by Pierre Tristam -
Everyone's heard of the scam, but since we're all living it on a scale worthy of a Christo exhibit, it's worth a refresher. Charles Ponzi was an Italian immigrant of small stature and oversize ambition who wanted to be rich, sought after and talked about. He briefly became extremely rich, the police sought him out, and he's been talked about ever since. But he didn't merely achieve his goals. He codified the REM cycle of the American Dream: The glory of getting rich quickly and with as little work as possible outweighs all consequences no matter how reckless.
The way Ponzi did it is a beauty of short-attention guile. He created a front with the upright name of Boston Exchange Company. He invited people to invest and promised them better than 50 percent return within 90 days. The promise wasn't without a financial foundation. Ponzi planned to buy foreign postal coupons at cut rates and redeem them at face value for cash in the United States. It was 1920, exchange rates hadn't caught up with the devalued currencies of countries wrecked by World War I. He would just take advantage of the disparity, legally. Today they call it currency trading.
Except that Ponzi never bought a single postal coupon. Cash from investors rolled in so fast and in such huge amounts that he saw no reason to. He became a millionaire in a matter of months. His and his investors' wealth was made entirely of borrowed money and the expectation that an ever-larger number of fools would keep financing the debt ad infinitum. When reporters and banks finally did look into his numbers, the game was up. Most of his 27,000 investors were ruined. Ponzi spent a few years in prison and finished his days broke and poor in Brazil, but not before a stint as a swindling real estate broker in Florida, without which no scheming life is truly complete.
Which segues neatly into the two great Ponzi schemes seducing the country at the moment: Social Security privatization and the real estate boom, the Thelma and Louise of the Bush era -- two brash, attractive, recklessly joyriding ideas gunning for the cliffs, with the economy in tow.
First, dispense with the illusion that Social Security privatization and home-buying as they're practiced today have anything to do with an "ownership society." Both are about wealth as an entitlement. Instead of expecting government to owe you something, you expect the free market to owe you, with this difference: Government payouts are premised on fairness. The free market isn't. You play to win but without government's safety net you can lose and own nothing more glamorous than membership in the Chapter 11 Society.
Luckily in the case of Social Security, the scheme is still at the theoretical stage and losing favor. Most people realize that retirement isn't something to gamble with, least of all with Wall Street for a croupier. People driving the real estate boom have yet to realize that they're involved in a similar scheme, with nothing theoretical about it. The real estate boom is a creature of speculation feeding on debt and the assumption that foolish "investors" at the bottom of the pyramid will keep shoving more money up the pipeline. The numbers show why this is unsustainable.
Homes are selling at an annual rate of more than 7 million, for a median price above $200,000, with almost 70 percent of Americans owning homes and cashing out equity (that is, borrowing against the future) at a rate of $120 billion to $150 billion a year, a quadruple-crown of records. In 2000, homes were selling at an annual rate of 5.5 million, at a median price of $165,000, with equity cash-outs below $30 billion. Americans haven't become 21 percent richer in four years, nor has the population increased so dramatically, nor has the economy grown impressively.
To the contrary. Wages are stagnant, the job market is a roller coaster ride at Cedar Point, household debt is at a record high, savings at record lows, and a record number of new mortgages are being financed with adjustable rate mortgages or interest-only mortgages whose fine print takes after the fins of loan sharks. At the root of it all is a borrowing frenzy that assumes guaranteed returns -- without a whit of evidence other than what others have reaped so far.
In other words, your classic Ponzi syndrome. The more they keep reaping, the worse the bust, when it comes.
A crash isn't merely a possibility, it's a certainty built into any system that replaces the prudence of basic balance sheets with unalloyed money lust. So it's no longer a matter of whether there is a real estate bubble, but of when it will burst, with consequences that will hit much closer to whatever home you have left than the stock bubble's burst of 2000.
For now though, in Ponzi we trust.
Tristam is a News-Journal editorial writer. Reach him at ptristam@att.net.
Source: Common Dreams News Center
