC requiring first trading in sixteenths instead of eights of a dollar, and then in pennies; and Petters was arbitraging warehouse goods [allegedly with a gap between cost and sale return, but in his case the goods never existed, it was a fraud from the start and not an arbitrage situation that worked small-scale or shrunk from profitable to unprofitable, as with Ponzi and Madoff].
With Madoff and Ponzi, arbitrage "profits" ended up being insufficient to pay costs, and each survived by taking in new investment money and paying off any lesser volume of withdrawing investors from the pool; regardless of the pool not growing from any profit making but growing only from more investor money entering than departing.
In each situation, a day of reckoning occurred, just as banks lending out more than they can cover will, in a bank run, lead to a failure. How much banks can leverage things is a Fed policy matter, and we recently have seen how the Fed will intervene in what it believes to be in the best interest of its owners - banks, for the Fed is NOT owned by taxpayers. It is a bankers' bank. Banks own it. Bankers regulate themselves.
In Seattle a health club firm was selling lifetime memberships in health clubs at various locations for a downpayment and monthly charges, and the nature of business, corporate existence, the firm's pricing, and bankruptcy law being what they all are, when the new membership rate of increase fell to where costs exceeded periodic fee income plus a dwindling downpayment cash flow the firm folded - and all of the members found that what they'd bought was a membership for the lifetime of the corporation, not for their personal lifetimes as they were led to expect.
It is something like a chain letter. A saturation point is hit, or a downturn, and the pool of cash on hand is insufficient in a Ponzi program, (or forwarding a chain letter fails to produce cash flow from each new recipient to where more is paid out than recouped). So, bottom line is, the Fed polices a Ponzi scheme in the sense that fractional reserves are required to be held in the vaults, not 100 cents to cover every dollar deposited. The money can be leveraged, but not over-leveraged (the optimum rate being a judgment call), and if everyone makes payments on time -AND- there's no run by depositors to cash out, all is well.
I have wondered, should there be formed a Ponzi anti-defamation league? Everyone says, "Ponzi scheme." Always the linked words. Never, "Ponzi promotion," "Ponzi approach," "Ponzi structured investment opportunity," or "Ponzi arbitrage proposal," always instead it is "scheme."
Given how bankers operate without a general usage being to talk of "banking schemes," it seem Ponzi arguably was as much "imprudent" as a crook and that the anti-defamation proposal has ideological merit.
Had the margin that Ponzi cleared on each coupon been greater, and the spread between the money FX rate market and the postal rate market stable so that as Ponzi first proposed, coupons could be bought in one market, exchanged for stamps, and the stamps sold in another market where the imbalance allowed a profit sufficient to cover agent commissions and all other costs, then Ponzi would not have been a schemer, but instead a businessman and role model, as he was viewed, for a while.
Figure all of that out for yourself. Invest wisely.
Finally, does anyone have any idea where that coupon designer drew inspiration from, in designing the product? Imitation is flattery. And the coupon designer did not have to lie on his back on scaffolding doing a fresco. I have wondered if the original item also was the origin of the saying about the left hand not knowing what the right hand was doing, at least before the magic moment. Probably not.