Yesterday’s drop must have got someone’s attention that there is risk out there. Or maybe not. But cracks like that don’t occur without some consequences.

In the cartoons, Wile E. Coyote scoots off the cliff but doesn’t fall until he looks down. I happened to walk past a TV in Road Town tuned to CNBC to see David Faber over a caption of “Subprime Meltdown” or something similar. At any rate, the ongoing collapse of subprime lending is finally coming to Page 1. So far, the implications have not been understood - the withdrawal of buyers from the housing marketplace, the reduction in consumption as refis end, and the damage to lenders which will result in the reduction of credit and eventually a vicious deflation. The BoJ’s recent tiny rise in rates will do nothing to stem the full-thottle flow of Japanese money into world markets, so in effect there is no reserve money-printing power. All that can be absorbed is being printed, although by the BoJ rather than the Fed.

Couple this credit problem with a tech wreck - just look at inventories - and job losses in construction and elsewhere- and you have a very serious situation. This has been developing slowly for a long time and will doubtless take longer than I imagine to play out. But remember Baruch and many others - their fortunes were made by selling too soon.

A “Ponzi” scheme is an “investment” offering that attracts investors by offering very high short-term returns, which are paid to the early investors out of the funds received from later investors. While named after a certain Charles Ponzi, whose scheme brought him notoriety in the early 1900s, these schemes have been around for a long time. Ponzi was simply the first to achieve national attention in the US.

A bubble shares most of the characteristics of a Ponzi scheme - apparent high returns paid out of contributions rather than investment income, a disbelief in financial reality, herd behaviour and so forth - but in a bubble, there is no schemer.

A bubble is sustained entirely by mass hysteria - drawing in new investors and inducing those already involved to reinvest their profits. So long as the enthusiasm continues, prices can keep rising because even the sellers promptly turn around and become buyers. A Ponzi is sustained more by the activities of the promoter, although of course herd behavior is important.

Clearly the housing market is one or the other - and is rapidly deflating as the willingness of lenders to extend credit to the last entrants, the subprime borrowers, is exhausted.

Is there a schemer? If there is, it has to be Alan Greenspan. His low interest rate policy and active promotion of adjustable rate mortgages is now causing much pain to borrowers. His willingness to promote and tolerate easy lending policies is now chopping down subprime lenders on nearly a daily basis. The beginning of the end of the scheme was clearly simultaneous with his departure from the Fed. But was it intention or incompetence? Machiavelli teaches us to always consider incompetence before assuming conspiracy. And perhaps it is so in this case.

So we should assume it is a bubble, probably we will never know. But it is certainly possible that Greenspan’s name will be added to Ponzi’s in the taxonomy of financial fraud.

Limited internet access, trying to take a vacation from the markets but couldn’t resist a peek. Looks like the ABX indexes are completely tanking, Fremont is eliminating the 80/20s and all seconds, NEW is restating because of high buybacks, etc. But the share markets seem not to care. Ah well. Patience, grasshopper.

Off on vacation tomorrow, so blogging will probably suffer.

A couple of notes, though. First is a report on yet another homebuilder CEO - Standard Pacific Homes CEO Stephen Scarborough - who said Friday that he doesn’t foresee a huge recovery in the national new-home market at least for a year or more. In general, the homebuilders have been pretty clear that they don’t see any recovery yet. But their shares are being bought as if the crisis were over. In my view, it is yet to come.

Alan Abelson in Barron’s: “The dismal disclosure of just how effectively Jane and John Q. are spending more than they earn has been greeted with the usual serious sophistry from the usual Panglossian pundits. Their contemptuous claim is that benighted worrywarts like ourselves who fret over such inconsequentials as a negative savings rate are just plain silly. And, it grieves us to confess, after carefully mulling their arguments, we do feel, well, just plain silly.

For how could we overlook the fact that savings as officially defined don’t include the equity in houses and investment in stocks. And, as we all know, it is decreed that house prices can go only one way — up. Pay no heed to minor variations in that sacrosanct trend; they probably won’t last more than five, six years at the outside.”

The graph is from Stephanie Pomboy’s MacroMavens commentary. As she observes, “For all the bragging about the $6 trillion in cash households have sitting on their balance sheets, relative to household debt, this cash cushion is at a record low!”

In addition, the households with the cash are not the ones with the debt. The top 1% of householders hold 30% of the assets and 7% of the debt, while the bottom 50% hold a mere 6% of assets but 24% of the debt.