So the bailout proposal before Congress seems to have been rejected because legislators were worried that voters back home saw it as a bailout of Wall Street at the expense of Main Street. Is such a fear rational?
It may be that voters simply don’t understand or believe that a broader Wall Street failure could quickly trickle down and harm their Main Street interests. Or could it be that they’re willing to pay a price to exhibit their disgust even if it ultimately harms their self interest?
Consider the popular academic experiment known as the ultimatum game:
The ultimatum game is an experimental economics game in which two players interact to decide how to divide a sum of money that is given to them. The first player proposes how to divide the sum between themselves, and the second player can either accept or reject this proposal. If the second player rejects, neither player receives anything. If the second player accepts, the money is split according to the proposal. The game is played only once, and anonymously, so that reciprocation is not an issue.
Very often, the first player offers a 50-50 split. But what happens when he offers the second player only 30 percent of the total, or 20 percent?
It turns out that the second player often rejects a 20 percent offer, which means that both players walk away empty-handed.
Many economists cannot understand why they’d do such a thing. To an economist, an offer of even 1 percent would be worth accepting since it is free money, and because for the second player it is ultimately irrelevant how much money the first player takes home.
But most people do not think like economists. When offered 10 percent or 20 percent or even 30 percent of the total, they are disgusted by the inequity — and willing to pay the price for that disgust by rejecting the offer.
Is that what we’re seeing now in the vigorous antipathy toward a government bailout? Perhaps, at least in part — although there are a lot of super-rational reasons to dislike the bailout as well.
This disgust factor, and the disconnect between Wall Street and Main Street, seems to be where the bailout’s supporters have focused their attentions. (They are also adamant that it shouldn’t be called a “bailout” at all, but rather a “rescue.”) In the coming days, look for the public debate to move strongly in this direction. From this morning’s Wall Street Journal:
Adding to the pressure on Congress to act were some of the nation’s biggest corporations, including Verizon Communications Inc., Microsoft Corp., and General Electric Co. GE Chief Executive Jeffrey Immelt is actively lobbying politicians and finance officials in Washington to complete the financial-rescue bill, said a company spokesman. To back up his message, Mr. Immelt directed his staff to compile evidence of the “negative ripple effects” throughout America from the crisis on Wall Street, including information on what is happening to customers and employees in all 50 states.
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I have an alternative to the rescue plan that I think that conservatives might be able to support. Vouchers. 700 billion works out to more than 7,000 dollars for every man, woman and child in the country. Let’s send each of us a 7,000 voucher for primary residences.
For those with failing mortgages this could save them. For those with sound mortgages, they could pay down some of their principal. Those that rent could use the money they save to pump up the economy, or it might augment their savings enough to let them buy something.
This would stop the drop in house prices, and indirectly pump more money into the credit markets. It would also be fair. Instead of bailing out the bankers we could bail out everyone. This would be popular with voters!
In what way will the average joe actually benefit from the government buying up bad debt?
In the current market what reason do banks have to loan out money? It seems perfectly reasonable that chase wouldn’t loan wamu anything but instead offer to buy it up at a stupendusly low price, with or without the ‘bailout’ of it’s own bad debt.
What are economists saying about these mega banks getting even bigger at a time when they’re supposedly in really big trouble, and apparently can’t afford to loan any money?
Your discussion of this brings me back to your earlier posts about the economics of happiness. In those posts you posited that people were happier in a less financially stratified society where the wealth of the haves did not dwarf that of the have nots. That may be a bit of what we are seeing here. People would rather be less economically well off in a society where everybody was less well off than be absolutely more wealthy while being relatively worse.
Or they could be cutting of their noses to spite their face, or maybe they are just listening to rabble rousing politicians trying to stir up hysteria in order to get re-elected / elected.
Obviously, the difference between the ultimatum game and the “bailout” is that there’s no such thing as free money in real life.
Economists like to write things like “The game is played only once, and anonymously, so that reciprocation is not an issue.” I don’t think this is true. Even when the game is played only once, even when it is anonymous, the person who is asked to accept an unfair offer knows that there’s always a chance they could come into contact with this anonymous person in the future. Why encourage unfair behavior? Instead they send the person a message, and hope that better behavior will result.
Whether or not you think the bailout should go through, this is a game that clearly isn’t anonymous, has been played many times in the past, and will be played in the future.
I think it’s about trust. The elites in this country have simple ran out of credibility. If the Bush Administration, the New York Times and the Wall Street journal all agreed that the sky was blue, many Americans would go double-check to be sure; now that it’s falling, nobody is willing to give them the benefit of doubt.
The proposal made by #1 is a lot like saying “instead of repairing the levee to keep the town from flooding, let’s divert the money to homeowners so they can build sandbag walls around their homes.”
Problem is, if the levee breaks, there aren’t enough sandbags in the world to hold back the water, and the homes will be swamped anyway.
If we bail out Wall Street on this one, maybe — maybe — our investments won’t tank and we’ll get to keep our jobs.
They drive a hard bargain, but I’ll take it.
Actually, I got a different “game theory” game out of this vote. I learneas the congressional pay raise game.
The rules of the game are:
- The players are divided into multiple “houses” of government.
- Each house gets to vote on their own pay raise.
- If a house votes for their own pay raise, they all earn 10 points.
- Any individual within the house that votes for the raise loses 5 points.
- Voting is done in a prescribed random order.
When the game is run (with, for example, 3 voters per house), the “ideal strategy” is that the first voter votes against the plan, knowing that the last 2 voters will vote for the plan out of necessary self-interest.
This felt analogous to what happened in the House of Representatives last Monday. The early votes came out against the plan, knowing that the rational players would eventually vote for the plan out of neccesity. But things broke down because the “swing” voters decided to act non-rationally, voting down a bill they needed to pass out of anger.