What the heck happened?

I was sitting in a beautiful backyard in Los Angeles with (soon to be) family when they asked me, as a lawyer in the far-away province of New York, what the heck has happened to our economy. Of course I said I don't know, and if I did, I would be working for Treasury. But I've got a guess, and it has nothing to do with regulation, or credit default swaps, or whatever else, at least directly. Here is the story I told.

Imagine you were invited to a casino to play poker. And let's say that you're pretty good at poker - you can grind out some nice cash by beating up on the casual players, the weekend warriors. But when you get there, instead of being allowed to go to your usual table, the pit boss takes you to a special room. In the room, he explains the deal he's been offering to a few special people. "All you have to do is roll this die, which has 100 sides, every five minutes or so. If you get through an hour without rolling a '1', you win $20 million". That's a lot of money, you think. You never need to work again if you win. "But what happens if you roll a '1'"? "Oh!", says the pit boss. "Then you lose $1 billion. We have to get paid somehow. But here's the good part. Someone else loses that money - not you".

A lot of people in finance took that deal. They knew the risk of rolling a "1". Of course they did. Or at least their bosses did. But they took the deal because almost anyone would take the deal, when put to the test. The upside (and I can't emphasize this enough) was generational, lasting, wealth - complete freedom to do almost anything forever. The downside was inchoate. Some really bad stuff would happen, possibly, but not to you.

Would you have played the game?