Knowing what you know now, isn't the housing bubble and crash looking more and more like a textbook Ponzi Scheme or economic bubble or every day?
An economic bubble (sometimes referred to as a "speculative bubble", a "market bubble", a "price bubble", a "financial bubble", or a "speculative mania") is “trade in high volumes at prices that are considerably at variance from intrinsic values”.[1] The intrinsic value is a theoretical calculation that aims at reflecting the fair value by taking into account hypotheses of future returns and risks.
The bubble is usually followed by a sudden drop in prices, known as a crash or a bubble burst. Both the boom and the bust phases of the bubble are examples of a positive feedback mechanism, in contrast to the negative feedback mechanism that determines the equilibrium price under normal market circumstances. Prices in an economic bubble can fluctuate chaotically, and become impossible to predict from supply and demand alone.
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, named after Charles Ponzi.
24 comments:
Want to see a classic bubble? Check out what's happening in London where homes in my already insane hood went up $250,000 LAST MONTH. Can you say blow off top? Crazy people sure are fun to watch...
Bank of England might raise 1/2 point next meeting too. Oh, that'll be fun for all these ARMs over here...
http://tinyurl.com/ysyugx
Property asking prices are rising by nearly £280 a day - the fastest rate since records began.
Research out today says the average asking price jumped £8,307 last month, fuelling fears that the booming housing market is heading for a crash.
The figures from property website Rightmove mean a typical home is 'earning' about five times more than its owner. The average worker is on a gross salary of about £24,000 a year, giving a monthly take-home pay of about £1,500.
Question for Keith.
Is the Brit media not reporting what is happening to prices in America? I'm sure it is. Are people thinking "it can only happen in America, it can't happen here?"
there is one difference between a true Ponzi scheme and the US housing bubble: Ponzi's scheme had no assets at all behind it. At least with the US housing bubble there is the real estate (however inflated the prices were)
Keith, you should do more posts like this, seriously.
I was sitting here eating my Sunday morning Cheerios, watching reruns of Sesame Street and then I came across this post. I immediately felt my IQ surge about 30 or 40 points. Wow, thanks!
I'm now going to spend the rest of day brushing up on the Keynesian Economic Theory and I might spend a little time dabbling in the General Theory of Relativity too. I'm so pumped up!
Oh, wait, I have to mow the lawn and make a couple of trips to the dump. Okay, never mind.
on the brit media question - lots of reporting on the us problems but in a distant way - they haven't connected the dots that it'll happen to them too
there is a report out today I think from datamonitor predicting prices could fall in england by 40%
Another research house is warning banks here to prepare for a 20% drop
But these stories are buried deep in the financial press. The mainstream media is SHOUTING how prices are soaring, people are getting rich, and ideas on how to get on the housing ladder like buying houses with strangers and 5 to 1 income ratio loans
In other words, it all feels so Arizona 2005 over here. And we all know how that turned out
Keith, a Ponzi scheme is a crminal conspiracy that claims to pay out returns to their 'investors.' Those who unwittingly make money (those who get in early) act like free advertising to lure in new 'investors.'
These 'advertisers' are not in on the sceme to defraud. Only those at the top know that the assets/invetsments that they claim to make or possess are non-existent.
Bubble manias are a result of people KNOWINGLY bidding on an ACTUAL ASSET (tulips, houses, stocks, art, whatever) They are NOT defrauded, they are mistakenly assuming that the particular asset always rises. Unlike the early Ponzi participants who think they are making money and who simply refer others in good-faith, the current bubble 'victims' committed fraud themselves when they lied to obtain credit to purchase the asset they so desired and that they thought would always rise in value.
Want to see a classic bubble? Check out what's happening in London where homes in my already insane hood went up $250,000 LAST MONTH. Can you say blow off top? Crazy people sure are fun to watch...
Put another way you missed out on making a $250,000 profit by renting.
Bravo. Bravo.
It seems likely to me that rich foreigners are buying up London which means, in the best case scenario, prices stay high and the native population is effectively barred from owning property because of the insane values.
I was talking on the phone to an aquaintance yesterday who started building her real estate empire a few years ago, and asked her how things were going (I played naive). She let out a little groan, but said she bought another house a few months ago (!). SHE quickly changed the subject, instead of telling me how I'd be priced out forever if I didn't buy now (like she's done in the past).
I think she's getting an inkling of what's on the horizon now, and realizes she'll be in big trouble soon.... Maybe it's the headache of paying a mortgage where the rent payment doesn't cover the costs, I dunno.
Realize this person is extremely educated, makes good money, but apparently has no experience with asset bubbles and market manias.
Instead of recognizing the mania for what it was, she (and many others) truly drank the Kool-Aid and were deluded. She's in for a real clock-cleaning as this continues to unwind.
I didn't have the heart to tell her to goggle "housing bubble". It's not like she would be able to sell in her frame of mind or market conditions, anyway, unless she finds a "greater fool". Besides, people tend to blame the bearers of bad news, regardless of it's truth....
Yup, I missed out on $250,000 by renting
But I would have had a tough time coming up with the $5,000,000 to buy a house in my neighborhood
Actually, they don't even let yanks have a credit card from the bank over here
One thing about bubbles - always sell early as Buffet says and never buy near the peak. You miss short term gains but you avoid long term pain
"But I would have had a tough time coming up with the $5,000,000 to buy a house in my neighborhood"
LOL this is what the kool-aid drinkers don't ever understand. The prices are already out of reach for anyone to buy and supposedly "cash in" on all the increase. Unless you're a field worker making $15,000 a year, then you can buy.
So the DOW is closing in on 13,000. DOW stocks are a buy because DOW companies have operations overseas nowadays and the falling dollar means these companies get a wind at their back come earnings time. So...
as long as the dollar keeps dropping fast enough the DOW will go higher because earnings will continue to increase at 10%+. That's great, until one realizes oil is traded in dollars, and as the value of the dollar falls the value of the commodity will rise. So we'll be hearing about the DOW roaring to 14,000 meanwhile the price at the pump surges to $4 a gallon.
Keith, can't England see what has happened to Spain? From what I've read Spain is about a year further down the same path than England.
I think the reason why your neighborhood appreciated $250,000 last month was Toni The Mortgage Broker Hottie has gone international.
Too bad only a small percentage of Americans have ever had an econ class. Especially during classic financial manias and ponzi schemes
Hopefully the blogs are bringing some education and information to the masses, that they didn't get in the terrible American education system
Ignorance is NOT bliss when you're signing your name on a $500,000 loan document that you don't understand
And if I see one more damn article with the obligatory "we didn't know we had an adjustable rate", I swear...
I think it's Oprah's fault that the bubble got out of control. If she had done "housing - ponzi scheme" or "liar's loans - illegal and a terrible idea?" as a shows in 2004 we wouldn't be in the mess we're in today
So we'll be hearing about the DOW roaring to 14,000 meanwhile the price at the pump surges to $4 a gallon.
And this is a bad thing?
DOW to 14K is a 7.7% increase. I have about $85K invsted in stocks. So I'd make $6545. On the other hand I use about 25 gallons of gas a month, costing me an additional $22 a month from today's price of $3.10.
Hmm. I make $6500 in column A and lose $20 in column B. Yeah I think that equation works out quite well for me. Bring that shit on.
It does seem like we're doing students and the country a disservice by allowing kids to graduate from high school without even a basic understanding of micro and macro economics. It doesn't seem like it would be that hard to teach kids what an 'investment' is and how to do a basic evaluation of an investment. You know, like teaching them that there is no asset class that always goes up, not even real estate.
It all comes down to teaching them the answer to virtually every question asked in an MBA program: it depends. And then you identify and describe what it depends on. Such as: is real estate a good investment? That depends. It depends on the ratio of average prices to average incomes, population growth, supply and demand, etc.
If you have this basic understanding then you never unwittingly become the victim of a mania, bubble or ponzi scheme.
Anonymous said...
So we'll be hearing about the DOW roaring to 14,000 meanwhile the price at the pump surges to $4 a gallon.
And this is a bad thing?
DOW to 14K is a 7.7% increase. I have about $85K invsted in stocks. So I'd make $6545. On the other hand I use about 25 gallons of gas a month, costing me an additional $22 a month from today's price of $3.10.
Hmm. I make $6500 in column A and lose $20 in column B. Yeah I think that equation works out quite well for me. Bring that shit on.
April 22, 2007 7:13 PM
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$4 a gallon gas means a lot more than an extra $20 to you at the pump. Everything which is grown, made, imported, service provided and shipped becomes more expensive. While you may not feel the impact, the other 9 out of 10 who have nothing beyond their 401k in the market will. So if you clamor for an upset electorate, enjoy.
the $4 a gallon is no big deal guy is so dumb, we shouldn't even respond
So if you clamor for an upset electorate, enjoy.
Right on!
>This study’s important conclusion for PIMCO and our clients is that if home prices in the U.S. have peaked, and are expected to stay below that peak on a real price basis for the next three years, then the Fed will cut rates and cut them significantly over the next few years in order to revigorate an anemic U.S. economy. Strong global growth (not part of this study’s assumptions) may temper historical parallels and provide a higher floor than would otherwise be the case.
Full text -> http://tinyurl.com/2zfsv6
I have noticed that the local MSM only comments on real estate bubbles if they are far away. So in Green Bay we hear every couple of months about a real estate bubble in California. But nothing about the local real estate situation.
The problem, IMHO, with preventing problems via increasing people's knowlege is that it rarely, if ever, works. Walk around your local college campus and take a look at all the student's puffing away. Are you telling me these kids haven't been educated about the dangers of smoking???
Keith,
Can you shed some light onhow the English gov't injects liquidity into the system. Is it the same situation as here with the REIC?
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