Recent Blog Posts
-
The Times' Rorshach Geithner Story
Apr 27 20099:04am EDT -
Sinking Animal Spirits
Apr 27 20098:04am EDT -
Counter-cyclical Urban Policy
Apr 26 200910:04am EDT -
Be Your Own Counterfeiter
Apr 26 20099:04am EDT -
Being Tim Geithner
Apr 25 200912:04pm EDT -
Notes From a Press Conference Naif
Apr 25 20099:04am EDT -
What Good is the News?
Apr 25 20098:04am EDT -
Stressful Enough
Apr 24 20092:04pm EDT -
Not Regretting the Pound
Apr 24 20091:04pm EDT -
Introducing the New Ford Squeeze
Apr 24 20099:04am EDT -
Non-Economic Questions of the Day
Apr 24 20099:04am EDT -
The Stress Test Blind Alley
Apr 24 20098:04am EDT -
Happy Hour
Apr 23 20099:04pm EDT -
Recovery Without Rebalancing
Apr 23 20096:04pm EDT -
The Shape of Your Recession
Apr 23 20095:04pm EDT
Links
- Felix Salmon
- DealBreaker
- Ryan Avent: The Bellows
- The Epicurean Dealmaker
- Chris Anderson
- Ultimi Barbarorum
- MarketBeat
- Michelle Leder
- John Quiggin
- The Panelist
- Andrew Leonard
- Streetsblog
- Brad Setser
- Michael Mandel
- Financial Crookery
- Kash Mansori
- Dean Baker
- Calculated Risk
- Free Exchange
- Curbed
- Lance Knobel
- Econospeak
- Carbon Tax Center
- Overcoming Bias
- Mark Thoma
- Naked Capitalism
- Alphaville
- Barry Ritholtz
- Alexander Campbell
- The Bayesian Heresy
- Brad DeLong
- DealBook
- Greg Mankiw
- Deal Journal
- FP Passport
- Carl Bialik
- Marginal Revolution
- A Fistful of Euros
- Dan Gross
The Frannie Bailout and the Prisoner's Dilemma
John Hempton has an interesting take on the Frannie bailout: the markets forced Treasury to take this step by being irrational. It's almost as though there was some kind of collusion going on.
Remember the prisoner's dilemma? Given the choice between action A and action B, action B is always preferable from an individual's perspective, holding everybody else's actions constant. But if everybody chooses action A, then that's the best result of all. Here, action A is refusing to buy agency bonds at wide spreads, while action B is believing in the government guarantee and buying them. And in this case, the prisoners didn't confess.
The bond investors kept agency spreads wide, thereby forcing a government intervention -- which is an even better outcome, for them, than a government guarantee which can be rescinded at any time. Yes, the government guarantee was real -- but the bond market held out, and got an even better deal. Hempton says he's "staggered" by this -- it does seem to fly in the face of the common conception of how markets work. Which probably says quite a lot about how much we really understand of how markets work.
