If AIG Uses Its Bailout to Pay Off Other Debts, Is That a Ponzi Scheme?

BY busadmin  April 21, 2009 at 11:56 AM EST

AIG; file photo

Question: If we are shoveling money into AIG and they are pushing it out the back door to pay off bad debts and then banks announce profits, does this mean we are in a new kind of Ponzi scheme?

Paul Solman: A “new” Ponzi (ie, pyramid) scheme?

I’ve written before, in only partial jest, that capitalism is a Ponzi scheme in which even Ponzi believes. More optimistically, it’s a Ponzi scheme that has paid off handsomely for hundreds of years, maybe many hundreds, depending on when you start counting.

Sometimes, the Ponzi scheme becomes unsustainable, which only means that people cease to believe in it. Is the AIG bailout, then, a Ponzi scheme?

To the extent that it’s meant to restore confidence system-wide, and that you believe the above argument, I guess it is. A Ponzi scheme at the highest level of abstraction, that is. The debts being incurred to pay off AIG’s bets and promises are themselves promises of the U.S. government. What are they based on? Theoretically, they’re based on future tax revenues. But it’s hard to imagine we’re ever going to tax ourselves enough to pay off the national debt, now up in the $10 trillion range and, of course, growing.

So then what’s backing these promises of the U.S. government? “The full faith and credit of the United States.” In other words, they’re backed by our belief in them. A Ponzi scheme? You make the call.