Financial Crisis:A Hardy Perennial 13 Chain letters,pyramid schemes,Ponzi finance,manias,and bubbles Chain letters,bubbles,Pyramid schemes,Ponzi finance,and manias are s The neric te asset prices at distant future dates.The Ponzi schemes g renerally involve ises to pay an interest rate of 30 or 40 or 50 nt onth:the s that th schemes alw dis ered a new secret formula so they can earn these high rates of return They make the r omised interes ents for the first few months with the m uad from their n by the prom of return.But by the fourth or fifth month the m these new customers is less than the mo nies pr nised the first sets mers and the e entrepreneurs go to Brazil or jail or both. A chain letter isa lar for the dure is that indivi mid a gem ceive a letter tham t nd $1 (or $10 o $100)to the name at the to of the ramid and to send the same letter to five friends or ac thirty davs 64 for aach ing nt Pyramid arrangements often involve sharing of commission incomes from the sale of securities or cosmetics or food su lements by those whe actually make the sales to those who have recruited them to become sales nal The bubble involves the purchase of an asset,usually real estate or a security not beca ise of the r ate of return on the in estment but in anticination that the asset o can be sold to some ne else at an 、highe erm 'the ater fool'has to the last huve tas always counting stock or the condo artment or the baseball cards could be sold. The ter mania describes the frer zied natte of increase in an increase in trading volumes:indi r to buy before the prices increase further.The term bub ble su ggests that when the prices stop increasing,they are likely almo Chain letters and pyramid schemes rarely have macroeconomic conse nents of the econ my and involve m the late-comers to thos who were ir early Asset iated with e phora and increases in both business and household sp ending because the futures are so much brighter,at least until the bubble pop Virtually every mania is associated with a robust economic expansion but only a few economic expansions are associated with a mania.Still the association between manias and economic expansions is sufficiently frequent and sufficiently uniform to merit renewed study.c01 JWBK120/Kindleberger February 13, 2008 14:58 Char Count= Financial Crisis: A Hardy Perennial 13 Chain letters, pyramid schemes, Ponzi finance, manias, and bubbles Chain letters, bubbles, pyramid schemes, Ponzi finance, and manias are somewhat overlapping terms. The generic term is nonsustainable patterns of financial behavior, in that asset prices today are not consistent with asset prices at distant future dates. The Ponzi schemes generally involve promises to pay an interest rate of 30 or 40 or 50 percent a month; the entrepreneurs that develop these schemes always claim they have discov￾ered a new secret formula so they can earn these high rates of return. They make the promised interest payments for the first few months with the money received from their new customers attracted by the promised high rates of return. But by the fourth or fifth month the money received from these new customers is less than the monies promised the first sets of customers and the entrepreneurs go to Brazil or jail or both. A chain letter is a particular form of pyramid arrangement; the proce￾dure is that individuals receive a letter asking them to send $1 (or $10 or $100) to the name at the top of the pyramid and to send the same letter to five friends or acquaintances within five days; the promise is that within thirty days you will receive $64 for each $1 ‘investment.’ Pyramid arrangements often involve sharing of commission incomes from the sale of securities or cosmetics or food supplements by those who actually make the sales to those who have recruited them to become sales personnel. The bubble involves the purchase of an asset, usually real estate or a security, not because of the rate of return on the investment but in anticipation that the asset or security can be sold to someone else at an even higher price; the term ‘the greater fool’ has been used to suggest the last buyer was always counting on finding someone else to whom the stock or the condo apartment or the baseball cards could be sold. The term mania describes the frenzied pattern of purchases, often an increase in prices accompanied by an increase in trading volumes; indi￾viduals are eager to buy before the prices increase further. The term bub￾ble suggests that when the prices stop increasing, they are likely—indeed almost certain—to decline. Chain letters and pyramid schemes rarely have macroeconomic conse￾quences, but rather involve isolated segments of the economy and involve the redistribution of income from the late-comers to those who were in early. Asset price bubbles have often been associated with economic eu￾phoria and increases in both business and household spending because the futures are so much brighter, at least until the bubble pops. Virtually every mania is associated with a robust economic expansion, but only a few economic expansions are associated with a mania. Still the association between manias and economic expansions is sufficiently frequent and sufficiently uniform to merit renewed study