International Law

The Stock Market is a Ponzi

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Mark Cuban, writing at his blog, confirms that we can model the stock market as if it were a Ponzi scheme.

"I've said a lot of this before.

The stock market is by definition a ponzi scheme.

As long as money keeps on coming in, then there is someone to take the stocks from the sellers. If the amount of money coming in is reduced, the stocks, indexes, et al go down.

What if, for who knows whatever reason, the amount of money going into stocks declined significantly ? Who would buy stock from the sellers.

I mean goodness gracious, you could see something disastrous happen.

Like the Nasdaq dropping from 5000, to under 2000 in just a few years.

Its happened before, it can happen again."

The reason that this is important is that we tend to think that although the stock market may border on irrational, it is not inherently a criminal exercise.

But what if it were?  What would it look like?  How much differently would it appear to us?

The reason for this type of counter-factual thinking is well understood by scientists, philosophers, and indeed anyone who models the social world: let us assume that world is completely different than we assume it to be, deduce phenomena that would appear in the far away world, and then see just how close we are to the supposed far away counter-factual world.

We are fortunate too have a number of excellent books on Charles Ponzi, his own diary, and years of bubbles to study.

One feature of Charle's Ponzi scheme was his payment to his salesmen.  For every $100 scrip they sold, they were immediately paid $10.

Ten dollars was a lot of money.  It basically signaled the huge risk involved in taking a long position in Ponzi's SEC.

Ask yourself: are the bid/ask spreads in the purchase of sub-prime mortgages both reasonable and transparent?

If not, you just might be dealing with a Ponzi.  

Full post as published by Misleading Advertising Law on September 08, 2008 (boomark / email).