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Betting markets in everything
Will Congress approve a bail-out package for banks before September 30? Right now the contract is selling at about 79, which usually translates roughly into a 79 percent chance of approval.
Note however that the marginal utility of money here does differ across worldstates. Assume that the marginal utility of money is higher (people are poorer) with no bail-out. That makes some people want to bet against the bail-out as a form of insurance, thereby raising the price of the "no bail-out" contract. (Addendum: that was bad phrasing -- no one has to intend insurance as long as the MUs of money differ across the world-states.) In other words, the real implied chance of a bail-out is higher than 79 percent.
Posted by Tyler Cowen on September 24, 2008 at 09:47 PM in Current Affairs | Permalink
Comments
Assuming x is true is different from x being true. You're correct, one could take that strategy. But just because it could be used as insurance, doesn't mean it is.
Posted by: Martin at Sep 24, 2008 10:17:49 PM
Assume (?) people are poorer without bailout. Why not assume people are richer without bailout?
David
Posted by: David R. Henderson at Sep 24, 2008 10:17:57 PM
I'd love to see that pricing kernel.
Posted by: OneEyedMan at Sep 24, 2008 10:38:17 PM
This bail-out has a touchy subject with the presidential candidates. The past week has been nothing but chaos in the financial market. Congress is expected to make a decision within the next few days to figure out how to fix this crisis. Both the Federal Reserve Chairman and the Tresury secertary have attempted to get congress to go ahead with the bailout. The odds look like the congress will go ahead with the bailout. If they don't who knows how worse things can get, all we can do is hope they do the right thing.
Posted by: Danny at Sep 24, 2008 11:02:16 PM
Congress doing the right thing is off the table. Isn't no bail outs part of the GOP platform? I want my tax dollars (and the dollar itself) to be kept safe. No bail out, let's take our recession (depression?) like men, and rebuild.
Of course that will never happen. Bernanke is trying to force a bail out by sucking liquidity out of the markets and causing more banks to suffer. I would like to see Bernanke and Paulson removed from their posts. Of course, that won't happen either.
What will happen is that the American taxpayer will transfer what little remians of their wealth to the people who bet on the credit default swaps.
Sucks to be a citizen these days.
Posted by: Seth Burn at Sep 25, 2008 12:28:36 AM
I'm guessing the only place where people hedge their exposure to the bailout in the betting markets is in theory. It would be like betting against your favorite team to win or shorting a REIT to hedge your home's exposure.
Posted by: MM at Sep 25, 2008 12:52:22 AM
Seeing as how it seems only within the past few days, Congress et. al. have finally
understood it is indeed one hell of a slow-motion train wreck, they will get off their
collective brains and pass a (perhaps not the) bill. So, yes.
Posted by: glenn at Sep 25, 2008 3:41:01 AM
If the Barney Frank dream of "we're now the biggest mortgage holder in town" comes to fruition, what are the implications for eminent domain? How does it impact the urban/rural political divide?
Posted by: rluser at Sep 25, 2008 4:44:57 AM
Anybody who can insure against his exposure to the crisis by betting on Intrade will not have any inside info.
Unless he's a janitor in the Treasury etc.
Posted by: J Thomas at Sep 25, 2008 6:29:23 AM
My solution to the financial crisis.
Normally, I don't like the government undertaking production of pretty much anything. I've been reading the Paulson and Dodd plans, and I dislike them. The moral hazard and obtuse generalization at this point does not inspire a lot of confidence. The bottom line is: the Fed is trying to recapitalize the major lending institutions in an effort to shore up liquidity and keep credit flowing to borrowers that would qualify under more normal credit circumstances. Instead of having the Fed bail out lending institutions that are not any good at lending (look at this mess) why not set up an in-term federal lending institution that will lend to the people we are worried will not get loans, but that would otherwise qualify. These would be "good" loans - in the sense that they would not cost the taxpayer much, if anything at all - given the rating of the potential borrowers. The nasty soup of finance would probably implode with banks unable to roll over their liabilities, but so what? The people who need credit will be getting it, the government can resell the loans because they will be "clean" loans and we will probably see some more reasonably capitalized private banks that were not embroiled in the mess start buying up these loans, and eventually making their own loans under similar conditions - at which point the fed can shut down this institution. Maybe it would be way too complex to set this sort of thing up, but since they now own Freddie and Fannie, why not use them as the shell?
I'm probably way out in left field?
Posted by: Hannes at Sep 25, 2008 6:36:31 AM
I love the smell of Arrow-Debreu securities in the morning.
Posted by: Robert Bell at Sep 25, 2008 8:57:58 AM
Will Congress approve a bail-out package for banks before September 30? Right now the contract is selling at about 79, which usually translates roughly into a 79 percent chance of approval.
Isn't that only in the risk neutral measure? In the real world measure, the probability could be different.
Posted by: Corporate Serf at Sep 25, 2008 9:22:27 AM
not really true, the amount you can bet on intrade is too small to hedge anything that matters
Posted by: pnj at Sep 25, 2008 9:38:20 AM
I would like to see a betting contract on whether the bailout will be profitable for US taxpayers. Some politicians and others have dangled the possibility that the bailout could actually make money if the price of the assets rises enough. It would be interesting to see how many people would actually put money on that proposition, of if it's just a useful fantasy to help sell the bailout to the public.
Posted by: a at Sep 25, 2008 4:34:22 PM
