Bryan Caplan  

I Don't Want to Be a Paul Ehrlich

Political Put-Down of the Year... Canadian Caplania...

I've figured out a way to operationalize a bail-out bet. Method: In five years, the government itself is supposed to publicly announce whether the bail-out lost money. I propose to use the government's self-assessment in five years to adjudicate the bet. As Newsday explains:

If after five years the Treasury Department has lost money in its program to buy and resell the mortgage-backed securities, Congress and the next president will develop a program to recoup its losses from participating companies.
I'm not holding my breath about "recouping," but if the bill passes, the government will have to say whether it lost money. (Notice: The bill carefully times the assessment to come after the next election. How clever is that?) And while I expect some fishy accounting, I don't think it will be enough to turn a loss into a gain. So I'm tentatively willing to bet at even odds that, in five years, the government will say it lost money.

But first: I don't want to be a Paul Ehrlich. So you tell me: Would I be walking right into a sucker bet of my own making?

Your comments will have a big influence on my decision, so vote early and often. :-)

Comments and Sharing

COMMENTS (7 to date)
Alex J. writes:

I expect something like this: The government will spend 700G$ purchasing assets. Later the government will spend 300G$ more supporting the bailout plan, but will label it as something else or as "off budget". The government will over time sell its purchased assets for 800G$. It will then claim to have made a 100G$ profit.

OneEyedMan writes:

Do you think that the government measure will include the cost of funds?

Jason writes:

I think it may be a suckers bet. Just some quick points:

Some of these distressed securities are trading at 17 to 20 cents on the dollar. That's right down at bankruptcy levels. Lets say he buys the stuff at 50 cents on the dollar. Now, not only can the Treasury rewrite the rules of "default", keeping these securities alive, they can also pump tons of money into the economy. More importantly, 50% loss rates with 0 recovery would be pretty apocalyptic by any measure. If the problem is (as the Fed seems to be guessing) a liquidity problem, then just holding onto these suckers for a couple of years and selling them back out would net them a profit.

Depending on the asset managers they hire, they would have to work hard at losing money.

cvd writes:

Given the government's normal methods of accounting, I think you'd be a fool to make a bet that would depend on reliable and meaningful numbers that stem from government accounting. I guarantee they'll show a profit, though we may have no idea how.

Sam writes:

Color me cynical, but I think you're betting on a sure thing. In five years, will Congress and the President want to develop a new program to "recoup its losses"? The answer is surely, "Yes".

So the President will direct the Treasury Secretary to report a loss.

jsalvati writes:

If this is something that can be mechanized relatively easy, can someone set up an intrade contract?

michael e sullivan writes:

definitely a sucker bet.

Are we sure that the government measure will account for all costs? Will it account for inflation?

I can imagine many scenarios whereby you would win this bet under any *reasonable* measure, but lose it under many possible measures typical of political reporting.

Treasury invests $700Bil. Treasury prints a pile of money, inflation flirts with double digits for a few years. Government sells securities for $800bil, declares $100B profit, while real return was actually negative. 5 years is a long time for games like this to make a giant difference.

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