Allen Stanford gets kicked around, but Bernie Madoff can clearly throw down some serious smack. While the former's being moved from one facility to another because he's lost some ground on the cell block, Madoff just earned himself some props.

The engineer of the largest (known) Ponzi scheme in history apparently got into an argument with another geriatric inmate at the Butner, North Carolina federal prison. Of course, it was over the stock market. Does it really make sense to outmaneuver a guy who never needed to know what the market was doing to deliver double-digit returns?

Well, push came to shove, as they say, with the "attacker" stumbling and looking up at a mean, mean Madoff. He got up and ran off.

As the severity of the problems in the housing mortgage market become clearer each day, it's interesting to ask how such a mess could have developed in the first place. How could so many bad loans have been made? Some commentators blame Alan Greenspan and easy money from the Fed, while others focus on the irresponsibility of borrowers. Some even blame the software used by banks to make the loans.

An economist named Hyman Minsky provides a more compelling interpretation. In his view, finance plays an important role in the dynamics of the business cycle, which inevitably ends in a financial crisis. Minsky argued that there are three kinds of finance. Hedge finance is basically conservative, and seeks to protect capital from losses in currency exchange. The second type is speculative finance, which places bets on payoffs from future production. Borrowing money to build a factory is a good example. The third kind of finance Minsky called Ponzi, after the great swindler Charles Ponzi. This kind of finance occurs at the end of the business cycle and is an intentional effort to make money from investors who will never be repaid. Those providing financing know perfectly well that they are making bad loans. They simply hope to make some short term profits and get out before the whole thing collapses. As Louis XV (and Karl Marx) famously remarked, Après moi, le deluge.

The disaster at NovaStar Financial (NYSE: NFI) may provide a good illustration of Minsk'y theory. Back in December, BloggingStocks' Peter Cohan analyzed the problems at NovaStar. He advised investors to short the stock due to obvious problems, and those of you who followed his advice are no doubt pretty happy right now, as the stick has fallen from the $30s to below $5.

Yesterday's New York Times provides more data on NovaStar, with examples of borrowers who ended up with higher loan payments than they expected. The borrowers are now suing NovaStar, claiming they were intentionally misled. The courts will have to settle this one. But Minsky's theory of Ponzi finance suggests that we should not surprised to find financial firms knowingly making bad loans as we head toward the end of the current business cycle.