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View Diary: Krugman's numbers - a second try *UPDATED (65 comments)

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  •  Those positions aren't contradictory (1+ / 0-)
    Recommended by:
    maxzj05

    it will not do what it is supposed to do and yet some people will make a killing off it nevertheless.  If you need an example, consider the Iraq War.

    Victory rests on your finger! Phonebank NY-20!

    by Seneca Doane on Sun Mar 29, 2009 at 05:42:09 PM PDT

    [ Parent ]

    •  there is no way for the investors to make a lot (1+ / 0-)
      Recommended by:
      soms

      without the Treasury earning a lot.

      •  That is not correct. (2+ / 0-)
        Recommended by:
        Seneca Doane, Justanothernyer

        When the treasury is prepared to absorb all losses, it could lose money while the investors make a profit.

        •  how could that happen (2+ / 0-)
          Recommended by:
          Mother of Zeus, soms

          I don't think you understand the scheme. Even Krugman does not try to show investors making a profit while Feds lose.
          His argument is break even while feds lose.

          •  There are two (2+ / 0-)
            Recommended by:
            Richard Lyon, Seneca Doane

            "assets" (these assets can be pools of mortgages, pools of CDOs, pools of CDO squared, pools of MBS or whatever else).

            Asset A is bought for $100, with $85 of non-recourse debt, $7.50 from the Treasury and $7.5 from private investor.

            Asset B is bought for $100 with $85 of non-recourse debt, $7.50 from the Treasury and $7.5 from private investor.

            Asset A is worthless.   Asset B is worth $130.

            Total Gain to Private Investor   $7.5  ($15 profit from asset B and $7.50 loss from asset A) for a 50% return.  

            Total Loss for the Feds ($77.50)  ($15 profit from asset B and $92.50 loss from asset A) for a loss of slightly less than 42%.

            For this to occur, all that needs to happen is that a large proportion of the assets sold are lemons.  

            •  no. some must be 0 and some a lot (0+ / 0-)

              and it must be both impossible to tell which is which and possible to be highly confident in frequencies. Otherwise the investor has no way of calculating whether both might be valueless or, even worse, both  worth exactly $85.

          •  All you have demonstrated is that (1+ / 0-)
            Recommended by:
            Seneca Doane

            there other plausible scenarios than the one Krugman put forward. You are now trying to present your hypothetical arrangement as a certain outcome. You have no valid basis for doing that.

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