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.