Politicians fail America
September 29th, 2008 Posted in Politics, PsychologyBBC News reports that the tough government plan for bailing out the US banking sector has been rejected by a vote in Congress. Shares fell across the board by an average of well over 5% – a colossal fall in just a short time towards the end of the day’s trading session.
The repercussions of this gargantuan cockup are potentially catastrophic for the US financial system. With massive debt remaining on their books, the US banks will have to watch their share prices plummet over the next few days and we can be fairly certain that there will be several more major casualties before the end of the week.
The most worrying aspect of this decision seems to be that the politicians have fallen into two of the most classic emotional traps that make people do stupid things every day: revenge and gang thinking. The politicians’ rhetoric seemed to focus on how bailing out the banks would be a failure of punishment – that it would equate to ‘letting off’ the big bosses despite their complicity in the present financial crisis. But this is, of course, cutting off one’s nose to spite one’s face. Human beings, according to the studies, want to live in societies that punish perceived transgressors and are even willing to pay to carry out this punishment, thereby accepting a worse outlook for themselves.
We might see why a punishing society would evolve – it’s important for law and order that people are aware that their selfish actions carry an enforced negative penalty. However, the whole evolutionary point of this is that the actors involved in these dramas should be aware beforehand what the punishment is likely to be, or else there is no disincentive whatsoever. Tough new regulations could easily be brought into play in America that would clarify the penalties for choosing risky investments in the future – a practice that, it must be stressed, has never been illegal – without having to plunge the entire banking system into free fall.
The second failure of thinking that the politicians seem to have succumbed to is that of gang thinking. I’ve just watched an interview on BBC News with an American politician claiming that the very reason for the failed vote was because Nancy Pelosi, the Democrat speaker of the house, gave a talk that was deemed to strongly aligned with partisan lines, and the Republicans thought that they had to vote against her on principle.
I didn’t catch the name of the Republican senator who claimed that the reason for the failed vote was Pelosi’s speech, but he should lose his job immediately. The vote that a politician makes should be determined entirely by his or her conviction about what is right for the people effected by the decision, and nothing else. Voting based purely on injured pride, partisan solidarity or personal hostility leads to disaster.
The ultimate truth of this evening’s financial farce is a tragic one – the 5% drop in the markets today will have hurt every single American far more than the proposed $700bn rescue plan. $700bn works out at a little over $2000 for every American, and that represents the maximum figure that the government was committing to spending. However, a 5% fall in even a small $100k retirement fund already adds up to twice this figure in lost value and it’s not clear that this shortfall will be recovered any time soon.
