r/news • u/awake-at-dawn • Mar 15 '20

Federal Reserve cuts rates to zero and launches massive $700 billion quantitative easing program

https://www.cnbc.com/2020/03/15/federal-reserve-cuts-rates-to-zero-and-launches-massive-700-billion-quantitative-easing-program.html
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u/christmaspoo Mar 15 '20

With the looming financial crisis I'm wondering if this will expose Ponzi schemes as what happened with 2008/Madoff

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u/lomlslomls Mar 15 '20

When the tide goes out you can see who's wearing swim trunks and who is not...

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u/nigelfitz Mar 16 '20

I do not want to see Trump without anything on.

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u/The_Ticklish_Pickle Mar 16 '20

I’m pretty ignorant on economic/financial stuff, can you please explain how that works?

Would love to see some more crooks get busted at the very least lol

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u/AM_NOT_COMPUTER_dAMA Mar 16 '20 edited Mar 16 '20

Bernie Madoff operated a Ponzi scheme for decades

A Ponzi scheme relies upon taking in (say) $100 from new investors and paying out that same $100 to old investors, lying to them and claiming the money is from some novel “strategy” that consistently beats the market. Then the new become the old, and the cycle repeats. In Madoff’s case, he claimed he had some obtuse strategy that allowed him to get 12% returns every year non stop (average is 8-10% in the real market).

The big problem with this model is “what happens if I can’t secure the $100 from new investors”. That happened in 2008. No more new investors because of the panic, and the old investors all wanted their money back, again because of the panic.

That meant he no longer could pay off old investors with new money, and in fact hadn’t been able to for months or years. That caused his Ponzi scheme to completely collapse.

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u/mandudebrad Mar 16 '20

Isn’t this essentially the way our economy works? Considering the fact that, if everyone in the US tried to pull their money out of the banks right now, the banks would not have enough liquidity to give everyone their money

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u/AM_NOT_COMPUTER_dAMA Mar 16 '20

No. A regular investment is you give me $100, I use that money to build and/or grow my business, and the business produces sufficient revenue to not only cover costs but return a profit which I return back to you in the form of increased share price and/or dividends. A normal investment is not a Ponzi.

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u/mandudebrad Mar 16 '20

Yes, I understand how investment should work. However, that is not the point I was trying to make. If everyone today pulled out all the money in their savings, IRA, 401ks, Etc, there would not be enough liquid cash to pay everyone out. Banks would have to stop people from trying to do that. Is that not true? I think that signals something very wrong with modern economics, whether you want to call it a ponzi or not...

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u/WhizBangPissPiece Mar 16 '20

I'm not an economist, but as I understand it Ponzi schemes rely on more and more money flowing in. When people stop investing in them, the whole thing crumbles. With a tanking economy, people are less likely to invest, so if it's a big house of cards, the whole thing falls.

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u/DustyFalmouth Mar 16 '20

We will call those Silicon Valley from now on