What's the difference between a good Ponzi scheme and a bad Ponzi scheme?

The most obvious is Social Security (and James Pethokoukis has already nominated Madoff for Social Security Commissioner). Today's taxpayers contribute money that is funneled to today's Social Security recipients, and hope that tomorrow's taxpayers will put in enough money to fund their retirements.

Wow. Why don't you just get a job at Heritage, and be done with it.

the essence of a Ponzi scheme is its fraudulent nature -- social security is no more of a Ponzi scheme than buying a certificate of deposit is -- absent sufficient liquidity, that CD is worthless.

Please stop spreading right wing talking points implying that social security is fraudulent, or "in crisis". Its neither --- if you want to talk about crises, talk about Medicare, snd if you want to talk about fraud, discuss the entire financial system run by banks and brokerages -- but leave Social Security out of it.

The market is having its Madoff moment. The Minsky moment has yet to arrive.

@plukiasiak -- "the essence of a Ponzi scheme is its fraudulent nature"

Nope. "Fraudulent nature" requires a value judgement, and one person's "fraudulent" may be another's "benevolent".

What characterizes a Ponzi scheme is a dependence upon attracting a growing body of participants (some would say suckers), with the proceeds being paid not out of earning from the enterprise, but from the investments of the growing body of participants.

Such a scheme is always ultimately doomed to failure, as the minute the growth in new participants slackens, so does the output from the enterprise. Given the demographic bubble of the baby boomers, the Social Security system has reached its "Madoff moment", with the numbers of participants per recipient dropping to unsustainable levels. Either they figure out a way to improve the yield on the Social Security trust fund, or reduce benefits dramatically, or that fund will collapse like any other Ponzi scheme.

Whether a person believes Social Security to be a good or bad Ponzi scheme depends (for the most part) on whether they are putting money into the system or pulling it out.

So Madoff goes to jail and FDR gets a monument...

What a country!!

The comparison to Social Security is a problem since the strength (and weakness) of Social Security is that it is based on a promise. There isn't a closed fund of resources that sustains it. It is based on a promise that if we pay for a number of years, the government will pay us something when we need it. There's no pretense of payback or profit or even sustainability. The government uses what I pay for whatever they wish and them promises to give me something back. The revenue becomes another source of income for federal programs and the benefit becomes just another entitlement.

I don't advocate for a change because I doubt that the alternative would be as good for the general population, but I also don't deceive myself by thinking that my social security is "funded".

There is no good Ponzi scheme. There is just a Ponzi scheme. That is to say, it is any business model which has no successful exit strategy or sustainable profit generating engine. Period.
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Ponzi, as you might recall, was notable because he promised 50% and 100% returns on what he believed earnestly to be a working business model to trade (arbitrage actually) International Reply Coupons. In essence, he was enacting a sort of modified currency trading system.
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Social security is built upon a very different premise. It assumes that the global population will enjoy long-term trend expansion in numbers and productivity. In general, as the human race on the whole has done so, it has been a workable solution to caring for those no longer able to contribute productively (or that have already banked efforts) into the economy.

I bought shares in Bradford and Bingley and Northern Rock and now I have lost it all. They paid good divi's too, but now they have been Nationalised without any compensation. So what's the difference with Madoff and all the other 'investments'on the market - they take the money, give you some back and keep the rest. At 12 to 20%, Madoff would have paid it all back to most of his old-time associates. I imagine he turned to the hedge funds and bank investors only in the last few years in order to keep the early friends and family paid. He looked after his family and kept the boys out of the scam, so he can't be all bad.

Justin:
According to NPR Obama has named Carol Browner as his environmental "Czarina".
All good things come to an end. I guess Obama's anti-czar promise lasted about two days.

Social Security may not be promising a magical font of future returns, but it has been promising constantly improving returns to its participants because average lifespans have been increasing much faster than upward adjustments in the Social Security retirement age. I believe when Social Security was first enacted the average worker died around age 65. If we now increased the Social Security retirement age to match the typical worker lifespan, the cost of funding Social Security would drop dramatically and current payroll taxes could be slashed.
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I think it would be fair for each generation to ask the next to fund increased Social Security benefits to the extent the economy in general grows, but it seems unfair to keep growing the total payouts from Social Security faster than the growth in the economy. We have gone beyond Ponzi and maybe Madoff in that respect, because each generation has been insisting that the next generation fund richer (i.e., longer-lasting) retirement benefits than the currently-retired generation was required to fund when it was working.
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On the whole, I think Social Security is a great system. Much better than expecting low-wage workers to fund their own retirements and defend themselves from Wall Street sharks. But the promised investment return to each generation of "investors" keeps getting more and more extravagant.

MADOFF IS NOT SO UNIQUE - OVERSIGHT MAY NOT BE ENOUGH

The corruption trench is deep and wide, much requires cleaning-up on Wall Street…
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http://pacificgatepost.blogspot.com/2008/12/is-madoff-really-anomaly.html
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@plukiasiak -- "the essence of a Ponzi scheme is its fraudulent nature"
Nope. "Fraudulent nature" requires a value judgement, and one person's "fraudulent" may be another's "benevolent".
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wrong. By definition, a "Ponzi scheme" is fraudulent. The fact that Fox doesn't understand the difference between an actual Ponzi scheme where investors are lied to, and something like social security that is utterly transparent, is evidence of his (and your own) willingness to embrace far-right wing lies about Social Security.
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Either they figure out a way to improve the yield on the Social Security trust fund, or reduce benefits dramatically, or that fund will collapse like any other Ponzi scheme.
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more far right wing lies. First off, one way to help "fix" social security is to increase the minimum wage. Because benefits are based on the best 30 years of someone's earnings, an increase in the minimum wage would increase Social Security receipts without a corresponding increase in benefits. Secondly, even under the most pessimistic assumptions, the "cuts" that would have to take place when the trust fund is completely depletemed would result in a higher benefit level than what today's recipients get. That's because of how Social Security adjusts its benefit levels for inflation -- and making relatively minor changes in how those adjustments are calculated would also prevent any kind of 'disaster'.
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Even if no changes are made, Social Security benefits as a percentage of GDP peak (in 2035) at only 6.09% (see http://www.ssa.gov/OACT/TRSUM/images/LD_ChartB.html) which is well within normal ranges for industrialized nations. And it declines from then on -- in the year that the social security trust is completely depleted (2043) benefits will only be at 5.94% of GDP -- a level below that of 2029. In other words the economy would have adjusted to paying approx 6% of GDP to pay Social Security benefits -- and making the change from using general revenues to redeem the securities held by the Trust to a direct subsidy for Social Security from general revenues would not create any problems for the economy.