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Posted at 2:18 PM ET, 12/15/2010

The 'Walking Dead' theory of financial markets

By Ezra Klein

walkingdead.JPG

Mike Konczal argues that when you're betting against very unlikely events, as many in the financial market do, you're doing something that's closer to buying insurance than any other activity. And that has implications. Undead implications:

There’s good reason we regulate insurance – it needs to pay out exactly at the moment when it is the least likely to get paid. I wrote a post for the Atlantic Business section that asked how should you think of zombie insurance? How would you price a contract that paid $100 if the world turned into The Walking Dead, where cities were overrun with zombie hoards?

The short answer is that you wouldn’t pay anything, since when you need to collect it the person on the other end is probably a zombie. This “who can credibly commit to backstopping bad events” goes towards a notion of the roll the government can play in financial markets.

Photo credit: AMC/AP.

By Ezra Klein  | December 15, 2010; 2:18 PM ET
 
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Comments

Cute Freudian slip: "the ROLL the government plays"? I believe role was intended, though the "roll of the dice" undertone isn't entirely misplaced.

Posted by: JJenkins2 | December 15, 2010 2:41 PM | Report abuse

You mean you are "selling insurance", not buying. Which is an incredibly profitable business model when you (A) have no plans or means to make payouts, should the worst happen, and (B) there are no regulators preventing you from running your business this way.

I'd love to sell discount earthquake insurance in California. If anyone looks at my books and notes 0 corporate assets to cover anything, I could point out that I'm reinsured up to $100 trillion (purchased from my brother). Pay myself a $10,000,000 salary. Not my fault if things go bad and my brother isn't good for it.

Posted by: eggnogfool | December 15, 2010 3:03 PM | Report abuse

No Freudian slip...Konczal just needs more work
on his homonyms, or an editor. In all likelihood, for example, he probably meant to refer to "zombie HORDES."

Posted by: themugster | December 15, 2010 3:14 PM | Report abuse

Absolutely marvelous typo (???). the government's "role" is to "roll".

Posted by: Ken36 | December 15, 2010 3:46 PM | Report abuse

'zombie hoards' isn't an inaccurate phrase in a world where unmanned computers use algorithms to make investment decisions with billion dollar asset pools.

Posted by: eggnogfool | December 15, 2010 4:01 PM | Report abuse

...in order to overrun cities?

Posted by: themugster | December 15, 2010 6:36 PM | Report abuse

...in order to overrun cities?

Posted by: themugster | December 15, 2010 7:31 PM | Report abuse

This is the very reason that insurance companies got seriously regulated in the first place. Those who do not learn from history will be forced to support the lavish lifestyles of those who do.

Posted by: paul314 | December 16, 2010 9:29 AM | Report abuse

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