How Stupid Do You Think We Are?

Imagine you have a cousin, Merrill, whose idea of an investment strategy is to go to the track with $100 of his own money and then borrow another $10,000 so he can bet on a horse called Five-Year ARM in the third race.

The horse finishes out of the money and your cousin's mortgage payment is due tomorrow.  So he goes to collect a $10,000 debt from your other cousin, Bear, who unfortunately is coming out of a casino where he just left his last $100 plus another borrowed $10,000 on the blackjack table. 

Bear's car payments are due, along with the first installment on yet another gambling loan.   So they both go to your third cousin, Morgan the bookie.   But along with earning an honest living he's made bad bets every NFL Sunday and owes his brothers about $10 grand each plus the next guy up on the bookmaking ladder a lot more than that.  And this guy is calling your cousin Morgan on his cell phone as we speak.

Your cousins realize that there is no money left to borrow, so it's time to beg and steal.   Merrill and Bear and Morgan march to your Dad's house.  They tell their Uncle Sam that unless he takes on their debts that his nephews and grandnephews and grandnieces will all die or be killed, that the family as he knows it will collapse.

Your Dad says, "Sure, boys.  Let me talk to my boy John Q."

Your Dad calls and says, "You need to bail out your cousins."

"Why, Dad?  Did some tragedy befall them, some hundred-year financial flood?  Was there a quantum exception to the laws of risk-reward or supply-demand?  Were they true and just in their actions but fell upon unforeseeable hard times?"

"No, son.  They just thought they had a chance to get a lot of something for next to nothing and now they're broke without anything even a pawnbroker would want." 

" Not sure I can do that, but I'd like to help.  What do they have as collateral?"

"Nothing."

"They don't have any assets?"

"Yeah, but there's no way of knowing if they're worth anything."

"Sounding better all the time, Dad.  Well at least I might be able to buy cheap and make a profit if things turn for the better."

"Not exactly.  They want to value them on the high end if you're going to pay them off, and then if there's a market for them later they want to keep the proceeds."

"So you're saying that if their assets are worthless I should pay them and if they are worth something I should pay them.  And they keep the assets.  I'll just take responsibility for them and they'll collect the dough."

"Yes."

Would you say A.) Sure, Dad.  It's only fair and there but for the grace of God and a few brain cells, a conscience and a bottomless margin account go I.   Or B.)  Um, no.  Blood may be thicker than water but it ain't dumber.

Your government is hoping you'll go with A.   Oh, and they expect that you're ok with adding six to twelve zeroes to the end of those numbers.