Crikey!

Color me confused, but I’ve never really understood the difference between a bet and “financial trade.” And if there ever really was a line, it’s definitely becoming blurrier.

In recent months, there have been millions of dollars bet in options markets, as traders seek a big payday in the event that the economy heads south — and this hasn’t raised an eyebrow. But when an Aussie bookie began offering bets on whether the Australian economy is headed for recession, he stirred up a bit of strife.

Federal Treasurer Wayne Swan called the bookie’s actions “utterly irresponsible.”

The contrast between the Treasurer’s response to financial trades and bookies’ bets provides a nice example of how people respond differently, depending on how a bet is framed. One is modern finance, while the other is a repugnant market. Both, of course, are simply state-contingent contracts.

But I’m also confused for another reason. The Aussie economy is now a strong odds-on favorite to slide into recession. In fact, if you are betting on a recession, you would have to bet $5 just to stand a chance to win $1. But after its recent interest rate adjustments, the Reserve Bank of Australia declared that the “size of the response to date was judged to be such that a period of assessment of local and overseas events was warranted over the summer.” That’s antipodean boffin-speak for: there’s no more interest-rate cuts to come for at least a couple of months.

Put the facts together: Despite a near-certain recession, the Aussies are leaving interest rates at 4.25 percent. Are the reserve bankers content to stand by as the recession wreaks havoc, or are they simply confident that they are smarter than the punters? Either way, I’m worried.

By the way, a few years back, Refet Gurkaynak and I studied a related betting financial market run in the U.S., and we found that its economic forecasts were typically more accurate than the consensus drawn from expert economists.