Ezra Klein has an interesting take on Ultimatum Bargaining Games and Wall Street:

During the 1980s and 1990s, economists in a variety of countries conducted a series of experiments that shocked their profession. The experiments were called “ultimatum bargaining games,” and they were very simple: One person was given a pot of money to dole out. The other person got to accept or reject the deal. But here was the catch: If the second person rejected the deal, neither party got any money at all.

Market man — and his bible, textbook economics — would’ve thought this easy. The second person should take any deal that’s offered. After all, even a bit of money is better than no money. But that’s not how it worked out. When the second person was offered less than 30 percent, they generally rejected the deal. This was true across countries, age groups and even dollar amounts. “Apparently, responders do not behave in a self-interest-maximizing manner,” commented Ernst Fehr and Simon Gächter in a review of these experiments. Apparently not.

This brings us to a word that’s very important to most people but not very important to Wall Street: fairness. As the ultimatum experiments show, fairness is very important to the way most people make their economic decisions. But that particular quality is not very important to how Wall Street makes its decisions. Banks mislead customers, make money from betting against housing bubbles they help fuel, get bailed out with taxpayer dollars, and then pay out massive bonuses to their executives while the rest of the country is mired in a recession they caused. This might not be illegal, and the bailout might have been necessary to save our economy, but all of it is deeply unfair.

I think this is also relevant to the Euro-zone debacle. Wall Street creates the conditions for a global recession, and then when the public sector takes it upon itself to clean up the attendant mess (through fiscal and monetary stimulus), bond vigilantes initiate a run on the sovereign’s currency, running up borrowing costs. Paul Krugman has labeled this a “death spiral”- as the government goes deeper into debt to shore up the economy, investors raise its borrowing costs for fear of default. This means that a country, say Greece, has to spend more to service its debt in addition to its initial stimulus. This increases Greece’s debt, startling investors even more (who express their feelings the only way they know how: by raising borrowing costs). And so on and so forth.

In this case, Greece sort of made its own bed. There was a good article in The New York Times on Sunday about massive tax evasion in Greece:

In the wealthy, northern suburbs of this city, where summer temperatures often hit the high 90s, just 324 residents checked the box on their tax returns admitting that they owned pools.

So tax investigators studied satellite photos of the area — a sprawling collection of expensive villas tucked behind tall gates — and came back with a decidedly different number: 16,974 pools…

Various studies, including one by the Federation of Greek Industries last year, have estimated that the government may be losing as much as $30 billion a year to tax evasion — a figure that would have gone a long way to solving its debt problems.

But Portugal and Spain especially have been more responsible. The fact that they’re teetering reflects less upon their own vulnerabilities than on the capriciousness of financial markets. I’ve always thought of these sort of runs as being similar to a stack of newspaper sections sitting outside on a windy day. The underlying papers are safe, at least until the top one blows off.