James d. Gwartney

particularly attractive for young people saving for their retirement years.
Even with bank deposits, which are far lower in risk than stocks or even bonds, you
should be aware of the risk of bank failure. If a bank becomes insolvent and can no longer
return your money to you, most countries offer national deposit insurance that will pay you
money up to a limit, which they publish. If you have more money than the limit, it is a good
idea to divide your money between two or more banks in order to keep the amount in each
bank below the insured limit. If a bank, like any investment, is offering you higher than normal
returns, always ask yourself “why?” It could be that smart investors are avoiding that bank
because they know trouble is likely. This leaves the failing bank desperate to attract money.
Don’t let that money be yours in pursuit of a slightly higher interest rate! We know one very
good economist in a post-communist country who managed to lose money in three straight
banks where “they were paying the best (highest) rate.” Fortunately, he is a theorist, not a
finance professor.
It’s also important to be aware of the possibility of fraud, especially in the cases when
you are being sold an investment that purports to have a higher rate of return than the rest of
the market (you could call this, “too good to be true”).
One illustration of this is the Albanian Ponzi (or Pyramid) Schemes of 1996: when
Albania moved to a market economy from a command economy, individuals were not very
familiar with investments. Certain criminals collected cash investments by promising to return
5% per month or more, or 60% per year; the 60%, instead of coming from business profits,
came from collecting more investments and paying the cash to the original investors.

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Therefore, each month, the criminal operators had to collect more and more money to pay out
on the scheme, creating the “pyramid” of the name. Eventually these schemes were discovered
to be fraudulent, and people lost their money in the collapse of the scheme.
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