So, the U.S. House has discarded the plan to save the U.S., and really by some extension, the world economy. The markets have collapsed. It was never an ideal plan in the first place. The insane right wanted changes that had nothing to do with economics, and everything to do with Bizzaro World ideology. So they were out. Ordinary citizens saw the price tag and balked, rightfully so — but because very few people know anything about detailed economics, people really don’t understand why having a functional banking system is an important thing even for them. So they were out. Economists mostly said it was the wrong plan to start with, but we needed something to save the economy, and the weekend’s changes were enough to make it palatable. So they were mostly in, holding their nose. Democrats were stuck being responsible, and got a lot of votes for a second- or third-best plan, but it wasn’t enough. They got stabbed in the back by House Republicans, to use a phrase that has some propaganda value over here.

What next? Collapse, anybody? Maybe there’ll be another attempt after the holidays, with a better plan. Or after the election. Maybe Sarah Palin will come up with something brilliant, and all economics students will be discussing the Moose Doctrine for a century to come.

I’m going on vacation to a village without Internet access for a week. Please don’t break the world completely while I’m gone…

I somehow missed this a few days ago. From Forbes:

In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.

“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”

To be fair, they did have to pick a really large number, and part of the problem in this collapse is that there isn’t good information on the total value of distressed or illiquid assets, or even agreement on how to value them in the first place. The Treasury seems set on overvaluing them as a means to recapitalize the banks (because if the government actually paid market value, the banks wouldn’t get enough new capital to keep them afloat). A lot of economists think this is an atrocious idea unless the government gets equity in return.

Here’s the silver lining to global financial collapse. It’s kept me from obsessing about Sarah Palin and McCain’s latest whopper for the last week. Except in the context of financial collapse, for which there’s been plenty of material.

What’s fascinating is watching this in the blogging era. Roughly a billion serious economists are online, and are writing about Paulson’s bailout plan in more or less real time. What’s emerging is partly politically driven (it’s getting very hard to find any economist, left or right, who’s seriously backing McCain), but also perhaps disturbingly divorced from traditional ideological divisions.

The (idiot) right doesn’t like the bailout because it’s not letting markets do their thing. I’m not sure there are many of these folks, outside the mouth-breathing politician class. Markets can fail catastrophically, and while this may seem like a salutory thing to some, if we’re living in a market-based economy, it’s not really a practical object lesson.

But a very large number of economist types seem to be seriously skeptical of the plan as presented, for two main reasons.

First, it gives the government — read, Bush’s executive branch and its successor, as advised by the Fed — virtually unlimited power to spend $700 billion without any kind of genuine oversight. Granted, most people  seem to be pretty happy with the way Paulson and Bernanke have played defense over the past few weeks. But imagine the lobbying that will go on. Remember the way that the Bush administration has staffed important agencies such as Iraq’s Coalition Provisional Authority, FEMA, or the Interior Department’s coke-snorting oil- and gas-royalty division.

The other arguments are tied closer to the economics. The massive sum will be used to buy the mortgage-backed securities that the financial sector has been binging on for years, and which no prudent investor will now touch with anything short of a gas mask and rubber gloves. Worse than Bayerisch Gammelfleisch, this stuff.

The short version of the theory is: Take these currently worthless “assets” off the financial giants’ hands. Instead, give them taxpayer money, filling their coffers with actual assets. This, in theory, makes them financially secure. Investors stop fleeing financial stocks. Banks once again start lending to each other, and to regular people trying to buy houses, start businesses, or conduct business in the ordinary credit-dependent way that makes the world economy tick. Best of all, in the end (as when the government bought distressed savings & loan assets in the 1980s), the “worthless” assets purchased today might actually turn out to have some value once the crisis passes, home prices stabilize, and people turn out to be able to pay their mortgages. Government sells them, the $700 billion or however much we laid out to rescue the financial system gets partly paid back, and everybody goes into the history books happy.

Yes. But.

One big question is how much the government is paying for the all-but-worthless assets. There are various opinions on what they’re worth. The market, for example, is currently pricing sub-prime mortgages as the rough equivalent of belly button lint. However, it’s unlikely that the banks are going to see it that way when they’re selling.

The Naked Capitalism blog quotes a reader who claims to be a congressional staffer thusly (read the full post here, it’s a very good critique of the plan):

Anyway, I wanted to let you know that, behind closed doors, Paulson describes the plan differently. He explicitly says that it will buy assets at above market prices (although he still claims that they are undervalued) because the holders won’t sell at market prices. Anna Eshoo pressed him on how the government can compel the holders to sell, and he basically dodged the question. I think that’s because he didn’t want to admit that the government would just keep offering more and more.

This puts the government in a tricky situation, and may perversely give the banks more power than they deserve. The government, once this is passed, is going to want to clean the mess up as soon as possible. Banks, by contrast, are going to want to get the best price they can for their trash. If they can manage to stay out of bankruptcy long enough, they’re going to be able to stick taxpayers for an unjustifiably high price.

Paul Krugman amplifies on this idea, arguing that the financial sector’s capital deficiency stems from hugely overleveraged (debt-financed) operations, rather than solely from the mortage-backed paper.

Even without panic asset selling, the financial system would be seriously undercapitalized, causing a credit crunch — and this plan does nothing to address that.

Or I should say, the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.

There’s more, but this post is getting long.

So what’s all this mean? We need a massive plan, and fast. That much is evident. We’re teetering on the edge of chaos far worse than anything we’ve seen since the 1930s. The lesson from the Depression is that the Hoover government did precisely the wrong thing for years, cutting back spending instead of stimulating economic activity, and making a number of other mistakes that virtually no Econ 101 student would today. Bernanke knows this, and is playing the professor-with-power role to the hilt, to make sure that today’s government doesn’t make the same sins of omission.

But it’s worth remembering that this is a democracy, and that Congress should play a role. Safeguards should be in place, and some ability to make Wall Street firms, and individuals, bear the brunt of the cost for their own salvation. Negotiations are underway now, and Democrats are just getting back in the game. This thing probably shouldn’t be approved as is (This pissed-off email, purportedly from a leftie Congress member is great. Quote: “I don’t really want to trigger a world wide depression (that’s not hyperbole, that’s a distinct possibility), but I’m not voting for a blank check for $700 billion for those mother fuckers.”).

Interesting times.

I’ve been a casual reader of news the last few days. I’ve skimmed. I’ve been busy. But I think I’m not alone in that. Regardless, the point I’ve gotten about Obama’s energy policy is that he’s backtracked on offshore drilling, and is now willing to support it.

I was a little pissed about this, until I actually read the speech he gave. Anyone who’s concerned about the future of energy consumption, the environment, or gas prices (so, yeah, everyone) ought to read it. It’s an outline of serious proposals, with real targets and financial incentives behind them, the kind of thing that we’ve been running away from in the U.S. for way too many years.

Yeah, he said he’d be “willing to consider” a lmited amount of offshore drilling — something he calls unmeaningful in the long or short term — if that’s what it politically took to pass a comprehensive energy bill. That hurts a little, but it also shows who he is — someone practical who is willing to compromise a little in pursuit of a very important goal. I can accept that, and it is better that he tells us this now than later. Right?

His real proposals (or targets) are serious, and good grist for genuine discussion:

• work to get 1 million 150 mpg hybrids on the road in 6 years
• $7000 tax credit to consumers for buying these
• $4 billion in tax credits and loans to help U.S. factories retool to make these
• by end of 1st term, require that 10 percent of energy in US comes from renewable sources. (This can be a tricky figure, depending on whether he’s talking total energy demand, or total national electricity generation. Renewables accounted for 7 percent of total demand in 2006, but already 9.5 percent of electricity generation. It’s not an easy figure to grow, either– three-quarters of the renewables-generated electricity was hydroelectric, and it’s unlikely we’ll be building any significant new dams soon)
• national goal to reduce electricity use by 15 percent by end of next decade.

There’s meat here, even if it’s possible for us to do more. More than just a flip-flop on offshore drilling. As a package, it’s so much more serious than what McCain is proposing (drilling and a tax holiday on gas) that it makes the GOP sound a little like, I don’t know, maybe Paris Hilton…

I know, I haven’t been blogging lately. I’ve been traveling, in the States for the first time since moving to Berlin (more on that later, but it was only in going back that I finally felt like an expat). Also reading, evolutionary theory and sociobiology.

Which leads to this point. Reading this article on the growing branch of “neuroeconomics” (economists that actually look inside the brain, with MRIs and such, to see what’s happening in the course of an economic decision). It strikes me that a pretty simple evolutionary argument exposes a serious flaw in much of classical liberal (or conservative, in modern parlance) economics.

There’s an exercise called the “ultimatum game,” which behavioral economists use to study people’s preferences. Two people. A set sum of money, say $100, to be split between the two. Person A is given the right to set the distribution split, without any limits. She can say 50-50, for example, or 90-10. The only limit is that B has to agree. If B in fact agrees, they both get whatever cash A has doled out. If B disagrees, both get nothing.

A perfectly rational B, (classical economics’ rational actor) should in theory accept even a radically uneven (90-10) split, because he is getting a free $10. The fact that A is getting $90 shouldn’t matter, all other things being even (another big assumption, but skip that for a little while). In fact, studies show that B rejects a very large proportion of uneven splits, apparently because they seem unfair.

Irrational by “rational actor” standards, sure. But it strikes me that an evolutionary analysis shows why this is perfectly rational, even inevitable, from a genetic perspective. As Richard Dawkins (“The Selfish Gene“) describe, genes themselves clearly don’t have conscious preferences. However, behavior can evolve, as in the case of genetic-driven behavior which successfully allows an individual to accumulate more resources, which translates into greater ability to reproduce (more nuts gathered, for example, means that a larger number of offspring can be supported), and thus a wider propagation of that particular gene or genetic pattern.

Clearly, in a world of limited resources, there is competition for resources. Every individual would be best served by being in the position of the game’s A, getting more resources than her rival. In a strictly economic perspective, B’s getting a free $10 is a good thing, and should be accepted regardless of the unfair split. But in an evolutionary perspective, a gene (or gene-driven behavior) which happily accepted the 10 percent split while a rival took 90 percent, wouldn’t last. The A group, with more resources, would propagate at a much higher rate, and ultimately drive the B’s out.

It’s a bit more complicated than that, of course. A rise in the proportion of As probably wouldn’t be stable itself. But what might be stable is the rise of B’s who had evolved a sense of being cheated — who would reject the 90-10 split, leaving both parties with nothing, leaving them both poor but equal. From B’s perspective of evolutionary survival, equal at zero is better than being a little bit better off absolutely, but having less resources than A.

I’m sure evolutionary-minded economists have puzzled this all out before. But it has interesting consequences for thinking about our consumption decisionns, and our preferences for a fair vs. unequal society. The conservative argument that it is OK if the rich get very rich, as long as the poor get a little better off in absolute terms, probably violates a kind of internal fairness system we’ve developed over the years in order to keep ourselves alive. So much for “rational actor.”