February 26, 2006

Someone tell us how what happened to housing wasn't just a classic Ponzi scheme


Ah, they're so obvious when they're over. What were we thinking?

A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. In fact, a Ponzi scheme must have abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme advertises (and pays) require an ever-increasing flow of money from investors in order to keep the scheme going.

The system is doomed to collapse because there are little or no underlying earnings from the money received by the promoter. However, the scheme is often interrupted by legal authorities before it collapses, because a Ponzi scheme is suspected and/or because the promoter is selling unregistered securities. (As more and more investors become involved, the likelihood of the scheme coming to the attention of authorities will continue to increase.)

The scheme is named after Charles Ponzi, who became notorious for using the technique after immigrating to the United States from Italy in 1903. Today's schemes are often considerably more sophisticated than Ponzi's (though the underlying formula is quite similar), but the principle behind every Ponzi scheme is to exploit a lack of judgment based on greed.

18 comments:

Anton said...

I've been asserting for years that the insanely inflated real estate market here and abroad is simply another pyramid scheme, a grandiose version of Herbalife, which was huge in the earty-to-mid 1980s (and a virtual bedrock of Yuppiedom). And I have no doubt that many of the scammers behind today's real estate bubble are recycled multi-levelers resorting to their standard bag of tricks. There are always going to be people of no conscience trying to get rich by ripping off others, knowing full-well that at some point those coming into the scheme behind them are going to lose everything.

I think it highly significant that almost every community in America seems to have suspended its zoning and other building restrictions just in time to accomodate this bubble. We have giant, expensive, but poorly-built, houses going up in lower-class neighborhoods of tiny shacks, and flimsy million-dollar condos being build in slum districts and on waste lands, or on little shards of downtown property with no setbacks. And this is happening everywhere, not just in one or two communities, suggesting that the convergence of events is not spontaneous at all.

I suspect many politicians and government officils are somehow involved, and that calling this a Ponzi scheme is generous. We are talking about the biggest get-rich-quick flim-flam in history, with, potentially, the most devastating results.

ocrenter said...

well, that's what the Extreme Flipper I and Flipper in Trouble were all about. One flipper buys from another flipper, then sell to another flipper. The last flipper goes to foreclosureland.

What you basically have is an initial group of flippers, recuiting more flippers to buy, generating "demand," drive up prices, more flippers join in because of the increase in price, then herd mentality sets in and more flippers. and then these flippers just buy from each other.

I remember going to an Ecoquest siminar. the whole premise was not to sell $800 air purifiers, but to recruit more like minded folks to sell. of course, to join, it is recommended that you buy a set of "demo" machines costing up to $2500, which includes 4-5 of those $800 air purifiers.

Anonymous said...

HOW DARE YOU CALL IT A PONZI SCHEME!

Just WHO do you think you are?

Real estate is a huge portion of the AMERICAN economy. Many jobs are tied to it from furniture salesmen to carpenters. IT IS THE MAJOR PORTION OF THE GEORGE BUSH ECONOMIC SUCCESS STORY. It is the salvation of the worker as the manufacturing job that makes widgets goes to CHINA. According to Donald Trump it is the only way to financial independance and real wealth.

And YOU, KIETH, have the Chutzpah to call it a Ponzi scheme!

The problem with you is that you think too much. You should be should be sitting in your Lazy Boy chair chugging beer and watching the a reality show.

Real Estate ..... a Ponzi scheme REALLY!

I suggest you look at Wall Street now THERE'S a Ponzi Scheme that pays billion dollar bonuses!

Anonymous said...

How dare you call Wall Street a ponzi scheme. I admire Keith for his Chutzpah.

cereal said...

and when the lights are finally ficked on, all action stops and you can clearly see who looks stoopid.

how about the poor schmuck in modesto with a $475,000 house on his hands and he knows full well that it's worth $225,000. picture this pathetic creature looking around with this giant package strapped to his back trying to find another player to hand it off to.

"hey, where did everybody go? come on you guys, quit playing around like that. it's not funny. hey, don't leave me with this thing....."

Anonymous said...

I suppose it is not a ponzi scheme if it cooked up by professors at Harvard, the Federal Reserve, Sir Alan Greenspan, esteemed politicians and other in the smart set. And then there is the MEDIA who runs for advice to the RE Industry economists ala
soft landing

I predict that those who caused this mess will be crowned as heros because the smart set made money on the deal.

The average folks who got hurt by it will be forgotten like yesterday's old banana peel. Could we call them SUCKERS?

Dogcrap Green said...

I tell you about a pozi scheme. The people that write blogs on how to make money blogging

Anton said...

Hi Dogcrap Green.

I've been looking at all your blogs. You must be a very talented writer to manage all of this.

Isn't Baltimore where John Waters (spelling?) makes all his movies? I recall one with Tab Hunter that was hilarious, and of course, "Hairspray," which is a classic.

As for blogging, I have no idea how any of this works, so I can't make any suggestions.

keith said...

poor dogcrap.. here's his blogs:

The Upcoming Housing Boom
Dogcrap Green - Bet
Handicapping thoroughbred horse racing
Baltimore Maryland

Time for some fresh material I'd say

If you blog for money, that's as sad as selling real estate for money

Dogcrap Green said...

Kieth say what you want.

I make $15 a month on my blogs. But make a whole lot more for the people that read them.

My housing boom index is ready to be in the black again. I have fun with the baltimore one. The horse racing takes a termendious amount of time to do it right. Unfortently I just don't have it. The sport handicapping blog is up over 4,000 dollars for all those that follow my bets.

It is a hobby. That's why I don't have Amazon littering my blogs, and I keep the google ads out of the way.

Dogcrap Green said...

Kieth - this is your blog, so i never used it to plug my gambling sites (some people take issue with this). But you did bring up "Dogcrap Green Bet". Today I am three for three on college ball games. On that note I suggest you all look at who I have for my final pick.

I just keep kicking ass

Grinch34 said...

Both Wall Street and the current bubble are Ponzi schemes.

Dogcrap Green said...

Here you go Kieth. My latest post from my sorry ass blog.

It has been one great month of February for all of us. You should now be up between $4,000 and $5,000!!!! It is now time for me to start getting ready for my trip to Vegas. This means cash withdrawals from the books. By March 4 my accounts will be back down to where any newbies caring to join us should be able to keep up. In order to be able to wager the exact same way it is important to setup your money the following way - $200 at Intertops, $200 at Nine, $200 at SportsInterAction. All these books are giving away money with their great sign up deals and they can be found at the bottom of this blog. If you wish to be notified each time I post a new selection go to the top of the blog and click on the "notification via e-mail". You can if you choose simply check in on this blog through out the day. The picks I e-mail are the exact same as these here.

Good Luck

moman said...

The housing market today is a huge ponzi scheme. It is built on artificial demand created by sellers who use fear tactics to create buyers "If you don't buy now you'll never be able to buy". One day the "greater fool theory" will come to an end and there will be no greater fool and as the old saying goes, we'll see who's swimming naked when the tide goes out.

I wish this thing would bust already. I just spent 2 hours on a flight listening to the woman in front of me (a self-proclaimed office manager) brag about how she had made so much money in Florida real estate to the guy that was sitting in front of me. She used the typical (and disproven) theories that they aren't making any more land, that EVERYONE wants to live in Florida, and those that don't want to really want to but don't know it, that people who don't live near the beach don't "get it", etc.

seattle price drop said...

If you want proof of just how "ponzified" these markets are, check out these flipper blogs:

http://seattlerei.blogspot.com

http://trishasblogsite.blogspot.com

The first is a blow by blow account of the RE "investments" of a young man named Eric.

What is scary is that he started flipping in August '05, the height of the market. In fact, many of these new young flippers began in the past 6 months.

Okay and if that's not bad enough, all of the ones I've looked at so far (with the single exception of possibly Trisha), ARE NOT MAKING PROFITS.

They have managed to take the whole concept of flipping and turn it on it's head. They are satisfied with negative cash flow !!

One guy in CA lists his "net worth" as @ 1.5 M and his debt at @ 3 M.

Obviously, these are the flippers who came late to the party and are at the bottom of the pyramid.

Read the blogs if you haven't done so already. Trisha, as said above, does not appear to be slitting her own throat as badly as others, but her site has a lot of links to other flipper blogs.

This has changed my whole idea of what an RE flipper is. I always thought they were in it for the money!!

Anonymous said...

"One guy in CA lists his "net worth" as @ 1.5 M and his debt at @ 3 M."

Isn't this the truth about almost everyone in America? People base their "wealth" on appearances, not reality. Living in a three million dollar house with a thirty year mortgage is not the same as ownership, no matter what the government calls it. If you owe five million dollars, but have a million in the bank, you're not a millionaire, but an anti-millionaire, its mirror opposite.

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