Mattoff and social Security Schiff

Discussion
1

thanks Phil.

You know, I was thinking earlier about how this guy is probably just another scapegoat like that 'rogue' SocGen trader a few months ago. I don't know all the details of this case yet, but apparently Madoff was diligent about paying out 10% dividends for years. Is that bad? That must be better than half of the other fund managers who paid less than 10% ( or maybe if he hadn't paid that much, he wouldn't be in this pickle now??)

Anyway, my big question is - how many funds out there took in 10+% new capital per year for the past 5 yrs or so, invested it on real estate, and made some better return than 10%/yr - but - then ended up losing 90% of it in the last 6 months or so and wrote it off as an investment loss? I would bet - most of them. And the sad thing about this is - a classic ponzi scheme means you don't do anything but spend or sit on the incoming capital, and they haven't even proved that Madoff did that yet!

So in that light, SSA be damned - what about the majority of the investment and depository banks in this country? Are they not also ponzi? Or is it more legitimate that they took in 100% of their depository capital in and converted to 30X 'assets', and then lost the majority of it when subprime when bust?

IMHO the yard 'am should be both wide and deep with the guilty at this point.

d

2

David:

I've still yet to see a convincing argument as to why fractional
reserve banking is incompatible with Libertarian principles, provided
that it is disclosed to depositors what the bank is doing. Have you?

-Derek

3

Derek,

The problem is central bank fractional reserve banking. Without a central bank, banks *couldn't* lend much more than they had in deposits because when the lenders spend the money and the check is deposited in another bank, the other bank would presumably demand delivery of the cash (unless they form an oligopoly and agree not to demand cash delivery).

It's only the central reserve system that avoids cash demand deliveries which would otherwise keep the system in check.

- Steve

4

Look for the gun. The gun is in the legal tender laws. Absent legal tender laws, a private issuer of paper or electronic receipts could create create extra receipts so long as he told all the receipt holders aka depositors, ahead of time. Depositors would agree to take additional risk for communserate reward. Other competitibe institutions would keep this in check. If the extra receipts were created without consent then that is fraud. The legal tender laws are the fundamental problem. This is very difficult for folks to understand as bad money always chases out good.. But if one asked Zimbabwayans, they sure understand the hell of being forced to use the goverments paper.

5

This from a buddy who I'm sharing this discussion with...regarding
Phil's comment below.

Absolutely agree. The US gov is practicing fraud on such a grand scale
it makes Madoff look like a piker. I do support private fraction
reserve banking when contracts between all the participants clearly
specify the business relationship. Reserve banking with reserves backed
by gold, etc. Limits on the types of investments, etc.

Right now we are treated as imbeciles since the gov has assumed the role
of "protecting" us rubes. I don't have a choice in the marketplace
because bankers don't have to complete on the basis of character. They
only have to appeal to our greed. The character part is out the window
due to gov regs.

Free markets bring out the best in people in spite of their character
due to self interest and competition.

Scott Brown

Mike

6

Mike:

I agree with your friend and believe it supports my position, which
is that it is not the "fractional" nature of fractional reserve
banking that is the issue.

The following passage by Rothbard is highly misleading. "Let's see
how the fractional reserve process works, in the absence of a central
bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether
gold or government paper does not matter here). Then I "lend out"
$10,000 to someone, either for consumer spending or to invest in his
business. How can I "lend out" far more than I have? Ahh, that's the
magic of the "fraction" in the fractional reserve. I simply open up a
checking account of $10,000 which I am happy to lend to Mr. Jones."

If it's not obvious why this is misleading, then I can explain.

-Derek

This from a buddy who I'm sharing this discussion with...regarding
Phil's comment below.

Absolutely agree. The US gov is practicing fraud on such a grand

scale

it makes Madoff look like a piker. I do support private fraction
reserve banking when contracts between all the participants clearly
specify the business relationship. Reserve banking with reserves

backed

by gold, etc. Limits on the types of investments, etc.

Right now we are treated as imbeciles since the gov has assumed the

role

of "protecting" us rubes. I don't have a choice in the marketplace
because bankers don't have to complete on the basis of character.

They

only have to appeal to our greed. The character part is out the

window

due to gov regs.

Free markets bring out the best in people in spite of their

character

due to self interest and competition.

Scott Brown

Mike

________________________________

From: lpsf-discuss@yahoogroups.com [mailto:lpsf-

discuss@yahoogroups.com]

On Behalf Of Philip Berg
Sent: Friday, December 19, 2008 8:03 AM
To: lpsf-discuss@yahoogroups.com
Subject: Re: [lpsf-discuss] Mattoff and social Security Schiff

Look for the gun. The gun is in the legal tender laws. Absent legal
tender laws, a private issuer of paper or electronic receipts could
create create extra receipts so long as he told all the receipt
holders aka depositors, ahead of time. Depositors would agree to

take

additional risk for communserate reward. Other competitibe
institutions would keep this in check. If the extra receipts were
created without consent then that is fraud. The legal tender laws

are

the fundamental problem. This is very difficult for folks to
understand as bad money always chases out good.. But if one asked
Zimbabwayans, they sure understand the hell of being forced to use

the

goverments paper.

> David:
>
> I've still yet to see a convincing argument as to why fractional
> reserve banking is incompatible with Libertarian principles,

provided

> that it is disclosed to depositors what the bank is doing. Have

you?

>
> -Derek
>
>> thanks Phil.
>>
>> You know, I was thinking earlier about how this guy is probably
>> just another
>> scapegoat like that 'rogue' SocGen trader a few months ago. I

don't

>> know all
>> the details of this case yet, but apparently Madoff was diligent
>> about
>> paying out 10% dividends for years. Is that bad? That must be
>> better than
>> half of the other fund managers who paid less than 10% ( or

maybe

>> if he
>> hadn't paid that much, he wouldn't be in this pickle now??)
>>
>> Anyway, my big question is - how many funds out there took in

10+%

>> new capital per year for the past 5 yrs or so, invested it on

real

>> estate,
>> and made some better return than 10%/yr - but - then ended up
>> losing 90%
>> of it in the last 6 months or so and wrote it off as an

investment

>> loss? I
>> would bet - most of them. And the sad thing about this is - a
>> classic
>> ponzi scheme means you don't do anything but spend or sit on the
>> incoming
>> capital, and they haven't even proved that Madoff did that yet!
>>
>> So in that light, SSA be damned - what about the majority of the
>> investment
>> and depository banks in this country? Are they not also ponzi?

Or

>> is it more
>> legitimate that they took in 100% of their depository capital in

and

>> converted to 30X 'assets', and then lost the majority of it when
>> subprime
>> when bust?
>>
>> IMHO the yard 'am should be both wide and deep with the guilty

at

>> this
>> point.
>>
>> d
>>
>> ________________________________
>> From: Philip Berg <philzberg@... <mailto:philzberg%40gmail.com>
>
>> To: Mike Gittelsohn <gittel@... <mailto:gittel%40twocats.com>
>
>> Cc: John Denick <1420mason@... <mailto:1420mason%40msn.com> >;
lpsf-discuss@yahoogroups.com <mailto:lpsf-discuss%

40yahoogroups.com>

>> Sent: Thursday, December 18, 2008 2:07:11 AM
>> Subject: [lpsf-discuss] Mattoff and social Security Schiff
>>
>> Peter Schiff writes on 321gold.com. ..
>>
>> The Social Security Administration runs its "trust funds" with
>> precisely the
>> same methods used by Madoff and Ponzi. As money is collected by
>> from current
>> workers, the funds are then dispersed to those already receiving
>> benefits.
>> None of the funds collected are actually invested, so no

investment

7

Derek,

  I understand how a bank can lend out money that's been invested for a non-fixed period -- it's a calculated gamble that the investors won't all want to take their money out at the same time. Rothbard's example appears to capture the spirit of this, but in an inaccurate manner, since he posits that the sum being lent out is not only greater than the likely demand for access to the money that has been invested, but is far greater than the total amount invested, and further posits all the money being lent to a single borrower, which greatly magnifies the risk, since all it would take is that single investor demanding his money, rather than a bunch of people demanding their money at the same time, to make the bank fail. If that's how you're saying his example is misleading, I get it.

  What I understand Phil to be saying is that it's immoral and fraudulent for banks to loan out sums of money such that they could not repay investors if all those investors were to demand their money back at once as allowed under the terms of their agreements. Whereas I understand you to be saying that allowing banks to make calculated gambles that this won't happen is reasonable, in order that the money can sort of be two places at once, thus getting more utility out of it, and that it isn't fraud because investors know that's how banking works and that by investing they are taking on a risk (in a free market non-FDIC-insured system) of a run on their bank which would cause it to go bankrupt and them to lose their investments.

  I guess a question I would have for you is whether you believe in limited liability under these circumstances. In other words, if there is a run on a bank engaged in fractional reserve banking and it goes bankrupt, should the bankers be required to repay investors out of their personal assets until either those assets are exhausted or the investors are fully repaid? If that is the case, I'm more inclined to agree with you that the practice should be allowed; if not, I'm more inclined to agree with Phil that it's fraudulent. That's my quick take on it, anyway, and certainly far from an opinion set in stone, since I am painfully aware that my understanding of the whole financial system is badly lacking (not that I think hardly anyone's is adequate!).

Love & Liberty,
        ((( starchild )))

8

Starchild:

You have a complete understanding of the arguments.

Introducing limited liability issues complicates it. I tend to
sympathize that strict limited liability is probably against
libertarian principles. I believe it was Brian Holtz that pointed
out that this objection could be overcome with having only 1 general
liability owner of the firm, perhaps someone indigent with no assets,
and then the rest as strictly limited liability shareholders. Not
satisfying from a practical sense for depositors, but I would agree
this overcomes any libertarian objections.

I will point out in this case that corporations, including banks, make
no secret of their limited liability.

-Derek

9

Derek,

  The solution you describe below sounds like something Brian Holtz might come up with, lol! But I'm not convinced it meets libertarian objections. How would it be ethical to designate someone as a general liability owner, in the knowledge that the person has no assets, as an end run around limitations on the use of limited liability? Would investors be told that the general liability owner had no assets? If not, it would still arguably be fraud.

Love & Liberty,
        ((( starchild )))

10

Limited liaability does not protect an individual from the criminal justice system . This is a common misperception that I have direct and painful knowledge of being false. If one is accused of fraud, or violation of public policy, one is directly liable and there is no corporate protection, and even most insurance policies such as e and O insurance are no good.