Michael Hudson explores the analogous nature of Ponzi schemes and the property bubble. How is wealth created in the modern era? Through hard word, through who you know or what you ‘flip’?
December 23, 2008
Last week the Good Lord evidently realized that not enough people had been reading Hyman Minsky’s explanation of how financial cycles end in Ponzi schemes – the stage in which banks keep the boom going by lending their customers the money to pay interest and thus avoid default. So He sent Bernie Madoff to dominate the news for a week and give the mass media an opportunity to familiarize newspaper readers and TV watchers with just how Ponzi Schemes work. What Mr. Madoff did was, in a nutshell, what the economy as a whole has been doing under the moniker “wealth creation.”
If the media were able to wait until as late in the financial collapse as last week to provide helpful diagrams about how Ponzi schemes need to keep on growing exponentially, it is simply because bad foreign financial news is not deemed newsworthy in North America. But Europe has been having its own run-throughs, headed by Spain – which by no coincidence is now experiencing the biggest real estate bust outside of the post-Soviet economies.
The best case study occurred two years ago. On May 9, 2006, Spanish police raided 21 homes and offices of Afinsa Fienes Tangibles SA, the world’s largest postage-stamp dealer, and rival firm, Forum Filatélico. They charged eleven men with running a $6.4 billion pyramid scheme that took in some 343,000 investors – 1 percent of Spain’s entire population, making the fraud one of the largest in Spanish history.