Menzgold, Ponzi Schemes and the Important Point We Are All Missing

The debate on whether the government ought to compensate customers of Menzgold has been infused with an interesting narrative that, somehow, those customers were a bunch of ‘’dumb and greedy’’ people who invested their hard-earned monies in an apparent Ponzi scheme. That is an erroneous conjecture. In fact, from an economics perspective, it is quite irrational to let such an opportunity slip by – as those with a higher risk appetite who were lucky enough to cash in on the scheme before the company’s troubles began would tell you.

I daresay that many of those who did not invest in their gold vault market were not necessarily smart. They were broke. The company presented a very lucrative investment option for those with excess liquidity, in a relatively high inflationary economy with little returns from mainstream investment. It was a golden opportunity many ‘smart’ people would find difficult to resist.

The Menzgold scheme was one of the most elaborate created anywhere in the world – make no mistake about it. People’s decision to invest in such schemes is built on trust, which is established based on evidence presented. And boy did they present such solid evidence – especially as observed from the perspective of those with little knowledge of finance! Trust is the foundation of the modern economy. The only reason you go to bed confident that your money is safe in the bank is because you trust that you would have access to it whenever you want. After all, the bank’s building is there, you can check your account balance and make withdrawals from an ATM or at the banking hall etc. If all customers were to lose that trust in a bank overnight and make a run for their money, not even the strongest bank in the world would survive.

Menzgold presented enough evidence for people to repose their trust and confidence in their brand: a strong, powerful and ‘rich’ personality at the helm of affairs, multiple flashy cooperate offices in prime locations, a private jet, foreign offices, numerous ostentatious billboards, doling out of cash to some of our most famous celebrities; and even to national institutions such as the GFA and above all, evidence that previous investors were cashing in big. It is hard not to fall for such a thing – if you have excess cash with limited investment options.

Ponzi schemes are more of marketing creations than finance inventions. Their sole purpose is to leverage on the power of advertising; preying on the human vulnerability emanating out of greed and or ignorance. Greed is not necessarily a bad thing. We all are to some degree. It is central to the civilization of our species – the fuel that oils the wheels of capitalism. The world was never built by people who get satisfied easily. It’s been built by those who wanted more. Greed is a guy looking at a bird in the sky and saying ‘’I wanna fly too’’.

Now, one of the easiest ways to prey on the human proclivity for greed is their ignorance. And I can’t think of any discipline where the majority of people are totally ignorant than the world of banking and finance. Forget about the fact that they work at a central bank or the finance ministry, let alone military men/women and other informal business people who frankly find the subject boring.

This is not surprising because finance/investment/banking etc. are difficult concepts to grasp – and for good reason. In fact, someone suggested that if people understood fractional reserve banking, democracy would not survive. This is because at the core of the system is a well-orchestrated ‘Ponzi’ scheme – only difference is the fact that it is legalized and regulated by the state.

Humans have the proclivity for greed and the tendency to exploit the hopes, greed, dreams and aspirations of other. That’s why we create governments and endow them with enormous regulatory and punitive powers. Achieving a more sanitized financial environment goes beyond a couple of press releases warning people not to patronize a certain financial product. It’s about going for those at the center of such a scheme in its infancy: Bringing the house of cards down before it becomes a skyscraper.

The rational pursuit of human interest predisposes us to exploitative schemes (though to be fair, some of those schemes start as legitimate business ideas until they metamorphosize into questionable monsters). Any government which fails to clamp down on them should have no moral right to criticize those who fall victim. And any society that blames victims of such schemes and ignores the network of ideas and institutions whose actions or inactions allow them to flourish lay the foundation for even bigger ones. History tells us that the bigger such schemes are allowed to become, the more likely we collectively bear the cost of their eventual collapse.

Kwadwo Agyapong Antwi

The writer blogs on social, political and economic issues at www.thinkingwityou.wordpress.com

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