Alternatives to the Bailout

Alternatives to the Bailout

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Dodd’s plan is available and I’m digesting it now.

The important point here is that the Dems have their own plan: not just fiddling with the margins of the Paulson plan. The reason has to do with a psychological heuristic well document by Kahnemann and Tversky called “anchoring.” The idea is that when trying to make a decision we “anchor” ourselves on one piece of information and adjust from it. (In a famous experiment, K and T spun a wheel to produce a number and asked subjects how many African countries there were in the UN. The higher the number the wheel produced, the higher their corresponding estimates, despite the fact there’s obviously no logical connection between the two.) Right now, the Paulson plan is serving as an anchor in the negotiations, but it shouldn’t be. If the Dems can unite around a plan, then that can serve as the anchor, the template to be adjusted. Otherwise the results won’t be pretty.

Also, in thinking through alternatives there are two distinct sets of issues. The first issue is whether the mechanism the government puts in place will actually relieve the pressure. There’s a lot of healthy debate on the blogosphere about the efficacy of the Paulson proposal. Then there’s the separate issue of fairness: if we’re bailing out Wall Street, but what about everybody else who’s hurting?

The right bill should be both effective and fair.

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