Vol. 2 No. 69 August 17, 2007

The Bogus Economist
Con Me(n)?


It 's a good thing The Bogus Economist gave up his garden (inside joke here). If he were still battling moles and dandelions, he couldn't explain to his countless readers the intricacies of the sub-prime market and the resultant worldwide semi-meltdown or the ins and outs of what victims call “Ponzi Schemes” and what the bunco squad calls Ponzis. Let's start with these.

In a front page story, the Willamette Week recently regaled readers with the tale of Wes Rhodes, an affable 63 year-old who is accused of separating roughly sixty investors from over twenty-four million dollars over a seven-year period. The method was tried and true, according to the Securities and Exchange Commission: Mr. Rhodes allegedly ran a classic Ponzi scheme.

For those who have never heard of Ponzis, they were named after a charming Italian immigrant named Charles Ponzi, who later earned a reputation as one of the great swindlers of all time. The way it works is getting lots of people to “invest” money, which is then used to pay dividends to those who have already “invested.” The operator uses the excess to have fun. By the time the money runs out, the last people on board get zilch and the operator is sunning himself on the Riviera.

“Sub-prime” loans, as opposed to Ponzis, are legal, although God knows why. Sub-primes come about when avaricious lenders, using a novel approach to free enterprise, make money available to folks whose credit-worthiness depends upon their ability to inhale and exhale. The lenders get the signatures on the dotted line, sell the loans to banks and mortgage companies and use the proceeds to make more pixie dust loans. Since for a long time home prices were going up, up, and up, people who didn't believe in gravity fueled the frenzy. Now that Newton is chuckling, “See, I told you so,” the frenzy is going in the opposite direction. Billions of dollars have vanished and lots of people don't have homes anymore.

Sub-prime borrowers and Ponzi victims have one major thing in common – for one reason or another, something overwhelmed good old common sense. Maybe they were conditioned by the number of “free” items being hawked in grocery stores, furniture establishments, magazines, media, electronic advertising and billboards. Everybody has been trained to think in terms of Something For Nothing. Whether we're talking about toilet paper rolls or national politics, we are told not to think in terms of what something costs, but of what we can get FREE if we just sign (or vote) here. Another factor is our growing inability to distinguish between what's real and what we want to think is real. Many folks refuse to believe John Wayne never served in the military or Saddam Hussein didn't attack the World Trade Center. We look for the pros, but not the cons. We see what we want to see.

Look at the “investors” who trusted their savings to Mr. Rhodes. These are not stupid people. They are primarily middle-class businessmen and women who wanted to feel their money was safe while earning incredible dividends, which were duly reported to them in monthly statements, says the WW. As long as the totals kept rising nicely, few “investors” asked questions about where the money was being parked. They saw the pros – not the cons.

As for the folks who thought they could get a 110% loan for a house while only having to fork over a small monthly payment after putting nothing down, we might reflect when people have been conditioned by million-dollar ads to think in terms of Something for Nothing, it's not unnatural to apply this to the American dream of owning a home. Regulators who were supposed to guard against excess were out to lunch. This is not to excuse buyers ignoring the cons. When you play the slot machines to win, you've got to realize you can also lose. For every person who bought what they hoped would be a secure future, there was a person who thought he was going to make a killing and become another Donald Trump. American dream or American greed, the rewards- and penalties – turned out to be the same.

Right now, the biggest difference in outcome is between the people who took the bait and the people who set the hooks. Some of the companies that profited most handsomely from “sub-prime” deals have already ducked into Chapter 11 bankruptcy protection. It's not unusual to want the scammers to feel as much pain as the people they scammed, but I'm not going to be terribly surprised if some of the greediest CEOs end up with a golden parachute and a house in Bermuda.

I keep talking about greed. What's greed? Upon consideration, I think the test is the word “enough.” When “enough” no longer has any meaning, we cross the line. Unfortunately, many individuals and many more companies have already crossed it.

This doesn't apply to me. I have enough moles. I have enough dandelions. I don't buy hedge funds. All I want to do is stretch out and have a little nap.

Better prone than conned.
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The Bogus Economist © 2007