Thread: Roubini: America One Big Ponzi Scheme

Roubini: America One Big Ponzi Scheme

Thursday, March 19, 2009 9:48 AM

By: Julie Crawshaw

For more than 10 years, millions of Americans ran their own personal Ponzi schemes, says NYU economist Nouriel Roubini.

"When you put zero down on your home, and you thus have no equity in your home, your leverage is literally infinite and you are playing a Ponzi game," Roubini writes in Forbes.

It’s a game virtually everyone played, Roubini notes. That’s how we became the United States of Ponzi.

Banks made interest-only, zero down payment liar loans to NINJA (no income, no jobs and assets) borrowers at initial teaser rates.

Private equity firms did over a $1 trillion of leveraged buyouts with a debt-to-earnings ratio of 10 or above.

Consumers allowed their debt relative to income to soar to 135 percent today from 65 percent in 1994.

“An economy where the total debt to GDP ratio (of households, financial firms and corporations) is now 350 percent is a Madoff Ponzi economy,â€

Much as I hate to say it, Roubini is half-right. Too many Americans that knew what they were doing were using their homes as ATM's to buy the latest toys, because real estate prices would never go down, so they could cash in the equity and buy more toys. But I mostly blame the banks and mortgage brokers pushing these liar loans with believing properties would never come down in value. And how many people who did not know what they were doing (including illegals) fell into their traps? It used to be that your mortgage payment could not exceed 30 or 33 percent of income but that lending sensibility was thrown into the garbage. Banks, with the spurring of the GWB administration that everyone should own a home, did this to themselves and now we are all paying for it.