|SUPPOSE SOMEBODY wants to make a bet with me that the San Francisco 49ers will win
the next two Super Bowls. He gives me $100 today, and I have to give him $100
million in case he's right. The chances of this happening are very small, but just
in case the impossible happens I want some backup. I buy insurance for my next-door
neighbor. I offer to give him a nickel every week in return for his promise to
cover my bet.
My neighbor sees that he has a good thing going -- getting money for nothing. After
a while he takes on more and more bets until others follow in his footsteps. Soon,
a market develops. In effect, people can bet on bets. Eventually, the total
potential amount of money builds up into the billions and trillions of dollars.
Unexpectedly, the San Francisco 49ers win two Super Bowls in a row. My neighbor
does not have $100 million on hand to cover my loss. The nickels I have been giving
him have been wasted. I don't have $100 million either.
Suddenly everybody in the market is worried about people's ability to back up their
bets. The Federal Reserve steps in and takes over the market. The free world is