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Archive for February, 2009

Ponzi Nation — A Land of Believers

Thursday, February 5th, 2009

My brother and his wife are huge believers in the power of Oregon State University teams: baseball, basketball, football, and any other kind of ball they play out there in Corvallis.  There are a lot of avid Beaver supporters in the Pacific Northwest-so many that they have begun calling themselves Beaver Nation.  As in: there are so many of us OSU supporters that we are not just a local phenomenon, we’re a nation.  A land of believers.

In that vein, I’m naming my first blog on the 21st Century Fusion Economy: “Ponzi Nation-A land of Believers.”  How else could millions of people believe they could invest in houses that cost way more than they could afford?  Don’t worry, they told themselves, someone will come along and pay us way more than what we paid.  It’s happened before, it’ll happen again.  And by the way, don’t worry, the banks and mortgage companies told them, we’ll loan you all the cash you need.

Back in the 1920’s, a swindler named Charles (Carlo) Ponzi figured out that he could make a lot of money by taking people’s money to invest for them, promising them unrealistic returns.  But that didn’t stop people from giving him their hard-earned cash.  Instead of investing it, however, he just paid the new money to earlier investors.  Enthralled that they were getting a much higher return on their money than they would have at a bank or at a reputable financial institution, many invested the money back with Ponzi.  Others told their friends and families about the fantastic returns.  Soon there was a steady flow of money in the Ponzi funds.  The scheme worked fine as long as there was someone down the line, ready to join in and get the same high return as those that went before.

The great housing boom of the early years of the 21st Century worked just like that-a Ponzi scheme that relied on blind belief and devoid of economic logic.  If there was someone coming in the door in a little while to pay you much more than what you paid did it really matter what it was worth?  All you had to do was believe.  By all appearances, the banks and the mortgage companies that provided the loans believed in the scheme as well.  Why else would they provide the money-sometimes up to 100 percent of the purchase price-to home buyers who didn’t have the wherewithal to purchase a house at all just a few years before? (more…)

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