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How the financial crisis could’ve been avoided!!

- October 11, 2008

I was being interviewed about election forecasting, and the topic of prediction markets came up. I mentioned Bob Erikson’s observation that one reason that forecasts can outperform markets is that the markets chase the polls, and I gave as an example McCain’s lead in the polls–and in the prediction markets–a few weeks ago. At the time, I didn’t think McCain’s .55 probability in the prediction markets was a correct valuation. Not that I thought Obama was sure to win–I just was giving him a 2/3 probability (again, following Bob Erikson).

I really wish I’d placed $1000 on Obama a few weeks ago, back when McCain was up. Not for the money but for the street cred. Then, whenever someone was interviewing me and I was saying that the markets chase the polls, I could say, Yeah, as a matter of fact, in September 2008 I made money on that . . .

Why didn’t I? I’ve actually never made an online bet, and, for whatever reason, I didn’t think of it at the time (and now it’s too late).

Anyway, that’s all prelude to the main point of this entry, which is how the government could’ve solved the credit crisis last month in one fell swoop. If only the U.S. Treasury had put a trillion dollars on Obama in InTrade last month, they would’ve made enough profit to get the bailout started with no cost to the taxpayer. On the other hand, without the financial crisis, maybe McCain would be doing better right now, and then the Treasury wouldn’t have been able to realize such profits, which then would’ve sparked a credit crisis, but then that would’ve been bad for McCain, but then . . . Uh oh, it’s an infinite regress.