Bryan Caplan  

Getting to Bet

I'm a Media Star... What Warren Buffett Wants...

In the comments, Patri Friedman points out that Barry Ritholtz has already offered a $1M bet that the bail-out loses money. Alas, though I agree with (and even chuckle with) Ritzholtz's conclusion, this is not yet a serious bet. Problems:

1. He names no clear way to measure the bail-out's cost ex post.

2. He doesn't name a time frame.

3. He doesn't give a specific number. Exact wording: "I bet you one million dollars, to the charity of the winner's choice, that the current plan is ginormous money loser." Ginormous is not a number.

4. Paradoxically, a million dollars is too big for a serious bet! Virtually no one could seriously accept; and even if they did accept, how do you propose to collect a million-dollar payment on a transaction that is, technically speaking, illegal? For a few hundred to a few thousand dollars, public humiliation is enough to make an established pundit pay up. But almost anyone would try to weasel out of a million-dollar bet. For practical purposes, a $1M is about as helpful as offering to to bet a "ginormous sum."

If I've missed subsequent refinements of this bet, I apologize. But at least as far as I can tell, we still need to hammer out a serious bet on a bail-out. If someone can suggest a neutral way to measure how much the bail-out recoups in the next ten years, I'd like to hear it ASAP.

Comments and Sharing

COMMENTS (7 to date)
steve Hsu writes:

How about a simpler bet? Are you or Arnold or Ritholtz willing to bet against Warren Buffet and others (like Paulson and Bernanke) who claim that mortgage assets are currently undervalued by around 20% relative to hold-to-maturity value?

"Mr. Bernanke distinguished between, on the one hand, “fire sale prices,” the ones that prevail “when you sell into an illiquid market” and, on the other, the prices that holders think the assets are really worth, sometimes described as “fundamental” values or “hold-to-maturity” value."

Buffet: "...if they do it right, and I think they will do it reasonably right, they won't do it perfectly right, I think they'll make a lot of money. ...They should buy them at the kind of prices that are available in the market. People who are buying these instruments in the market are expecting to make 15 to 20 percent "

Randy writes:

Unless this legislation fails, and a failure appears unlikely, the idea that the entire economy is a "public good" is reinforced. A "win", therefore, isn't possible. Not for those who value freedom.

Walt French writes:
...I'd like to hear it ASAP

Allow me to offer a straw man...
Note that this is for purposes of a bet, not public policy, so arbitrary terms are less offensive. And the whole starting point is our Administration's claim that ordinary markets are not working, so I claim a free pass on only loose links to market rates.

Since this is essentially an equity investment, it should be discounted somewhere around the risk level an equity investor would. Certainly, we hope that there will be cash flows before T=10. Those flows should be discounted at oh, 12% over the a nominal 10-year T-Bill of 4%, or 16%.

Why a 12% equity premium? Equity investments in Financials currently have a beta somewhere near 2.0 -- damn market thinks they're risky or somethhing, thus double a "normal" equity premium.

Why only 4%? Yes, short-term riskless is now cheaper, due to the very conditions we find ourselves in. But it's a fair bet that 5- or 10-year notes will NOT average below that over the period whenever any of these assets is unloaded, so the higher rate seems warranted.

We'll give the market credit for adequately discounting the probability of the standard solution to financial crises: to inflate the country, bigtime. Let us presume that all other avenues are pushed first, in an attempt to minimize the total cost to the economy. Otherwise, I'd use the CPI+12 as a discount rate.)

Finally, all items still held at T=10 should be treated as worth $0.09 of each original dollar. That's 16% discounted over 10 years, then a 50% haircut -- anything still on the books at that stage must be pretty toxic if the government, which is likely to be hugely in deficit, hasn't sold it off for whatever few pennies it can get.

Is Barry looking to risk-share his bet? Can I get in, even with a personal payout of only a moral victory vs a forced tax deduction?

gilead writes:

The bet can be recorded at

stubydoo writes:

After I won a schoolyard bet for a quadrillion dollars, the loser weaselled out of it by saying there's no such number as a quadrillion.

Steve Roth writes:

We can just use "google for government"!

Oh, but _wait_:

...the federal budget would not record the gross cash disbursements for purchases of troubled assets (or cash receipts for their eventual sale), but instead would reflect the estimated net cost to the government of such purchases (broadly speaking, the purchase cost minus the present value, adjusted for market risk, of any estimated future earnings from holding those assets and the proceeds from the eventual sale of them).
Barry Ritholtz writes:

Ginormous isn't precise? ; )

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