Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Stock Market FOMO Hits September CRASH Brick Wall - Dow Trend Forecast 2021 Review - 20th Sep 21
Two Huge, Overlooked Drains on Global Silver Supplies - 20th Sep 21
Gold gets hammered but Copper fails to seize the moment - 20th Sep 21
New arms race and nuclear risks could spell End to the Asian Century - 20th Sep 21
Stock Market FOMO Hits September Brick Wall - Dow Trend Forecast 2021 Review - 19th Sep 21
Dow Forecasting Neural Nets, Crossing the Rubicon With Three High Risk Chinese Tech Stocks - 18th Sep 21
If Post-1971 Monetary System Is Bad, Why Isn’t Gold Higher? - 18th Sep 21
Stock Market Shaking Off the Taper Blues - 18th Sep 21
So... This Happened! One Crypto Goes From "Little-Known" -to- "Top 10" in 6 Weeks - 18th Sep 21
Why a Financial Markets "Panic" May Be Just Around the Corner - 18th Sep 21
An Update on the End of College… and a New Way to Profit - 16th Sep 21
What Kind of Support and Services Can Your Accountant Provide? Your Main Questions Answered - 16th Sep 21
Consistent performance makes waste a good place to buy stocks - 16th Sep 21
Dow Stock Market Trend Forecasting Neural Nets Pattern Recognition - 15th Sep 21
Eurozone Impact on Gold: The ECB and the Phantom Taper - 15th Sep 21
Fed To Taper into Weakening Economy - 15th Sep 21
Gold Miners: Last of the Summer Wine - 15th Sep 21
How does product development affect a company’s market value? - 15th Sep 21
Types of Investment Property to Become Familiar with - 15th Sep 21
Is This the "Kiss of Death" for the Stocks Bull Market? - 14th Sep 21
Where Are the Stock Market Fireworks? - 14th Sep 21
Play-To-Earn Cryptocurrency Games Gain More and Is Set to Expand - 14th Sep 21
The CashFX TAP Platform - Catering to Bull Investors and Bear Investors Alike - 14th Sep 21
Why every serious investor should be focused on blockchain technology - 13th Sep 21
SPX Base Projection Reached – End of the Line? - 13th Sep 21
There are diverse ways to finance the purchase of a car - 13th Sep 21
6 Tips For Wise Investment - 13th Sep 21 - Mark_Adan
Gold Price Back Below $1,800! - 10th Sep 21
The Inflation/Deflation debate wears on… - 10th Sep 21
Silver Price seen tracking Copper prices higher - 10th Sep 21
The Pitfalls of Not Using a Solicitor for Your Divorce - 10th Sep 21
Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
This Boom-Bust Cycle in US Home Ownership Should Give Home Shoppers Pause - 9th Sep 21
Stock Market September Smackdown Coming Next? - 9th Sep 21 - Monica_Kingsley
Crazy Crypto Markets How to Buy Bitcoin, Litecoin for Half Market Price and Sell for TRIPLE! - 8th Sep 21
Sun Sea and Sand UK Holidays 2021, Scarborough in VR 180 3D! - 8th Sep 21
Bitcoin BTC Price Detailed Trend Forecast Into End 2021 - 8th Sep 21
Hyper Growth Stocks - This billionaire is now using one of our top strategies - 8th Sep 21
6 common trading mistakes to avoid at all costs - 8th Sep 21
US Dollar Upswing, S&P 500 and Nasdaq Outlook - 7th Sep 21
Dovish Assassins of the USD Index - 7th Sep 21
Weak August Payrolls: Why We Should Care - 7th Sep 21
A Mixed Stock Market - Still - 6th Sep 21
Energy Metals Build Momentum; Silver & Platinum May Follow - 6th Sep 21
What‘s Not to Love About Crypto Market Fireworks - 6th Sep 21
Surging US Home Prices and Gold – What’s the Link? - 6th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Housing Market Bust, Who is the ‘Greater Fool’ Now?

Housing-Market / US Housing Apr 16, 2009 - 01:59 AM GMT

By: Lorimer_Wilson

Housing-Market Best Financial Markets Analysis ArticleMany Americans, and indeed many people the world over, have lived in a Ponzi bubble economy for more than a decade. They have applied the Greater Fool Theory in the false belief that they would always be able to sell their house or their stocks or bonds or other highly leveraged assets to “bigger fools” than they were for buying them in the first place. With the collapse of the housing bubble and the stock market it begs the question “Who is the ‘greater fool’ now?


A Ponzi bubble? Yes, after Charles Ponzi, a Bostonian with an eye for get-rich quick schemes who, back in 1918, identified an arbitrage situation which he promoted as being able to generate sizeable returns for those who invested with him. He delivered on his promise by making his close friends and a small circle of investors very rich, very quickly, and, as word spread among the wealthier citizens of Boston, they began lining up to invest. Regretfully, when anything looks too good to be true, it probably is and it was.

As a result of his infamy his name has been immortalized to describe any fraudulent investment scheme where the money from later investors is used to pay the early investors and so on right up until the moment the whole thing collapses on itself. Sound familiar? Yes, 90 years later the 50 billion dollar Madoff pyramid collapsed – a Ponzi scheme if ever there was one! Now may well be the time to lay the Ponzi name to rest and replace it with the infamous word ‘Madoff.’ Time will tell.

But Ponzi and Madoff were not the only ‘investors’ who were conning those around them. We must not forget the tens of millions of Americans and others worldwide who were deploying their own ‘greater fool theory” that there was really nothing to worry about because there always would be a ‘greater fool’ than them out there somewhere who would still lend them money, buy their over-priced house, over-valued stocks, etc. to keep their financial house of cards from collapsing. Below is my edited, paraphrased and enhanced version of how Nouriel Roubini once described it:

When you put zero down on the ‘purchase’ of your house and thus had no equity in your house (and re-financed your mortgage each and every time it went up in value) your leverage was literally infinite and you were playing a Ponzi game hoping a ‘greater fool’ than you would be there to buy your house when the time came for you to buy yet another house that you could not afford.

When the bank sold you a mortgage for zero down on the basis of a NINJA (no income, no job or assets) liar loan, with interest only for a while, with negative amortization, and an initial teaser rate, the bank was playing a Ponzi game. They were hoping that you would stay employed; that you would be able to afford the eventual increased mortgage payment; that you would be able to sell the house for more than its original value; that you would always honor the terms of the mortgage. They were even ‘greater fools’ than you were.

When private equity firms engaged in leveraged buy outs with excessive debt-to- earnings ratios they were Ponzi firms playing Ponzi games – all “greater fools” hoping that future earnings would just grow and grow in future years with no likelihood of declining.

When our government issues trillions of dollars of new debt to pay for a severe recession and to socialize private losses it becomes a Ponzi government hoping that the Chinese and other foreign purchases of their debt will continue doing so regardless of the value of the U.S. dollar vis-à-vis their respective currencies and the level of interest paid. How foolish to expect foreign governments to be ‘greater fools’ than ours.

When our country spends more than it raises in taxes and thus runs an endless string of current account deficits and becomes the largest net foreign debtor in the world it becomes a Ponzi country hoping that foreigners will be even ‘greater fools’ and continue to finance their conspicuous consumption.

When consumers consume more than their income year after year (i.e. a household with negative savings; a government with a budget deficit; a firm or financial institution with persistent losses; a country with a current account deficit) they are all playing the ultimate Ponzi game hoping that some ‘greater fool’ will come along and bail them out.

These households, firms and banks and the government itself can be characterized as ‘Ponzi borrowers’ who need to borrow more to repay both principal and interest on their previous debt and, such being the case, need ever-increasing prices of the assets they have invested in to keep on refinancing their debt obligations. What fools they all are to expect that some ‘greater fool’ knight in shining armor will come along and wave a magic wand and make it all go away. Instead they all must realize they will be forever poorer but, hopefully, more fiscally responsible in the future.

With the average house price having fallen 20% to date and, as such, it no longer being feasible to use one’s house as an ATM to borrow against to finance Ponzi consumption, with equity prices having fallen over 40% in the last year, and with credit having dried up recently, the party is over for households, banks and non-bank highly leveraged corporations. Most of the ‘wealth’ that supported the massive leveraging and overspending in the economy was nothing more than fake bubble–driven wealth perpetuated by society’s belief in the Greater Fool Theory. Thank goodness for hard assets such as gold bullion and other precious metals which have stood up remarkably well during these tumultuous times.

Now that the bubbles have burst it is clear that the emperor had no clothes and that we are the naked emperor. A rising bubble tide was hiding the fact that most Americans and their banks were swimming naked and the bursting of the bubble is the low tide that shows just who has been caught with their ‘pants down’ i.e. just who really is the ‘greater fool’.

The U.S. household, financial and non-financial firms and government may well spend the next generation in debtor’s prison having to tighten their belts to pay for the losses inflicted by a decade or more of reckless leverage, over-consumption and risk taking. What great fools we have been for living beyond our means all these years and taking no fiscal responsibility for our future well-being in the false hope that there always would be a ‘greater fool’ out there than us.

Indeed, the American dream of Life, Liberty and the Pursuit of Happiness (and let’s not forget Wealth) has been nothing more than a glorified Ponzi scheme. Let us all look at ourselves in the mirror. We really are the greatest fools imaginable!

    Lorimer Wilson is an economic/market analyst and commentator who has written numerous articles on the major economic and financial crises (past, present and impending) of our times, investing in times of crisis, commodities, market timing and other investment philosophies. He is a Contributing Editor to www.preciousmetalswarrants.com and contributor to a large number of other precious metals, financial, economic, investment and op/ed sites. He can be contacted at lorimer.wilson@live.com .

    © 2009 Copyright Lorimer Wilson- All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

    Lorimer Wilson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in