Advice from The Strip to Wall Street

Nevadans understand gambling.  We bend over backwards to be hospitable to those who want to push buttons on our machines and enjoy the games on our tables.  We advertise it, we oversee it, and we are pleased to be one of the entertainment centers of the world.  We have large fancy casino resorts, and we have small pub-like local bars with enticing machines.  We support many of our public services from the revenue gaming produces.  However, enjoy it as we do we also know it from living with gaming 24/7/365.   There are two general rules we should share with you.

What happens in Vegas doesn’t necessarily stay in Vegas. No, we won’t advertise what you did — but that doesn’t mean your friends and associates won’t.  If you aren’t certain about this concept please contact Prince Harry’s public relations staff.  So, Wall Street, when your presidential candidate of choice makes disparaging comments about 47% of the country’s population at a donors’ dinner please don’t be surprised when the pictures and sound show up on the Internet.

Don’t gamble what you can’t afford to lose.   Nevada has an entire chapter (458A) in its statutes concerning problem gambling,  additionally we define issues involving people with serious trouble following the simple maxim:  “Problem gambling” means persistent and recurrent maladaptive behavior relating to gambling that causes disruptions in any major area of life, including, without limitation, the psychological, social or vocational areas of life.

Most problem gambling finds it origins in the Gamblers’ Fallacy:  “The Gambler’s Fallacy is committed when a person assumes that a departure from what occurs on average or in the long term will be corrected in the short term.”  There is also an investment oriented version of this definition:

“When an individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events. This line of thinking is incorrect because past events do not change the probability that certain events will occur in the future.”

Why are we reminding you of all this?  Because … the more you believe  you can lose without doing irreparable harm to your economic or vocational life  the less likely you are to play the games responsibly, and the more susceptible you are to the Gamblers’ Fallacy.   There isn’t all that much difference between playing at one of our roulette tables and playing with high stakes bets on derivatives.   Remember — Past events do not change the probability that other events will occur in the future — the next roll on the wheel or the next position taken on oil futures are not fundamentally all that different.

One may be emotional, ” X is my lucky number,” but there’s a reason for those two green slots on the roulette wheel — which create just enough margin for the house to make a profit.  No matter how elegant the algorithms created by the Quants in the investment bank office building, no bet is without risk, even those bets made in the interest of reducing risk.

Perhaps individuals like Nick Leeson, who brought down Barings Bank in 1995, or the collapse of Long Term Capital Management in 1998 [FRBC pdf], or the failure of Lehman Brothers in September 2008, or AIG facing a potential $60 billion loss in early 2009, or more recently the London Whale backwash for JP Morgan — should be a reminder that he or she who adopts the Gamblers’ Fallacy can easily become a “problem gambler” who disrupts major areas of life — like our economic system.

Goosing the Pot? One of the problems with current suggestions that the “Job Creators” be allowed to keep more of their earnings by lowering capital gains taxes and reducing taxes for the top 0.1% of American income earners is that we don’t know whether those funds will be allocated for venture capital and entrepreneurial support — OR — if they will be returned to the Wall Street Casino in the form of esoteric “bets” on the behavior of other investments.

If a bank believes it can bet its funds with impunity, without having a Financial Stability Oversight Council monitoring its behavior, then why not indulge in the kind of “gambling” that created the Credit Meltdown in 2008?  If the Federal government has no power to require the orderly liquidation of banks making too many bad bets, then all that remains is the status quo ante- Dodd Frank Act, and the chaos created as Lehman Brothers and other investment houses almost totally wrecked our financial sector. This is a timely topic because:

“The attorneys general of Michigan, Oklahoma and South Carolina argued that the government’s new power to liquidate large, non-bank financial companies that are on the brink of failure is unconstitutional.” [LATimes]

All three attorneys general are Republicans.  All three are arguing that the Federal government cannot monitor  financial sector behavior, and cannot order the rational liquidation of a troubled investment institution if something like those irresponsible bets in our immediate past go horribly wrong — again.   The only options left are a potentially catastrophic collapse or a — Heaven forefend — a bailout.

Frankly, this is tantamount to hugging the unrehabilitated problem gambler and politely admonishing him “not to do it again.”

At least the state of Nevada is willing to acknowledge that some people have serious gambling problems, that some need oversight and help to deal with their issues, and that some need a firm reminder that they have no business gambling money they cannot afford to lose.

The question remains: When will the Republican Party acknowledge the insufficiency of voluntary oversight of financial institutions entirely too prone to sail close to the winds of the Gamblers’ Fallacy, and admit that the Wall Street Casino requires the same level of diligence Nevada exercises over “problem gambling?”

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