Color me confused, but I’ve never really understood the difference between a bet and “financial trade.” And if there ever really was a line, it’s definitely becoming blurrier.
In recent months, there have been millions of dollars bet in options markets, as traders seek a big payday in the event that the economy heads south — and this hasn’t raised an eyebrow. But when an Aussie bookie began offering bets on whether the Australian economy is headed for recession, he stirred up a bit of strife.
Federal Treasurer Wayne Swan called the bookie’s actions “utterly irresponsible.”
The contrast between the Treasurer’s response to financial trades and bookies’ bets provides a nice example of how people respond differently, depending on how a bet is framed. One is modern finance, while the other is a repugnant market. Both, of course, are simply state-contingent contracts.
But I’m also confused for another reason. The Aussie economy is now a strong odds-on favorite to slide into recession. In fact, if you are betting on a recession, you would have to bet $5 just to stand a chance to win $1. But after its recent interest rate adjustments, the Reserve Bank of Australia declared that the “size of the response to date was judged to be such that a period of assessment of local and overseas events was warranted over the summer.” That’s antipodean boffin-speak for: there’s no more interest-rate cuts to come for at least a couple of months.
Put the facts together: Despite a near-certain recession, the Aussies are leaving interest rates at 4.25 percent. Are the reserve bankers content to stand by as the recession wreaks havoc, or are they simply confident that they are smarter than the punters? Either way, I’m worried.
By the way, a few years back, Refet Gurkaynak and I studied a related betting financial market run in the U.S., and we found that its economic forecasts were typically more accurate than the consensus drawn from expert economists.
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So, what is the difference between a bet and a call option? Whether the guy making it wears a tie and whether the bookie sits in a corner office?
It is a scam of sorts. The “authorized” players can take and make bets, as well as make money from the commisions being paid to make the bets. But the “unauthorized” players are nothing but low-life gamblers, to hear some say.
The truth is that if everyone was indeed playing fair–that is, bets were kept and honored, etc.–it’s the same thing! Oh, except maybe the government doesn’t get as big a cut, or big business doesn’t, etc.
Further, the barriers to become a “legitimate” business involved in the stock/commodities market is so high that only the elite can get in, even though they are doing nothing very different than saying, “You want to place a bet that the Colts will beat the Bucs?”
If anyone wants to fund me for a new stock exchange that would make about what the current one makes…look me up at jackriverboy@yahoo.com
Australia has the problem that their ability to lower their interest rates is limited by how far their currency has fallen in recent months.
You bet with your own money and you call options with your client’s?
I think this is kind of the situation Michael Moore was dreaming of when he described “White Collar Cops”.
The question, however… is money placed on a call option (or a put) “invested” into the economy, or held privately? In the case of bookie, the money might as well be sitting under the mattress until it’s time to pay up (or not), and even then, might not be injected into the economy once collected.
I think that may be the important difference.
My friend recently mentioned that in most economic downturns there are still ways to make money (selling short for example). However, he realized that he could not find a way to make money if the entire global financial system collapsed using normal market instruments. I suggested he try a bookie and make a bet with basic foodstuffs instead of currency.
To your last paragraph, perhaps in the mind of the economists there is a hidden sense of consciousness or even guilt at laying down the bare truth (“Head for the hills!”) for fear that their intervention might accelerate something they personally see as inevitable. Similar to the doctor telling the terminal patient “It’s going to be alright”. Economists are also human and subject to Social proof pressures – outlying opinions are more likely to be inappropiate thogughts than whatever is mainstream at the time. This is also a communications stream so the view that media wants to portray plays a part – and needless to say can be manipulated by shifting the opinion of socially influential economists and pressing on that wonderful social proof button.
I can see a regulator’s POV: a financial firm has a license to trade futures, etc. and it would not be good if anyone could start issuing securities – which is what a bet on the economy becomes.
I’m not sure the logic strictly applies, though, because the bet offered here is a literal short on the economy, not on say an index or other tradable financial instrument. It may create a security, which is a problem, but I doubt this is a currently existing security.