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Read other letters about this article
Andrew Leonard, I expect better from you. I read your column on a regular basis because you have a gift for clarifying a complex issue that keeps the essential underlying structure intact.
Your betting metaphor, however, is otiose. Betting is considered by some to be a distasteful activity, and it serves no direct purpose for the players or teams in the competition. Barry Bonds is not made stronger, faster, or more accurate because I bet my mother a twenty on the date of his record-breaking home run.
Investing is, on the other hand, a huge part of why we are economically successful as a country. The purchase of treasury bonds is an act of economic patriotism, and corporate IPOs and bonds directly fund their economic activity - the influx of cash allows a company to fund a startup, expand to new sectors or buy out a weaker competitor.
There is no industrial revolution without the concept of distributed ownership. And the distribution of risk is the foundation of pension funds, social security, health care, and any other version of insurance. The principal actors in your morality play are not unscrupulous people that have base gambling addictions; they are institutions that exist to pay for your bypass surgery, send your child to college, and rebuild your house after a flood.
In your haste, you missed what I think is an important facet of this panic. There are a lot of banks and funds left holding billions of dollars in CDOs. There is no standardized market for the sale of these derivatives, so their sale is difficult and decentralized. In the flush of catastrophe, the many current owners are forced to sell a lot of difficult-to-sell CDOs into a declining market. This, to quote The Economist is the fastest way to lose money yet invented.
The real panic is that no one knows what the CDOs are really worth, but the panic will undoubtedly overshoot the bottom of this market and there will be a lot of money made by buying them back.
