My Attempts to Stop the Stampede
By Arnold Kling
Hear I am on the radio. I start at about minute 5:30. There is a little back and forth including other guests before they finish with me near the end.
Late this afternoon, Bill Niskanen of Cato and I met with Congresswoman Mary Bono Mack (R, Ca.). It was therapeutic for me, even if the train has left the station. I made the case against the bailout. She asked about the Hold to Maturity idea, where the theory is that while these securities are illiquid if we just hold them to maturity we will be fine.
I responded that the securities are like cities in the Gulf Coast with Hurricane Ike coming, before they know where it will make landfall. Hold to maturity is like refusing to evacuate. It might not land on you, in which case you’re fine. On the other hand, you could be Galveston.
Along these lines, I am not sure what to do with Bryan’s bet. The following could both be true:
1. The probability that the bailout earns a profit is greater than 50-50.
2. The expected value (meaning the mathematical expectation) of the bailout is very negative.
For example assume that there are three equally-probable scenarios. In scenarios 1 and 2, you win $1. In scenario 3 you lose $1 million. If that is the distribution, you might want to bet that the plan makes a profit, because you have a 2 out of three chance of winning. But you still would not invest your own money in the plan.
Bryan and I are here, along with a bunch of other economists polled by Reason Magazine.