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Why Main Street hates Wall Street

People rallying in front of the NY Stock Exchange on Thursday.

TEXT OF INTERVIEW

KAI RYSSDAL: Maybe you disagree, but I think there's something visceral going on here in this debate about the bailout bill. There've been dire warnings from people who know pretty much all there is to know about the workings of high finance that if we don't do something, bad things are going to happen.

Politicians have been saying the same thing. Worth noting because polticians don't like to deliver bad news. Still, a majority in the House voted against a bailout on Monday, in large part because they were swamped by complaints from their constituents. Those are constituents who, it stands to reason, would be harmed by whatever bad things happen, but who seem to really want to stick it to Wall Street.

Dan Ariely's a behavioral economist at Duke University and an occasional contributor to this program. Dan, good to talk to you.

DAN ARIELY: Thank you. Nice to be here.

RYSSDAL: What is it about the human condition that just wants revenge out of a scenario like this?

ARIELY: Well, there's actually quite a few things, but let me first describe to you a little experiment that we and other people have done. It's called the trust game. Now, imagine that you and I each get $10, and you're the first mover and you decide whether to give your $10 to me or to keep it. If you keep it, we both go home. If you pass it to me, that $10 quadruples. So now I have your $10, it became $40, plus my $10, I have $50. I can split it in two and give you half and I get half and we both go home happy. Or, I can take the whole $50 and go home.

RYSSDAL: And I have nothing.

ARIELY: And you have nothing. Now, here's the kink. What happens after we do this game and I take the $50 and go home, you have a chance to take revenge against me. What if I tell you, "Look, for every dollar you spend, I will lose $2." Would you take revenge against me?

RYSSDAL: Well, yeah, 'cause you're leaving with 50 bucks and I have nothing.

ARIELY: That's right. So when you do this experiment in a PET machine, in a machine that scans people's brains, what we see happening is that the same area of the brain that reacts to rewards -- things like food and sex and heroin, to good things -- also reacts to planning revenge. Which basically means that revenge is actually rewarding.

RYSSDAL: But let me ask you this in the present circumstance with the bailout bill. Arguably, the thing was designed to make everybody's life a little bit better -- whether or not they believed that, I suppose, is a relevant question -- but by calling their congressman and saying, Vote no because we want to punish -- under your theory -- the Wall Street people, don't they sort of hurt themselves?

ARIELY: That's right. But right now what we're doing is we're willing to sacrifice money -- the same way that you were willing to sacrifice $3 or $7 to punish me -- people are willing to suffer to get this (you know, I don't know what's a polite way to call this) . . . . people on Wall Street. . . . But people are willing to lose money to get those people to suffer more. In fact, I've asked people about this. Everybody feels this anger. They have violated, in a very important way, a social contract in the same way that I would have violated the social contract of you giving me your $10 and me walking away with $50.

RYSSDAL: Given our motives for revenge, is there a way that Congress can shape a bill that's going to make it acceptable to people whose constituents really want to punish Wall Street?

ARIELY: Yes. So I think we need to include revenge in the bill. There was discussion about capping CEO salaries, which I think went a small way into revenge. But I think there are two ways to include revenge in the bill. One way is to say every time we are going to nationalize something, we are going to take the stock option of these people in these banks, right? We will make them pay for nationalizing it. That's one approach. The second approach is to build into the system future revenge. So another thing we can do is we can decide that the bill will actually force us to create a new code of punishment for people on Wall Street. And we have an opportunity here, with a meltdown that's so dramatic, that we feel that there is a need to go back and try and reshape the whole system. And that might actually be very, very useful in the long term.

RYSSDAL: Dan Ariely is a professor of behavioral economics at Duke University. His book on these sorts of things is called "Predictably Irrational." Dan, thanks a lot.

ARIELY: My pleasure. Thank you.

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How many companies will cease operations because they can't roll over debt? Will the bill restore enough confidence to let them stagger along farther? I'm a contractor helping a US Government outfit. We wanted to buy equipment before the end of the fiscal year. We couldn't get it because the small business retailer selling it to us was suddenly cut off by a large manufacturer. They wouldn't extend this small company the usual credit terms to sell through $50,000 of product TO THE US GOVERNMENT. You may be isolated from the growing turmoil, lucky you. But you won't be forever, or even very long. And in my opinion, this 700B is just the first installment, one of many more to come.

now that the losers got paid,,bushes big profit take on his way out of office,, everybody in america should file bankrupcy

I am truly disgusted by the fact that this bailout is going to pass without any specifics (at least that I know of) with regards to those that have lost property value, particularly with regards to tax credits for those losses. I purchased a property in good faith, one that has lost value, yet I am battling all the odds in order to pay for it. What is going to be done for someone responsible like me? I've been affected by those who've chosen the low road and stopped paying. Do I want revenge? You bet ya, particularly against those that have not acted morally responsibly.

I am upset that the Marketplace crew who I've developed trust for over the last year is buying into the Bush crisis. The world is not going to end if we don't act now. It won't even be the great depression. Bush has foisted two false crises on us in the past in the form of the Patriot Act and the Iraq War. Why should we trust him now?

Sure something needs to be done. Give Paulson $100 billion now with the requirements of equity stakes or current market value for securities, and see what he does with it. Build in revenge taking back CEO equity. But desiring responsibility and not trusting government is exceptionally rational. Buying into this boondoggle fiasco is what's irrational. If they've lied to us and hung us out to dry in their power grabs before, why should it be any different now.

Of all the agenda driven bought out media outlets out there, why is NPR falling into this trap? Maybe it's time to look for a more responsible economic new cast.

ABS-A-Lutely mind boggling to hear this segment. It seems a forgone conclusion to you that any opposition to desparate, no-strings attached, inexorable push to go back to happy-go-lucky lending is considered "revenge" and by implication irrational. I HAD to check the dial to see if I was still listening to "Marketplace" !!!

Holy Crap KR, the world may really BE coming to an end if YOU miss the boat by that margin.

Yes, there are times when the OPTIMAL solution WILL hurt (aka finite temperature, aka real world). But in trying to explain such obvious notions, make me feel like I'm talking to the crooks in the whitehouse, the incompetent fools in the Central Bank, and/or the three year olds in congress, NOT the "Marketplace" folk.

"Revenge"- call it "negative reinforcement", is a cornerstone to the rule of law. Laws and legislation are labeled impossible, or impractical, or unrealistic when some ideals are at stake, yet watch how fast the system turns on a dime when billionaires stand to have the spigots of greed interrupted. Who'd have thought it possible? So without tounge in cheek (its due to some dental work I can't afford)- let's allow this bailout this time (because they've arranged to bring us all down with them)- when we buy all those toxic mortgages from them, let's move their executive ranks and their families into those foreclosed homes and properties. Meanwhile, let some of those at the other end of the spectrum, who are footing the bill, move into Wall Street's mansions in their place, and everybody pays their existing mortgage payments. Once the mortgage markets are righted, everbody goes back home...

I take exception to your use of the word revenge with regard to why I, Joe Public oppose the unprecedented $700 Billion dollar bailout, which I understand amounts to some $24,000.00 for every first mortage holder in the United States.

First: Yes, the government needs to intervene. But your story seems to imply that this is the only and or best way to do so.
Second: This is not the first time this administration has played to congress's fear before. The "sky is falling, now" style has scared the American people and Congress into you into knee jerk reactions before.
Third: There may or may not be a recession I suspect there will be, but bailing out Wall Street is not going to fix the problem of the population being over indebted. Credit, whether this bill is passed or not, will be subject to tightened standards.
Fourth: Wall Street is a for profit business. And they have enjoyed their profits.
The former top five Wall Street firms -- Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns -- paid their CEOs a combined $3.1 billion between 2003 and 2007, when the banks were buying up the assets that led three of them to implode. In those same five years, the five firms reported a combined $93 billion in net income. In 2007 alone, the firms paid their 185,687 employees $66 billion, including $39 billion in bonuses. (Bloomberg) They made those profits by violating many of the long established rules of safe risk taking. The borrowed short term and invested that money into long term mortgages. Good risk management teaches to match maturities. But the industry was so proud of this "new" behavior they put a name on it, "the carry trade". Wall Street purposefully and successfully, lobbied (read made political donations) to increase their risk taking with more leverage. So now instead of having 1 dollar of their own money for every 15 dollars of assets, they only had 1 dollar of their own money for every 41 dollars of assets. At a 40 to 1 ratio, if those assets decrease by a mere 2.5%, you're broke, your bankrupt. And we should bail then out? The stock and bond holders made the money on the way up and they should be protected, bailed out?
Fifth: Yes, the government needs to step in, provide liquidity and assurance to the financial markets of the world. There is another way, this can be done without "saving" the risk takers that got us in this mess. Any and all monies should be provided in a way to take a preferred position to that of the stock and bond holders. Warren Buffet knows how to do it. Dr John Hussman at www.hussmanfunds.com articulates it much better than I.
Sixth: Giving away all that free money to millionaires does not promise to prevent a recession.
Seventh: It appears that the "new revised" bill that will be voted on Friday by the house has used the tried and true method of greasing the wheel with lots of pork. More tax dollars spent as justification and a reason for our legislators to pass a poorly conceived, wasteful bill. One of these days the American Public will have to stand up and say enough is enough,
Eighth:

Here is the definition of revenge - harm done to someone as a punishment for harm that they have done to someone else.
And here is the definition of consequence. consequence noun : an often bad or inconvenient result of a particular action or situation

You decide

Perhaps a public flogging of the executives, lobbyists and politicians responsible for this mess would in the short term make part of my brain feel better.

What makes us Main streeters really angry, is that every bailout bill that gets voted on does NOT have any calling to account of the people that caused the mess. Does NOT have any ethics reform. Does NOT ban paid lobbyists from being involved. Does not outlaw the behaviors that caused the mess. Does NOT have any help for main street. Does not prevent executives from receiving bonuses for having snagged taxpayer money in behalf of their investors. Gives a few partisan officials full power to make blank checks to their friends.

Every bailout voted on amounts to a happy hour buffet and orgy for executives, their paid lobbyists, and the politicians who get paid off by them.

That is why we need that part of our brain stimulated.

Unfortunately, Dan Ariely's suggestions for taking revenge show a common misconception about stock options and "nationalizing" companies. Ariely said "One way [to take our revenge] is to say every time we are going to nationalize something, we are going to take the stock option of these people in these banks, right? We will make them pay for nationalizing it." The problem with this is that if the government did "nationalize" a bank, they (the government) would take over and all the shares of stock would become worthless. Since the value of stock options reflect only the difference between the "strike" or "option" price (that is the value of the stock on the day the stock option was granted) and the market price for the stock on the day the stock option is exercised (or "cashed in"), nationalizing a company would make the stock and thus the stock options worthless.

Jonathan Edelfelt
Author of Who Said You Need Millions? Retirement Strategies for the Rest of Us

I'm not seeking "revenge against Wall Street." Why should I? My 401K plan is tied to it? No, I'm seeking a smart solution, a well-targeted, fair solution that will not perpetuate the behavior that caused this crisis to begin with. The bailout, as presented, is a crisis response that will perpetuate unsound, unchecked banking practices that contributed to and caused the current "crisis." Worse, it sets a terrible precedent that bigger is better because "if you're too big to fail" you never will fail." If a company is too big to fail, it's too big for a democratic landscape.

Once again this administration comes to us with a "crisis" and a bigger than life fear that ultimately gives too much power to one person. I agree with another commenter , it sounds very fishy. There's some Hanky Bernanke going on.

wha

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