Doubling Up on Losses With Taxpayer Dollars

Many novice gamblers who play roulette or other similar casino games at some point in their careers usually conjure up the following simple strategy: Bet $5 on red, if I lose I will double the bet to $10, if I lose that I will bet $20, and so on. Eventually red is bound to hit and then it's payday. This type of strategy known as the Martingale betting system, which was popular in pre-industrial Europe, works by simply doubling the last bet after every lose. Needless to say, the strategy is not very successful even at a fair odds game, which most casino games are anything but. Players who choose to employ such as a strategy on the roulette wheel will at some point be faced with a long streak of black and not be able to post the increasingly large bets.

Stock market investors have a similar strategy known as averaging down. Buy a stock at $50 and wait for it to go up. If it goes to $25 double your investment so that you're breakeven at $37.5. If the stock goes down to $12.5, double the investment again so the breakeven point is at $25. The obvious Achilles Heel of this strategy is that the stock might never go up and any subsequent drop in the stock price will cause catastrophic losses for the investor. Such strategies often bankrupt amateur investors. However, we might expect more from professionals working on our government's economic policies.

We might, but we shouldn't. It should be apparent to anyone who has been following our government's recent bailout policies that Martingale's system is alive and well in 21st century America. The loans given to AIG are a classic example. On September 16, 2008, the federal government loaned the failing AIG $85 billion. Unfortunately that wasn't enough and in October the government gave AIG an additional $37.5 billion. All these loans are backed by AIG's assets, the value of which has likely gone down since the loan dates.

The government has followed the same strategy with other financial firms. Mortgage backed securities not performing too well? No problem, the government will buy them all the way down, at the same time telling us that taxpayers will make money when the securities eventually recover. Bank stocks in freefall? Perfect. The treasury will buy them to prop up the stock market and help banks recover. But what if they don't? Will the treasury keep on doubling down till these stocks hit zero?

Now the automakers want $14 billion for their own bailout. Does anybody in their right mind expect that $14 billion will be enough to solve their troubles? The $14 billion is just the first bet to get the taxpayer in to the game. Once this first bet is made and most likely lost, the automakers will expect us to double down with bailout after bailout in order to save an industry we would already have so much invested in. In roulette, after betting on red, the player would have to bet $640 after losing seven times in order to win back the original $5 - that's 128 times his original bet. I'll let you do your own calculations with the bailout.

Comments

[herbert hoover:]

Hey, it may be rigged but at least we're in the game!

2008 Dec 14 08:58 AM

[axelrod608:]

Better yet, starting with Q3 2008, go back and add up all P&L until you get to $14B. You want that $14B paid back WHEN ?? Ain't gonna happen. EVER.

2008 Dec 15 02:00 PM