Re: [Pen-l] Why AIG Must Be Bailed Out

["Jim Devine" <jdevine03@xxxxxxxxx>]

Michael, are you too big to fail?

On Tue, Sep 16, 2008 at 10:23 PM, Michael Perelman
<michael@xxxxxxxxxxxxxxxxx> wrote:
> Suppose somebody wants to make a bet with me that the San Francisco 49ers will win
> the next two Super Bowls.  He gives me $100 today, and I have to give him $100
> million in case he's right. The chances of this happening are very small, but just
> in case the impossible happens I want some backup. I buy insurance from my next-door
> neighbor.  I offer to give him a nickel every week in return for his promise to
> cover my bet.
>
> My neighbor sees that he has a good thing going -- getting money for nothing.  After
> a while he takes on more and more bets until others follow in his footsteps.  Soon,
> a market develops.  In effect, people can bet on bets. Eventually, the total
> potential amount of money builds up into the billions and trillions of dollars.
>
> Unexpectedly, the San Francisco 49ers win two Super Bowls in a row.  My neighbor
> does not have $100 million on hand to cover my loss.  The nickels I have been giving
> him have been wasted. I don't have $100 million either.
>
> Suddenly everybody in the market is worried about people's ability to back up their
> bets. The Federal Reserve steps in and takes over the market.  The free world is
> saved.
>  --
> Michael Perelman Economics Department California State University Chico, CA 95929
>
> Tel. 530-898-5321
> E-Mail michael at ecst.csuchico.edu
> michaelperelman.wordpress.com
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-- 
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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