Readings

It's worth looking back at the February issue of Institutional Investor for what may be the most cogent, accessible and thoroughly reasonable explanation of what's going on in financial markets these days ( http://www.iimagazine.com). The piece "Ponzi Nation" was written by Edward Chancellor, author of a book on the history of financial speculation. Chancellor cites the work of economist Hyman Minsky to describe the pattern of almost all financial booms and busts: A period of unusual stability lulls investors into underpricing risk, overpricing assets and engaging in an orgy of credit creation. What results is a Ponzi scheme of systemic proportions in which the only way for the good times to continue is for everyone to keep refinancing his activity either by selling assets or raising more debt. As Chancellor shows, it all turns out to be a pretty good description of the subprime real estate market and what may lie in store for commercial real estate and the world of leveraged buyouts. -- S.P.