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The crisis explained

By one RDF:

Joe goes to the track and bets $2 on a horse.

Two guys standing nearby get into a discussion and Fred says to Sam, "I'll bet you $5 that Joe wins his bet."

Next to them are Bill and Bob. Bill says: "I'll bet you $10 that Fred welshes on his bet if he loses."

Next to them is Sally. Sally says: "For $3 I'll guarantee to Bill that if Bob fails to pay off, I'll make good on the bet."

Sally then goes to Mary and borrows the $7 needed in case she has to ever pay off and promises to pay back $8. She doesn't expect to every have to pay since she believes Bob will always make good. So she expects to net $2 no matter what happens to Joe.

A quick calculation indicates that there is now 2+5+10+3+7 = $27 riding on the outcome of the horse race.

Question how much has been "invested" in the horse race?

Wait for it:


$50,000 by the owner of the horse who is expecting to recoup his investment from the winnings of the horse and other future deals. Everyone else is gambling, not investing.

So, when Hank Paulson and his golfing buddies go to the track and lose the rent money playing the ponies, we should pay up?

NOTE Readers, if you enjoyed this post, you might also like this post by Shystee on bailout vs. "bust out" (a Sopranos reference).

UPDATE If you call Speaker Pelosi's office at (202) 225-0100, a human answers! That's what I just did at 11:17 PM EDT. So, if you want to share your views on the bailout, be polite!

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Submitted by hipparchia on

and betting on the ponies, now that's a concrete example i can relate to. thanks.

badger's picture
Submitted by badger on

and it's not even an analogy - it's exactly how derivitives and credit default swaps work, including none of the gamblers having any financial relationship to the underlying asset (the horse, or mortgages) in a lot of cases.

Damon's picture
Submitted by Damon on

You all keep coming up with brilliant book titles. This blog would be a treasure trove of titles.

Yes, for those of us who are financially illiterate and/or non-savy, this really helps.

splashy9's picture
Submitted by splashy9 on

I finally really really got it, and I am not too slow (most of the time).

More people should see this. Bet they would get it then.

Well done!

warren mosler's picture
Submitted by warren mosler on

And don't forget the 50,000 'invested' is also just a financial gamble!

At least if it was invested in, say, a bridge and the bets were whether it would fall down or not we'd at least have a bridge at the end of the day.

My proposals are to limit what public entities can do to public purpose.

So pension funds (the 'shark food' that feeds wall st.) that use tax advantaged funds need to be limited by public purpose the same way banks do, who also use public funds (fdic insured deposits).

As for financial regulation of the private sector, I'd turn it over to a federal gaming commission that included all regulated gambling and close down the SEC.

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