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.
and 
. You can also watch it on 
Bail Out the Little Guy,
How do you get $7,000? 700 Billion divided by 300 Million men women and children comes out to like $2,400. For sure that could help alot of families, but that’s $9,600 for a family of four… not $28,000.
Also, the assets the treasury is buying have some value. Even if they spend all $700 Billion and lose 80% on their investment (which seems nearly impossible) the total cost would be in the $550Bn range (still and outrageous sum). More realistic losses are porbably far less, though its impossible to say right now.
Here’s how the “ultimatum” game usually works in real life: management calls you into their office and tells you things are tough economically and you’re going to have to take a pay cut. You’re a team player and you have a family to provide for so you take it. The next week you see the bosses celebrating their bonuses and you read about executives getting huge raises.
Japanese executives don’t give themselves bonuses and raises if the company as a whole is suffering. Ours do. Why is that?
One reason the people are so disgusted is that we keep being told that these bad mortgages are the root of the problem. No, the root of the problem is the people who can’t pay those mortages. Bailout those people, who were suckered into a bad financial situation, not the lenders who were holding the lollipops.
You really should get a guy like Dan Ariely to do some columns for you. Or Brian Wansink.
We are not rational beings.
Maybe people would be more inclined to believe that Wall Street failure would trickle down to Main Street if Wall Street success had trickled down to Main Street as well.
Re: #1 (BOtLG)
$700 billion divided by 300 million is about $2333, not $7k. But I am reminded of the quote “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.” If Congress were to give us $2333 each, where exactly do you think the money would come from? We, the taxpayers, just get to pay it back (with interest) in the future. It’s the same problem with the ‘stimulus package’ from this spring.
Wholesale distribution of funds directly to the citizens is a waste of time and money, and will only worsen the federal debt (which we all own a share of) for years to come. If (and it’s a big if) the government should be distributing money in reaction to this crisis, it should be buying something with that money. I don’t know enough to know whether that should be the troubled assets themselves, or equity in the companies holding them, or what, but at least if a purchase is made instead of a handout, there is some chance that not all the money will be flushed away.
I’m just waiting for somebody to have the guts to stand up and say a large player in this mess is the main street home owner who took out a mortgage he/she had no business taking out in the first place.
In no way do I mean to excuse the irresponsible and arguably immoral behavior of lenders who preyed upon the poor, confused, and uninformed. But it takes two to tango. While having your home foreclosed upon is quite unfortunate and can certainly happen to responsible people due to unforeseen events, much of this was completely predictable.
I’m ticked off that I’ve been very cautious in taking on debt and living within my means while irresponsible borrowers helped inflate the housing/credit bubble. Why are the credit consumers who contributed to this mess being let off the hook as simple victims of a corrupt system? How are these people on equal grounds with those of us who acted responsibly throughout.
There is no unified Main St. There are those who made bad loans and hid them. There are those who took bad loans and are struggling to pay. And there are those of us being trampled underfoot in the struggle.
“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.”
If economists think otherwise, they are just naive
and making the common mistake of assuming money is
linear with utility (the same idiotic mistake might make these same naive economists think that the lottery is never a sensible investment).
In fact utility is a complex mixture of factors, only one of which is money, and even when it comes to money, utility is not linear with money (e.g. you cannot assume a 50% chance of $200 is equivalent to a 100% chance of $100, it may be less if you hate to gamble, more if gambling gives you a thrill!)
If you play the game and get X money, but feel you have been swindled the swindle-feeling has severe negative utility, and on the other hand the take-that-you-crook response has a strong
positive utility. This may easily wipe out the money gain.
Similarly when you play the lottery, the fun of playing has positive utility, and it may well be that 10,000,000 dollars is worth far more in utility terms than 10,000,000 times the utility of
one dollar. After all that’s the theory behind insurance. Perhaps these same naive economists think that insurance is always a bad idea because the naive utility is negative.
Any time economists equate utility linearly with money, they make idiotic conclusions!