The pyramid schemes/ponzi schemes in Albania during the late 90’s. Do they have any similarities to the situation of the US economy and with the finances of the Greek government?
To summarise what happened in Albania.
1. The public sought out other sources of credit because banks were not lending.
2. These sources included family, friends, associates and “investment” companies
3. These “investment” firms were given the quasi government seals of approval through their managers having photo opportunities with senior government officials inside Albania, from the EU, World Bank and IMF.
4. Millions of Euros were pumped into the economy from foreigners to support a corrupt/failing government
5. These investments firms went bust bankrupting large numbers of the population.
6. Large investors in these investments firms received a fraction of the “alleged” value of their investments back.
7. Smaller investors received nothing.
8. Break down in law and order for unknown reasons. Possibly due to population being completely naffed off at their government for robbing them.
9. People involved in the “investment” firms come back in senior government positions.
10. Rampant capitalism identified as source of problem
Does this series of events have anything in common with what is going on in Greece at the moment?
2. Check. Investment companies being government social security programmes, pension funds.
3. Check. IMF, EU, ECB, media outlets, Nigel Farage (no wait, not Nigel Farage) have all given the Greek government their seal of approval
4. Check. Troika bailouts.
5. Could happen any minute
6. Check and check. Banks in Greece have already received capital injections and one would imagine they will receive much more.
7. Possibly. Cyprus has hinted what might happen. No entity has the money to fund the obligations of Greek social security.
8. There is a definite possibility that Greek pensioners will be upset if they receive nothing after paying in for decades.
9. Check. It would be shocking if this did not happen.
Does this series of events have anything in common with what is happening to the US economy at the moment?
2. Check. Again, the “investment” companies in the US are government-run. Medicare, Medicaid, Fannie Mae, Obamacare etc etc
3. Check. They are government agencies getting the thumbs up from other government agencies
4. If you count the Fed
5. This seems like the only logical outcome.
6. Check. QE anyone?
7. Does not having a job count? Does losing your house count? Does not being able to afford health insurance count? Does having massive debt count?
8. Possibility. The government does seem to be arming itself.
9. Check. Already happened, is happening and will continue to happen.
What Is The Verdict? Is Greece and the USA, Albania?
Is the Greek government in danger of bankrupting the entire nation and leaving thousands of people, millions of Euros out-of-pocket? Yes.
Is the US government in danger of creating massive chaos in the American economy sending vast parts of the population into poverty? Yes.
Will the Greek & US governments seek to capitalise on the misfortune of the population by seizing more political power and concentrating wealth in fewer hands? Yes.
Will the people who caused the crisis be elevated to the top of the political system and hailed as saviors? Undoubtedly.
Will capitalism be blamed as the source of the all the problems? It already has been.
In short, if you want to see into the economic future of Greece and the USA just look at recent Albanian history, the resemblances are too many and too similar to ignore.
Here is come commentary on the Albanian social security pyramid schemes/ponzi schemes. (With the words “social security” added for effect)
The government was forced during the riots to seize $400 million in the bank accounts of two of our competitors’ schemes, and depositors in those two schemes got more than 50% of their money back. Ours, which operated on the scale of one of the largest banks in the United States transferred 93% of our revenue out of the country prior to seizure of the balance.
But the public could not believe that social security/a scheme involving every other Albanian family would not be guaranteed by the government. Moreover, fund/pyramid managers were seen at official receptions, and they were interviewed daily by the government-controlled television stations. Many protesters even claimed that the social security funds/the pyramids were the creation of the government, or more precisely, of the president. But the social security funds/the pyramids also reached other parties and other interest groups.
In early 1993 a journalist with the Albanian Economic Tribune visited Albania’s Finance Ministry to collect figures on the country’s macroeconomic development. Confident officials provided him with rosy statistics showing that Albania had reduced inflation, stabilized its currency and promoted growth
the Albanians thought that the government would never allow social security/the schemes to collapse. Opposition political parties and the press did their part by failing to debunk what everybody knew were unsavory dealings—the leading independent newspaper even made the head of Vefa Holding its 1996 Man of the Year. Albanians also interpreted the international community’s support for President Berisha—from the European Union, Council of Europe and, until recently, the United States—as a kind of international FDIC for social security/the ponzi schemes. Evidently some foreigners shared this feeling: Foreign missionaries, Yugoslav border guards and even some Western diplomats did not hesitate to invest.
Regardless of the reason for their collapse, people blamed the government for stealing their money or, at least, not protecting it. When President Berisha responded with violence to their peaceful demonstrations, an ever-intensifying spiral of protests and repression brought the country into its current crisis.
Western governments knew of this impending collapse, even if no one predicted the calamitous results. Western press reports indicate that some governments were aware of the vast social security-linked/pyramid-linked corruption, including the names of ministers who were involved, but decided to look the other way in order to help an ally in the region. Not only did they turn a blind eye, but they lavished the country with aid. The European Union gave Albania more aid per capita than any other Eastern European nation. The United States kicked in $236 million since 1991, two-thirds of it dedicated to promoting private enterprise and financial reform!
Albania’s transition to a market economy was rapid and quite successful, financial sector reform was very limited. Albania’s formal financial system was rudimentary. There were few private banks. The three state banks, which held 90% of deposits [Ed. this is similar to Iceland’s situation before their recent collapse], offered positive real interest rates but had growing portfolios of bad loans, prompting the Bank of Albania to impose tight credit ceilings on them. With the banks unable to satisfy private sector demand for credit, an informal credit market based on family ties and financed by remittances grew. The informal lending companies were initially regarded as benign and even as making an important economic contribution. Operating alongside them, however, were deposit-taking companies that invested on their own account instead of making loans. These companies were the ones that turned into social security funds/pyramid schemes.”
The Bank of Albania had been given the power to close illegal deposit-taking institutions with a February 1996 banking act, but it couldn’t get the government’s support, because the government was supportive of the new financial companies springing up.
“(In) November 1996, even as the social security funds/pyramid schemes began to crumble, the prime minister and the speaker of the parliament accepted medals in honor of the anniversary of one of the social security funds/the companies….There were allegations that many government officials benefited personally from the social security funds/the companies.”
Throughout this time, the government sat back and did nothing, despite repeated warnings from the IMF and the World Bank. It took until October before the government began warning the public. Then, when it did offer cautionary notes, it tried to draw a distinction between “real” companies and the social security funds/pyramid schemes, though by now there was very little difference between the two. Then-President Sali Berisha (currently prime minister) came to the defense of investment companies even when there were reports they were involved in money laundering.
“By March 1997, Albania was in chaos. The government had lost control of the south. Many in the army and police force had deserted,
But the long-term effects proved to be negligible, “reflecting not only the resilience of the Albanian economy but also – and, perhaps, most important – the government’s adjustment efforts and its refusal to bail out depositors.”
Isn’t that last bit interesting? The Albanian government also tackled the deficit and undertook long-overdue structural reforms.