Justice as an Option
Justice as an Option
Since the Great Recession financial macroeconomists have argued that the US government should have supported the liquidity of accumulated capital, but that standard options theory can be used to price the premium that it could/should have extracted for guaranteeing macroeconomic liquidity (the right to put unmarketable securities to the government at par in return for government debt). This chapter reads this literature politically by arguing that the macroeconomic liquidity premium is equivalent to the present value of historical justice as an out-of-the-money democratic option to wipe out the unjust effects of capital accumulation by bringing on an illiquidity event. The equation of private and public debt is central the options pricing formula itself, which creates hypothetical portfolios engineered to be equivalent to risk-free government debt in order to solve for the theoretical price of riskier components, like puts and calls. This methodology for pricing options assumes away the fact that government is not obliged to swap its debt for AAA private debt at par; but it does allow government to price the premium it could extract for obliging itself to do so. (That premium could have reached $9T in 2008.)
Keywords: financialization, Great Recession, macrofinancial risk, options pricing theory, liquidity premium, Robert C. Merton, Jean Tirole, Bengt Holstrom, government debt, capital markets
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