Left Flank

What Eric Schoenberg and Gary Marcus are arguing, that psychology is a useful guide for economic policy, but that ultimately skepticism about ideal economic presuppositions are beneficial, dovetails nicely with Nassim Taleb's black swans and Arnold Kling's caution. It's also just another way of understanding how the stock market jitters and the congressional bailout drama relate to what laypeople are experiencing.

As an explanation of the first vote US House rejecting the Paulson bailout plan, it's reassuring to hear Schoenberg to discuss the experimental economics game, concept of the ultimatum game. And then, from that point, move forward armed with more than ideological talking points to solutions.

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The failure of the US House of Representatives to swing at the first ball reaching the plate could be a sign of all the bad reasons Michael van der Galien offers, most disquietingly lack of leadership and Jason's ideological purism. But, in spite of the democratic messiness (a classic expression of the prisoner's dilemma) of the episode, it might be the optimal outcome. That is - and this is a big caveat - the batter gets his strike, and before next year. What I offer is a form of Arnold Kling's argument, that leaving something in reserve for the next step is optimal.

Firstly, let's keep some perspective when comparing the Great Depression and this Wall Street debacle.

Both the crisis and the authorities' response have been called the most sweeping since the Depression. Yet the differences from that era are more notable than the similarities to it. From the stockmarket crash of 1929 to the federally declared bank holiday that marked its bottom, three and a half years elapsed, and unemployment reached 25%. This crisis has been under way for a little over a year and unemployment is just over 6%, lower even than in the wake of the last, mild recession. More than 4% of mortgages are now seriously delinquent, but the figure topped 40% in 1934.

Plan B has taken effect in spite of the prisoner's dilemma.
Taking the prisoner's dilemma seriously, it's unlikely there will be any bailout before November 4. That is, unless the goals of the government's plan are scaled down to inject liquidity and restore a minimum of confidence without socializing debt. Funds need to be set aside for homeowners first - that's just political prudence. But Kling's proposal to forgive capital lending requirements leaves more room for future responses, eventual financial sector reform, and future crises. If that's too sparing a remedy, I would prefer taking an equity stake over a buyout. The Paulson plan was always the worst case scenario, with doom and gloom its only virtue.

As I've said before I resent the apocalyptic rhetoric about depressions and a fateful comeuppance, as much as Jason does. However, from a public choice perspective I both expect less and frequently respect how partisan gridlock at least hinders the most egregious legislation from reaching a signing ceremony on the White House lawn. I also worry about the loose political talk of Hank Paulson's role and extending his tenure as a sort of passive coup in which good Germans acquiesce to abuse in order to keep the streets clean. Much of the good economic discussions have merit, but are fit for subsequent reform, not this stopgap measure. It reassures me there are reasonable laypeople with a handle on the graphs and equations. In some minimal sense, panic is a measure of good will, yet it's still a dangerous sentiment. I believe the election is a higher priority, because the next cabinet and the next Congress will really have a burden to bear.

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Fundamentally, I'm skeptical about what the US Congress, Hank Paulson, and Ben Bernanke think they're doing (actually, for the same public choice reasons Will Wilkinson offers in his diavlog) with the compromise legislation awaiting floor votes in both chambers. I also resent the Bush administration's apocalyptic pronouncements as a tired reprise of post-September 11 doom and gloom. I continue to look for any expert who can reasonably explain the fiasco and give me a decent recommendation.

Cue Arnold Kling as he «blasts the Paulson plan as essentially corrupt». This just one small segment of a longer primer on this road to financial perdition. The advantage of Kling's plan is, that the government will have pennies to spare on relief, and not on pumping up stock prices. I'm also trying to avoid that huddling predisposition victims get when the tiger approaches, when a minute before each person knew the bad guy was luring the beast to them. I don't want just to trust Congress because I'm momentarily scared I have no other choice.

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