Tuesday, March 24, 2020

The Gambler at 1600 Pennsylvania Avenue NW

Donald Trump's ostensible bid to have the country reopen by Easter makes perfect sense. If you're familiar with what bankruptcy does to incentives.

A bankrupt firm has an incentive to take the riskiest gamble possible.

It already owes people more than it can pay. That's what being bankrupt means.

So if the gamble goes badly, it owes even more than it can pay. Nothing changes.

But if it wins, and wins big, it gets to pay all those pesky creditors off -- preferably when they've already agreed to take less -- and the firm is suddenly liquid again and keeps all the excess.

It's why countries generally try not have bankrupt firms hang around too long. The payoffs, as Nassim Taleb might say, are yuuugely convex, and that's often not a good thing.

Especially when we the people are the roulette wheel. 

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