HOW A BANK DEFAULT CAN BE DIFFERENT FROM A CHICKEN GAME.

HOW A BANK DEFAULT CAN BE DIFFERENT FROM A CHICKEN GAME. Kids, I posted here and here about how the negotiations about raising the American debt ceiling could be thought of as being like a chicken game, and Dick Weisfelder commented on each post, pointing out some of the complications in even a “simple” chicken game. I realize that the chicken game analogy was too simplified. An important difference is that in a chicken game, each player’s fate is independent of the other. One can go over the cliff without affecting the fate of the other player. A model which fits the budget deficit negotiation better is one where either player can blow up both players if a satisfactory agreement is not reached. This kind of model also applies to a lot of the negotiations over bank bailouts. The bank can threaten to cause great damage to bystanders (other banks, government, the economy…) by blowing itself up. This model fits the Lehman bankruptcy and the Long-Term Capital Management bailout. This kind of threat may also explain why some of the largest banks have continued to be treated with great care by governmental institutions. (Their argument goes that we need to be profitable because we are so vulnerable. If you regulate us too severely, there might be another bank failure.) The model also applies to the threatened Greek default. Greece can threaten to blow up the euro (if you require too many reforms, our citizens and politicians may refuse to implement them….)