How Madoff Works / How Banking Works

[casascius]

How Madoff Works

1. You give Madoff your money, because you want your money to be kept safe, and maybe get a return.

2. Madoff takes your money and uses it to promote an unsustainable scam.  Your money slowly disappears.

3. Madoff pretends he still has all your money.  He tells you he has all of it in the form of statements, and gives it back to you when you ask.  You assume that's just as good as actually having all of your money.  You trust him, after all, he's clearly got money coming out of his ears.  It looks like he's got plenty to spare.

4. One day, Madoff's cover is blown, there's not enough money on the table to keep up the illusion of liquidity, and people figure out he's running a scam.  People figure out it's not safe to assume that just because you can ask for your money, and because he says he has it, that it's actually there, and actually safe.  They ask themselves how they could have been so stupid.

5. The end game is, everybody loses their money.  It's already been spent.  Madoff spent it.  No wonder he looked rich.

Question: When did Madoff steal your money?  Step 1, or step 5?

How Banking Works

1. You give a bank your money, because you want your money to be kept safe, and maybe get a return.  You also like the convenience of checking, debit card, and bill payment.

2. The bank takes your money and uses it for gambling.  When gambling pays off, the banker takes chips off the table in the form of a bonus.  When gambling results in losses, as it inevitably does, your money slowly disappears, just like with Madoff.

3. The bank pretends it has all your money.  They tell you they have all of it in the form of statements, and they give it back to you when you ask.  You assume that's just as good as actually having all of your money.  You trust them, after all, with all of those tall buildings and highly paid execs, they clearly have money coming out of their ears.  Surely they have plenty to spare.

4. One day, the cover is blown, there's not enough money on the table to keep up the illusion of liquidity, and people realize their own money is being used for somebody else's gambling.  People figure out it's not safe to assume that just because you can ask for your money, and because they say they have it, that it's actually there, and actually safe.  They ask themselves how they could have been so stupid.

5. The end game is, everybody loses their money.  It's already been spent.  The bankers spent it.  No wonder they looked rich.

* If you had $250,000 in FDIC "insurance", if you took a lesson from Cyprus, "insurance" doesn't mean "we'll cover your losses", it just means "we'll put you at the top of the list to get paid back whatever's left, as long as it's politically convenient to do so, and if not, or if whatever's left turns out to be nothing... oh well, our part is done!  You read the fine print, right?"

Question: When did the banks steal your money?  Step 1, or step 5?

Question: Why is banking legal but Madoff not?  (Presumed answer: Because there's a pretense that the gambling done by the banks is somehow sustainable, when we all know that a ponzi scheme is not.)

Question: If you decided Madoff stole the money in step 1, and banking stole the money in some other step, then what was the reason for the difference?

Conclusion: Quit occupying Wall Street: think for a minute and realize that step 1 is what allows both of these scams to take place.  That step 1 starts with YOU!  They can't scam you if you don't give them the product of your labor.  Free checking is never free, everything has a cost.  The cost of that convenience is the possibility that you will wake up one day and you will find out your money is gone after it's too late.  Today, it's already gone, they're just pretending it's still there while they still can.

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[lebing]

How Madoff Works

1. You give Madoff your money, because you want your money to be kept safe, and maybe get a return.

2. Madoff takes your money and uses it to promote an unsustainable scam.  Your money slowly disappears.

3. Madoff pretends he still has all your money.  He tells you he has all of it in the form of statements, and gives it back to you when you ask.  You assume that's just as good as actually having all of your money.  You trust him, after all, he's clearly got money coming out of his ears.  It looks like he's got plenty to spare.

4. One day, Madoff's cover is blown, and people figure out he's running a scam.  People figure out it's not safe to assume that just because you can ask for your money, and because he says he has it, that it's actually there, and actually safe.

5. The end game is, everybody loses their money.  It's already been spent.  Madoff spent it.  No wonder he looked rich.

Question: When did Madoff steal your money?  Step 1, or step 5?

How Banking Works

1. You give a bank your money, because you want your money to be kept safe, and maybe get a return.  You also like the convenience of checking, debit card, and bill payment.

2. The bank takes your money and uses it for gambling.  When gambling pays off, the banker takes chips off the table in the form of a bonus.  When gambling results in losses, as it inevitably does, your money slowly disappears, just like with Madoff.

3. The bank pretends it has all your money.  They tell you they have all of it in the form of statements, and they give it back to you when you ask.  You assume that's just as good as actually having all of your money.  You trust them, after all, with all of those tall buildings and highly paid execs, they clearly have money coming out of their ears.  Surely they have plenty to spare.

4. One day, the cover is blown, and people realize their own money is being used for somebody else's gambling.  People figure out it's not safe to assume that just because you can ask for your money, and because they say they have it, that it's actually there, and actually safe.

5. The end game is, everybody loses their money.  It's already been spent.  The bankers spent it.  No wonder they looked rich.

* If you had $250,000 in FDIC "insurance", you'll find that the "insurance" doesn't mean "we'll cover your losses", it just means "we'll put you at the top of the list to get paid back whatever's left, and if whatever's left turns out to be nothing... oh well, our part is done!  You read the fine print, right?"

Question: When did the banks steal your money?  Step 1, or step 5?

Question: Why is banking legal but Madoff not?  (Presumed answer: Because there's a pretense that the gambling done by the banks is somehow sustainable, when we all know that a ponzi scheme is not.)

Question: If Madoff stole your money in step 1, and banking stole your money in some other step, then what was the difference?

Conclusion: Quit occupying Wall Street: think for a minute and realize that step 1 is what allows both of these scams to take place.  That step 1 starts with YOU!  They can't scam you if you don't give them the product of your labor.  Free checking is never free, everything has a cost.  The cost of that convenience is the possibility that you will wake up one day and you will find out your money is gone after it's too late.  Today, it's already gone, they're just pretending it's still there while they still can.

[gendal]

Question: Why is banking legal but Madoff not?  (Presumed answer: Because there's a pretense that the gambling done by the banks is somehow sustainable, when we all know that a ponzi scheme is not.)

Question: If Madoff stole your money in step 1, and banking stole your money in some other step, then what was the difference?

You're missing the key difference: whether people realise it or not, when you "deposit" money with a bank, you are *lending* it to the bank. You accept *counterparty risk* in exchange for the possibility of interest and the convenience of the services the bank provides.  You accept that a bank's raison d'etre is maturity transformation: borrowing short to lend long. You accept that this exposes them to liquidity risk and you, in turn, to the consequences of a run should the bank lose the confidence of its lenders.

When people invested with Madoff, they thought they were taking on *market risk* and believed they were not exposed to counterparty risk. That is: they were led to believe that Madoff had segregated their funds and that they, therefore, had no counterparty exposure to Madoff. Their return would increase or decrease in relation to the performance of the investments they believed Madoff had made.

As it turned out, their undoing was neither Market risk nor Counterparty risk: it was the risk that Madoff turned out to be a fraud.

It's hard to argue that the Madoff and banking situations are alike.

Sure... one can lose money (in both a nominal and real sense) in both scenarios but the risks you face and the resulting analysis are entirely different.

It's also important to consider: what would a world without the maturity transformation services of a bank look like?  I'm not sure we'd like it.

[johnyj]

Whether people realise it or not, when you "deposit" money with a bank, you are *lending* it to the bank. You accept *counterparty risk* in exchange for the possibility of interest and the convenience of the services the bank provides.  You accept that a bank's raison d'etre is maturity transformation: borrowing short to lend long. You accept that this exposes them to liquidity risk and you, in turn, to the consequences of a run should the bank lose the confidence of its lenders.

Actually most of the people do not realise this, and that's the reason once more and more people realized this, they won't trust banks any more

But even put your cash under matress won't solve the root of the problem, which is debt based money creation

[herzmeister]

If we need a banking service in the future (aka a service that mediates between lenders and savers), then it must be a fully transparent operation, democratic and community-owned. Blockchain technology could be used for full accountability.