Pyramid Schemes: A Story Through Caritas

Ioan Stoica was a business man in Romania that most of the country liked and supported. He was a man that wanted to give back to the poor and homeless, assist in his civic duty to the state and to the city of Cluj, and to do what he could for the people of Romania.

At least that's what he wanted everyone to think at the time.

Stoica was a business man, that part is true. But he was a business man out for himself. He started Caritas knowing that it would eventually harm a lot of people. The state of Romania was already in the process of making all pyramid schemes illegal, yet he still made his company in the heart of one of the biggest cities in Romania. Not only did this affect the city itself, but it affected the entire state and sometimes people from other states, i.e. Germany.

Originally, only those people who lived in Cluj or in Romania could deposit money into Caritas. But this later extended to anyone that was a Romanian citizen or had friends who lived in Romania. These people could travel and make deposits on their own in Cluj or they could send the money and have it deposited. The fact that Caritas was far reaching in Europe, especially outside of Eastern Europe, showed how personable Stoica was to everyone. People trusted him to do what was right. After all, they entrusted him with anywhere from 1,000 to 10,000 Romanian leis. This equates to anywhere from $255 to $2,555 USD. That's a large sum of money for many people in Romania.

The people trusted him because they had nowhere else to turn to. They would be turned down by the big banks or the government for services that they truly needed, i.e. a tractor for their farm. This resulted in them having to put in a large sum of money to get it back 8 fold in 3 months. This was a huge gamble that I'm sure not everyone truly understood. They just wanted to live their lives freely without a worry, so they had to trust the one person that would give them what they wanted, Ioan Stoica.

Throughout the history of Caritas, the company wouldn't give back to the people in the order of which they deposited money. They would sometimes give to the politicians much more quickly (sometimes 3 days instead of 3 months) and even more quickly for the people who helped the company start up (sometimes instantly). This would be the one major reason that the company collapsed sooner than it originally planned.

At the fall of the company, Stoica agreed to pay back the exact sum that the first time depositors who had not received money from the company. But this meant that those individuals that continued to invest into the company would receive no money back. In the end, Stoica would be arrested and charged with fraud, fraudulent bankruptcy, and false representation. The people had trusted Stoica with their money and trusted that he could deliver on his promises. These promises were not delivered and the people were angry.

While pyramid schemes initially sound good for people in dire need of money, this story alone shows how quickly fate can change. Some people sold their apartments and houses to entrust such a large sum of money with Stoica with the understanding that they would receive the money back 8 fold, but the people didn't understand the legalities of this company and didn't know that it would end in bankruptcy and eventually legal proceedings.

Too good to be true

The ability of Ioan Stocia to secure "investments" in Caritas relies heavily on the appearance of honesty and virtue kept by himself and the company. Like many who run pyramid schemes an overwhelming charisma masks the age old rule of if its too good to be true than it is probably too good to be true, and like Ben Franklin this appearance was central to his success. Caritas was able to manipulate so many into buying in but interestingly adopted some of the same favoritism that existed within the socialist structure. For instance a receipt was needed for every thousand or so leis that were deposited/withdrawn and therefore limited the amount of transactions per day for the average invester while allowing those with inside connections to bypass the receipt rule and withdraw others money before they were able to. What was interesting to me was how many Romanians reasoned that the money was being made, from shady deals to arms trading the idea of fraud was not present until the collapse of Caritas was imminent. Making money from money was not a part of the socialist manifesto and was a foreign idea to many Romanians. The combination of a good reputation and a foreignness to financial capitalism really allowed Stocia to flourish.
The collapse of Caritas, though like every pyramid scheme inevitable, did seem to be orchestrated by the Romanian government through their interviews on state TV and subsequent investigations. As the payouts rivaled the state budget it would make sense that they wanted Caritas to be shut down. I think that as Caritas grew to be a cult like movement it defiantly rivaled the power of the government and could be a cause for worry. These schemes certainly happen outside the post-communist world but I do not believe they garner such a wide cult like following because mechanisms like community funds are not ingrained in the culture. Where you do see pyramid schemes in the U.S. is in those types of mechanisms like profit sharing schemes as I have learned from watching Stacy Keech on MSNBC's American Greed.

Individualized Discourse in a Systemic Problem

     In her article "Regulating Credit" Deborah James discusses the cycle of debt experienced by South Africans. She details the effects and causes of the extremely high level of personal debt in South Africa as well as analyzing the debtors and lenders in relation to race. Of all the concepts in this article I will focus on the idea of the individual responsibility that is assumed in the cases of the debtors loans and repayment. 
     On page five James begins to detail the history of liberalization South Africa. This is the background to the view of individual being a matter of personal responsibility and not a group problem. The individual is seen to be the one taking on loans and therefore the responsibility of repayment is their responsibility as well. This trend continues into the relatively new practice of credit counseling where by an individual will pay a debt counselor to aid them in repaying their dent and the contractual agreements involved. 
     Another layer is added to the debt issue when the reader is able to see that the loans offered by most lenders were often unfair or even illegal in such large amounts that the borrower would almost certainly be unable to pay back with interest. Again, the problem is not seen as a systemic problem however with this argument of illegality not being successful in court. James records a debt counselor explaining this practice saying 

"The person must pay back, and must make an effort to do so. Don’t look at it as ‘They had no right to extend the loan’ – this is beside the point. Instead, I try to encourage people to pay back. Make an effort – it has to be a painful process. Otherwise they won’t learn the lesson. You need to make sacrifices. Forget about movies, eating out 3 times a week. The only way is to pay in as much as I can. This way I get a lot of acceptance from creditors (in court). I try to practice a system that makes sense" (James, 17).

This quote summarizes the problem of a systemic failure being placed on the shoulders of the victims. Reform is seen to be needed on the debtors behalf; they need to learn the lesson. How can financial literacy be learned by a person who is being penalized so harshly for past debts? The issue of debt and financials in general needs to be viewed as a systemic issue but in order to do so the discourse used to describe finances in a neo-liberal world needs to become caught up with the times. Instead of discussing debt as one would have two hundred years ago in an economy without modern "finance" the discussion of debt needs to look at individuals as part of a greater problem. A failure of financial education and awareness to all. Only then will the system be reformed. 

Regulating credit: tackling the redistributiveness of neoliberalism - DEBORAH JAMES

Runaway liberalization and belated regulation

"Ostensibly ‘to open up the market for small borrowers’, previously excluded from opportunities to start small enterprises because of their inability to borrow money from the big banks, existing legislation restricting the interest rate was removed in 1992. Removing the restriction would enable lenders – in theory equally small – to run viable businesses catering to the needs of such borrowers, thus creating opportunities for both." (James, 2013)


I think that the article, staring by its title, is a very good review and critique, through the South African case of how microfinance has become an extended neoliberal practice that intentionally targets the working class and the poor with the objective of bringing them into the financial market and creating channels for earning profit from them, even though it is with the rhetorical construction of providing them with tools for improving their lives.

With that said I think that James provides a very interesting and telling insight into the mechanics of these microfinance endeavours. First she describes the historical development of this institutions in a society deeply shaped by the Apartheid system and its racial and ethnic discriminatory organization and how sometimes the unexpected consequences of good-intentioned policies can be worst than the problem they are trying to fix. Second, the description and analysis of the both sides of the struggle when came to new regulation painted a very good picture of the scenario that in my opinion repeats itself everywhere when the public-private happens; and finally third, the author humanizes both those historical moments and the public debate through testimonies and quotes from people involved in the microfinance arena and by doing so she comes full circle in her analysis that began in the state sanctioned assassination of workers protesting predatory lending.

The Practice of Arbitrage

While most of the language in the article written by Hirokazu Miyazaki was difficult to understand, it was an intriguing article to follow since she looked at specific traders who lost their jobs due to the Japanese economic disaster in 1996, which was perpetrated by the government. This was a period called the "Big Bang" for the Japanese economy due to the formation of banks within the country. The selling of private Japanese trading firms and replacing them with American trading firms resulted in the loss of many jobs in Japan.

The leading term throughout the entire article was the word "arbitrage." While the article doesn't fully explain what the term actually means, it describes instances of taking advantage of the differences in prices in two or more markets. This concept was used by all of the traders throughout the article and some of the experience it more than others. One of the traders, Taka, explained that golf courses were extremely expensive and exclusive, meaning that it was mostly the rich that could enjoy the golf courses. He suggested that someone buy the golf courses, sell the membership to everyone, and turn it around and make a profit. This was a great example of using arbitrage because it helped me to understand the term a little better.

All in all, the article was hard to read for someone that has never taken an economics class. I found myself turning to Google to find out what words or phrases meant. But Miyazaki did help everyone to understand the collapse of the economy in Japan using these specific traders' lives to tell this story.

Privatization in China

While reading some of the articles on Generating Capitalism, I would continuously read articles that made little to no sense to me at all. The authors would drone on using text that could only be understood by individuals fluent in "economics." However, I finally read an article that I could easily understand, and one that interested me a lot. This article discussed the differences between a company being private and public in China.

When we think of privatization in the United States, we think of companies that have no ties to the government and are not ran by the government. They are completely ran by individuals that are out for their own interests, or are supposed to be seeking the interests of their clients. This is not so in China, and purportedly in other cultures throughout the world. In China, the privatization of a company does not mean that they are completely independent of the government. In fact, they still have close ties to the government and have bureaus or departments that oversee the company. Yet the owners of these companies don't seem to mind this as much as we would here in the US. This shows a major difference between our cultures and our economies because US business owners don't want government oversight but Chinese business owners don't find it bothersome.

Another point that drove home to me was the fact that individuals who buy stock in the company, don't really have a say in the running of the company. In effect, they only own part of the company on the side, but don't have voting rights for the way that the company acts. This is different in the way American stocks are sometimes used. If an individual owns a large portion of a company's stock, they would have voting rights and a say in how the company is ran because the company fears losing money (the stock) if they upset a stockholder. The use of stock in the US as a way of keeping people happy contrasts greatly to the Chinese stock, but it seems that both cultures are relatively happy with their arrangements.

Overall, this article did teach me to not think that all economic terms used in the US are universal. It is easy to see that these terms can be used in a variety of ways depending on the cultural implications for each individual country.

Salvage as Capital

In Salvage Accumulation Anna Tsing starts by asking how it is that "capitalism is at once so generative, flexible, and creative, and, simultaneously, so effective at doing certain things, such as making rich people richer." This question made me think of the early days of capitalism when supply chains offered capitalists the opportunity to take advantage of work done outside the "factory" and "translate" non-capitalist processes into profit. The spice trade was one such instance where a "salvage" good was traded as capital and used to make even more capital in the form of actual wealth. Even factories, as Tsing notes, were basically using "salvage" capital to create real wealth for labor "could not be made by capitalists." Agriculture and other natural resources are examples of non capitalistic processes turned into capital but what separates these from capitalist processes. If you think in terms of one definition that capitalism is making money from money then a woman's assumed knowledge of sewing or mushrooms picked in the American Northwest are certainly not capitalist processes. The women and pickers do not seek to create value with their actions, nor does the dinosaur that dies and becomes coal but the rich individual who seeks to become richer will take these processes and quickly convert them into value to become richer. How capitalism can be both "generative, flexible, and creative, and, simultaneously, so effective at doing certain things, such as [make] rich people richer" is because the generatively, flexibility, and creativity of capitalism only cater to those who have the means of turning"salvage" into capital. The factory worker and the sewer can only create "salvage" and have no way of converting it without previously converting the "salvage" of others for in capitalism it takes money to make money.