Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
I think there is a difference between a bubble and a Ponzi scheme, although one may shade into the other.

The South Sea Bubble and the Tulip craze did attract more and more investors as time went on, but all bubbles do that as those on the sideline see fortunes being made and decide to participate.

The Ponzi Age was created by the government as it forced investments into the stock market by changes in tax policy regarding retirement funds. People did not just jump into the market because it was going up, but were pushed into it as their funds were forcibly shifted from defined benefit plans to defined contribution ones.

Similarly people were trapped into home refinancing by loans which were predicated on the idea that they would be refinanced in a few years or the house sold. Alan Greenspan gave elaborate pseudo-mathematical explanations for why variable rate mortgages were better for borrowers. Banks made it difficult for buyers to even get conventional mortgages, something which is overlooked by those who want to blame greedy buyers for the problems.

Then there were the succession of changes to laws regulating the finance sector including the repeal of the Glass-Steagall law which prohibited banks for fooling around in equities. Rules for reserve requirements, reporting and oversight were all changed.

Pension plans could use their reserves in their main line of business and/or defer actual contributions if assets were increasing in price. Contributing to a pension plan later instead of now is the number one no-no of prudent investing.

Entities which wanted to avoid these changes and behave sensibly were handicapped since their returns would not be as high and investors would go elsewhere. Such firms frequently saw proxy challenges and their boards replaced. New management would engage in leveraged buyouts or take them private thus extracting all the cash and replacing it with debt.

The only way an entire economy can turn into a Ponzi scheme is if the government encourages it. A bubble is just ordinary greed and the excitement of seeing prices go up. This is much bigger and more sinister.

While bubbles may never go away, state-sponsored Ponzi schemes don't have to exist if governments are actually under the control of the people.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Thu Jan 15th, 2009 at 09:00:50 AM EST

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