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Here is my way of disambiguating terms "Ponzi schemes", "pyramid schemes", etc.

A Ponzi scheme (or Ponzi financing, as in Minsky's theory) is a scam initiated by an entrepreneur seeking investment. Mr Ponzi himself did this that way: he promised and initially gave high return for investment, which attracted much more investment, so that for a while he was able to give high returns from the investment growth alone. But of course, he had top cut and hide at some time.

Ponzi financing may occur not only as a designed scam, but from enterpriser's desperation as well. I call the Russian GKO scheme because the initiative came from the Russian government (for whatever reason), not from investors.

The situation of "too much money chasing too few assets" has different flavor. Here the initiative comes from eager investors. The mild term for this run is "asset inflation". I would avoid to use "Ponzi" or "pyramid" terminology here. I do not actually know how to call this stronger.

In a narrow sense, a pyramid scheme is a scam with a defined structure (mathematically, an exponentially growing tree graph) of cash contributions and flow. Here there is no formal distinction between investors and enterprisers - everyone plays the same role if only the game can continue indefinitely. Ironically, the current situation with all investors borrowing and all entrepreneurs investing is very analogous in this respect.

More generally, to incorporate the cases like CDO (presumably) a pyramid scheme can be defined as any designed or emergent financial structure with something organized within an unsustainable pyramid "geometry", as Liu describes. That would be the general idea.

by das monde on Mon Aug 20th, 2007 at 05:40:41 AM EST
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