Tuesday, September 6, 2011

Was the Housing market like a Ponzi scheme?


Jack Sprat wrote, “The mortgage market was not a Ponzi scheme.  It was simply handing out money to anybody with a pulse, whether they had a prayer of repaying it or not.  A Ponzi scheme borrows from Peter to pay Paul and borrows from Paul to pay Harry and borrows from Harry to pay Susie until it runs out of people to collect money from.  Then it collapses, as it always does.”

I used the expression a “sort of Ponzi Scheme.”  Perhaps that wasn’t clear.  I meant “like a Ponzi Scheme – not that it was the same thing but like it.”

The following people say something similar:

http://daviddegraw.org/2011/07/this-is-what-a-collasping-ponzi-scheme-looks-like-housing-market-headed-off-a-cliff-as-a-shocking-10-8-million-mortgages-at-risk-of-default/ “         

This Is What A Collapsing Ponzi Scheme Looks Like: Housing Market Headed Off A Cliff As A Shocking 10.8 Million Mortgages At Risk Of Default”

http://www.bergenjerseyforeclosures.com/blog/info/entry/the_housing_market_was_a “the Housing Market acted like a Ponzi Scheme.”

http://finance.yahoo.com/blogs/daily-ticker/housing-fix-end-government-subsidy-ponzi-scheme-says-184750774.html “Housing Fix: End the Government’s Subsidy ‘Ponzi Scheme,’ Says NYU Professor”


“The Australian housing market is a Government run Ponzi scheme set up to advantage governments, banks, developers and the real estate industry at the expense of ordinary Australians.”

http://my.firedoglake.com/tucsonrobert1/2011/07/27/the-u-s-housing-market-what-an-imploding-ponzi-scheme-looks-like/   “The U.S. Housing Market. What an Imploding Ponzi Scheme Looks Like.”

I’m surprised Jack can’t see the similarity, but then he hasn’t said that much about himself so maybe I shouldn’t be surprised – that is, at this point I have no idea what he knows and what he doesn’t know, but I’m learning.


The housing market was a bubble, not a Ponzi scheme. It's sloppy use of a word that seems to be entering into the vernacular and expanding its range. What Maddoff did was a Ponzi scheme, he kept recruiting new investors, pocketing the money and sending out bogus statements that sang of double digit returns. It was all phony. In the housing bubble people were buying houses and flipping them, i.e. selling them for more than they paid, as an investment to make money, because of Greenspan's idiotic interest rates. It's a Ponzi scheme to the extent that it was supposed to go on forever until it didn't. The problem isn't so much the flipping as that people were taking out mortgages that were over their heads and also using their houses as credit cards, borrowing against them for consumer items hoping to repay when they resold. When the bubble burst they were stuck with all the debt. However, the banks and hedge funds were the fuel behind the fire. They bundled the bad mortages and sold them to each other and made billions of dollars pushing them to consumers. Now they're happy to pass on the blame and are sitting pretty financially while people are hung out to dry.

Social Security is much more a Ponzi scheme, and it's running out of workers. Where there were six workers to one retiree in the 60's, there are three workers for one retiree today. Bubbles are like a mass hysteria that sweeps periodically, the tulip mania, the Japanese real estate market, now the Chinese real market possibly.



No, it isn’t sloppy use. A “BUBBLE” (upper case) implies passivity, an accident. The stock market goes up and no one knows why, but let’s all make a lot of money! -- and then the BUBBLE bursts. A “Ponzi Scheme” implies maliciousness. The orchestrators of the scheme hope to make their money and get out before the Ponzi bubble (lower case) bursts. In the Western European and North America cases, the orchestrators hoped to have their welfare entitlements in place and the heck with the bubble-bursting (cynical capitalists knowing the Ponzi bubble was going to burst, made their money and got out). Fannie Mae and Freddy Mack were tools of Liberals who (following the Liberal ideal of taking from the rich and giving to the poor) insisted on selling houses to people who couldn’t afford them.

As I said in an earlier note on this subject, I have no objection to entitlements, as long as a nation can afford them. The Obama administration, among others, is pushing through entitlements irresponsibly in my opinion. It is as though he hopes to get his pet programs approved before his Ponzi bubble bursts.

It will be interesting to see what happens in the next election. Will Americans want fiscal responsibility or more entitlements? In France when this issue was put to them, the voters chose the continuation of their entitlements instead of fiscal responsibility. Will we do the same?

Social Security isn’t supposed to be an entitlement. It assumes a growing population. The West has no intention of giving it up so when it discovers that its population isn’t growing, it imports workers from elsewhere. That would work out if the imported workers fit the pattern we have in America, but in much of Europe they have been importing Islamic Fundamentalists who have no intention of integrating into European society. It would be better, in my opinion for these nations (and ours) to decide to pay for the Social Security shortfall as another entitlement. If foreign workers can’t or won’t integrate, it would be better for all concerned if they stayed in their own countries.

BTW, Jack, you are beginning to sound like a fellow who liked to argue with me years ago, an Economist who called himself a Marxian.

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