Econopoly

By Tim Harford
Sunday, October 19, 2008

Comparisons between today’s financial crisis and the 1930s are looking less strained by the day. So what better to lighten the tension than to revive everybody’s favourite Depression-era board game, Monopoly?

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SOURCES: RealtyTrac, Standard & Poor's, The Economist, The Financial Times, International Monetary Fund, Bank for International Settlements

Three reasons why Monopoly is the perfect symbol of the financial crisis…

Loose money. Monopoly games start swimming in money, which is briefly mopped up as the players buy everything in sight. But then money starts to flood the system again, courtesy of the mysterious Banker who hands out cash to everyone who passes “Go”. The game is one big property boom, funded by an overly generous central banker – a diagnosis many economists would also apply to the sub-prime crisis. Alan Greenspan, the Fed chairman who presided over the boom, was nine when Monopoly was widely published. It is not known whether he played the game as a child, but he seems to have taken inspiration from it somehow.

Vague and constantly-changing rules. Most enterprising kids treat Monopoly the way enterprising investment bankers treat the financial system, quickly making up their own rules and striking side-deals insuring each other against catastrophe. These side-deals now add up to a nerve-wracking $596 trillion, more than forty times the size of the US economy.
Monopoly’s rules on buying unwanted assets at auction are disturbingly vague – the Banker is simply empowered to run the auction. Perhaps Treasury Secretary Hank Paulson, who now has $700bn to spend in a similarly vague set of auctions, is also a Monopoly fan.

The endgame. For all Monopoly’s merits, fans complain about the way it tends to end in a slow capitulation, one player after another dropping out as ever greater sums of money slosh around unpredictably between an ever smaller group of people. Remind you of anything?

…and three reasons why Monopoly led us all astray.

Instant mortgages. Any Monopoly property can be instantly re-mortgaged to raise cash. The bank never refuses, and never frets about illiquidity or negative equity. The world of 2006 looked much like the world of Monopoly in that respect, but it is no longer quite so easy to persuade banks to hand out mortgages.

Indestructible banker. Monopoly’s rules note that the Banker cannot go bankrupt; they grant him the power to issue as much money as necessary “in the form of IOUs written on ordinary paper”. Sometimes the banks behaved as though that rule applied to them. It didn’t.

Unknown unknowns. Monopoly is a game of risk-taking, but a game in which the risks can be precisely calculated. Monopoly’s dice rolls are known unknowns, and skilled Monopoly players know the risks of landing on any square and take them into account when crafting their strategies (hint: buy the Orange properties). The wizards of Wall Street have to deal in unknown unknowns. As they crafted their credit derivatives, they thought that they understood the risk of a loss in the same way that a Monopoly player knows the risk of throwing three doubles in a row. They didn’t. They never will.

Tim Harford is a Financial Times columnist and author of “The Logic of Life: The rational economics of an irrational world”.

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