the P word

There is one word that is probably more upsetting to US policy makers than the trio, recession, depression and deflation. That is the P-word, or Ponzi-scheme. The reason why is that while recessions, depressions, and deflation are serious to very serious, these conditions are not seen as criminal. Ponzi schemes are. In a Ponzi scheme money is taken from the masses and funneled into the pockets of a few. Ponzi schemes grow quickly based on deception, and when they inevitably collapse, they leave many victims in their wake.

When George W. went out repeatedly to tell the world that US style capitalism and the free markets are basically wonderful and should not be discarded, he is in essence saying our economy is legitimate. Our financial systems are legitimate. They are not there to make some people rich by deceiving everyone else. They actually do create wealth. It is not a Ponzi scheme. 

Unfortunately, our current financial system is a Ponzi scheme. It does not create wealth as much as shifting it from the poor to the very rich. While most of the victims are in other countries, ordinary Americans were not ignored in this latest crisis. 

Our financial system did deceive people and it did so on a grand scale. During the 90's it valued companies with no revenues higher than some of the world's most profitable and solid corporations. In the 21st century it valued essentially worthless housing in the remote desert areas at top location rates.

Additionally, the system introduced leverage at every level. Worthless houses were overvalued by 10 fold, and these mortgages were then wrapped in securities with another 10 fold markup. Securities that were then repackaged in derivatives with yet another order of magnitude markup, and bought with borrowed money to introduce yet another order of magnitude of leverage. In the end, less than 1/100th of 1% of what was sold was backed up by reality. 

All along the way people were deceived. Deceived into believing that their house was worth more than it was. That they could pay for it with money they did not have, because it was only going to up in value and they would flip it and cash out big. Investors were told these securities were solid, backed up by ever-more valuable real estate. It goes on and on.

It was a Ponzi scheme of the vilest kind.

And while you may think this is an extremist view, I am glad to see that the most recent Nobel Laureate in Economics thinks so too. He is a man who knows.

Here is Paul Krugman, commenting on the tech bubble and the housing bubble that followed:

"Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?" 

Needless to say our financial system needs a major overhaul. It is not a legitimate system in any sense of the word. Not in its current implementation.