Ponzi Schemes Are Busting Out All Over

The same week Ponzi schemer Bernard Madoff was sentenced to 150 years in prison, and Ponzi schemer Allen Stanford was denied bail, government Ponzi schemes in states across the country exploded.

If you fail to see the irony and/or the connection, you mustn't understand what a Ponzi scheme really is.

Without getting too technical, such a scam raises money by promising investors extraordinary returns. To attract more victims, interest payments are made out of the pool of invested dollars to give the appearance the fund manager is doing a good job.

As high-yielding "dividends" continue to be distributed in a timely fashion, more and more investors give the con artist their money. When the flow of new dollars ends, the scam explodes, and the schemer is exposed.

Sadly, this is how governments across the nation - including the one in Washington - have been behaving for many decades.

They distribute more and more money - much like a Ponzi schemer's interest payments or "dividends"- in anticipation that additional investments will be made in the future - i.e. taxes.

Fortunately for the feds, since there is no balanced budget requirement, the Treasury can just sell more bills, notes, and bonds to make up for the shortfall, although this ironically adds to the Ponzi scheme since the buyers are hoping to some day get their money back.

But, in states like California, whose Constitution demands a balanced budget, this is not an option thereby forcing it to issue IOUs to employees, which comically is what Ponzi scheme investors often get once the scam is exposed.

The saddest part of this story is that governments around the country- including the feds - were warned about their exploding Ponzi schemes in the early part of this decade.

When tax receipts plummeted after the tech stock bubble burst and a recession ensued in 2001, governments from coast to coast including in Washington were suddenly awash in red ink they never anticipated.

But did they do anything about it? Did legislators, governors, and presidents learn anything by this and become fiscally responsible?

Of course not, for much like a Ponzi scheme, once the economy began growing again, and tax receipts started to rise, so did expenditures.

The "finest" example was Washington expanding Medicare at the end of 2003 to include payments for prescription drugs. Rather than learning from the previous years' massive budget shortfalls, our elected officials actually added exponentially growing costs to the ledger.

Was this ignorance or arrogance?

Probably both, as top economists advised California back in 1999 for example, that the explosion in tax receipts the state was enjoying was non-recurring, and that they shouldn't create budgets anticipating this revenue growth to continue.

Of course, they didn't listen, and California not only entered into an easily avoidable budget crisis several years later resulting in Gov. Gray Davis' recall, but his supposedly more fiscally adroit replacement ended up making the same mistake in subsequent years leading to the current calamity.

3,000 miles east in the nation's capital, after years of fiscal irresponsibility by the Republicans in power, the new Democrat regime has taken the Ponzi scheme to an unprecedented level.

Unconscionably, the current explosion in expenditures is happening at the exact same time tax receipts are shrinking due to the ongoing recession.

As this is typically when Ponzi schemes explode and the perpetrators are arrested, it seems almost unimaginable that Americans who are rightfully cheering Madoff's 150-year sentence don't understand that their President, along with governors and legislators across the fruited plain, are involved in the very same scam, and with their money.

Noel Sheppard is the Associate Editor of the Media Research Center's NewsBusters.org. He welcomes feedback at nsheppard@newsbusters.org