The story of notorious speed-limit-violater and gambler-with-other-people’s-money Jon Corzine should remind us all of the problem with asymmetrical bets.
Corzine’s behavior has been linked to the idea of “too big to fail” (see link above)—-and I agree these can make things worse—-but I think the fundamental problem would arise even in a world without bailouts. The fundamental problem seems to be that the laws put people like Corzine in a heads-I-win, tails-you-lose situation. If he makes his bet, he wins billions, but if he loses his bet, he doesn’t have to pay billions. Sure, he lost his reputation, but he’s not having to pay billions of dollars back to people.
None of this is new but it’s worth keeping on the front burner, given that it happens over and over again (with or without government bailouts).