Shane: > With "fair" bets winnings and losses exactly offset each other, leaving no > net income > to go into the National Income Accounts no matter how many trillions > flow between the bettors.
This is true, only if the bets are fair. Think about the credit default swaps where both of the counter-parties can transfer the legs they are holding to other parties. Although in theory the price of one leg is the negative of the other, we know from the markets that both parties get paid money, since opinions about the prices of the legs differ. So, income is created out of thin air. Also, think about a mortgage pass-through and create a CMO with several tranches out of it. In the absence of transaction costs, the price of the pass-through should be equal to the sum of the prices of the tranches of the CMO constructed from it since if you buy all of the tranches what you are holding is the pass-through. But we again know that sum of the prices of the CMO tranches is larger than the price of the passthrough, and again income is created out of thin air. The same goes for all of the CDOs. Best, Sabri _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
