Mortgage bailouts and the Chicago Tea Party

Lynne Kiesling

Count me in as a taxpayer, mortgage holder, and economist who thinks that the Obama mortgage bailout program is bad policy-it’s expensive with little obvious benefit, it creates bad incentives and ex post rewards bad decisions (bad decisions that were abetted by bad government policy), and it’s morally reprehensible. Peter Klein’s remarks on the plan reflect my beliefs:

I am bewildered. But, more than that, I am angry. I can’t count how many news accounts I’ve seen about the poor, struggling homeowners who can’t make the monthly mortgage payment, are about to be foreclosed, and risk losing the family home, yard, white picket fence, and piece of the American Dream. But I haven’t heard one word about the poor, struggling renters, the ones who scrimped and saved and put money away each month towards a down payment, who kept the credit cards paid off, stayed out of trouble, and lived modestly, and thought that maybe, just maybe, the fall in housing prices meant that they, finally, could afford a house — maybe one of those foreclosed units down the street. These people are Bastiat’s unseen. For them, Obama’s housing plan is a giant slap in the face. To hell with the prudent. Party on, profligate! Now that’s what I call moral hazard.

I join Peter in being both angry and bewildered. That’s why I was heartened to see the groundswell of support for CNBC commentator Rick Santelli’s “Chicago Tea Party” mortgage revolt video from the floor of the Chicago Mercantile Exchange yesterday. Santelli, a former trader who has been a critic of the Fed’s monetary policy and its effects in the housing market, gives voice to the feelings of anger and injustice of many taxpayers and homeowners. After his show yesterday he talked with Stephen Spruiell of the National Review, and continued to be firm and eloquent:

The issue is, you can’t pick out 8 or 9 percent and give them things that weaken the 90 or 92 percent who are carrying the water. You need to come up with legislation that may help the people that need it but not hurt the people that… listen, my 401k’s a 201k, my kid’s college tuition is going up 10 percent. This is tough for everybody. Maybe a tax break, maybe everybody who has a house gets something. They need to quit picking winners and losers, and they have to quit alienating the classes. You have to figure out a way to float all boats, and I think that’s where the administration has gone wrong, and I think that’s the nerve I hit.

He sure did hit a nerve; CNBC has set up a poll page where you can vote on whether or not you would join Santelli’s Chicago Tea Party. When I voted “yes” and saw the results, it looked like this:

And now someone (calling himself “Patrick Henry”) has set up a Chicago Tea Party blog.

These invocations of the American Revolution reflect the important fact that the origins of the United States rest on the economic consequences of unjust government policy. We are a country founded on a tax revolt, and more importantly, on the ideas of individual liberty and autonomy that are crucial for us to be able to live together in civil society. To the extent that more and more people see the bank bailouts, loans to the auto industry, the “stimulus” bill, and mortgage bailouts as unjust government policy, we are going to tap into these beliefs.

And frankly, I say bring it on. I usually “keep on keepin’ on” with respect to politics; I’m non-partisan, I hate politics, and no politician has ever represented my philosophy and values, so I just take politics as a drag on productive activity and move on. But this is beginning to worry me and make me angry.

As an aside, this is one reason why I think the “liberaltarian” conversation that Will Wilkinson and others have been having will always be strained — if American progressives embraces fiscally irresponsible government policies that are seen by many people as unjust, this progressive liberal-classical liberal confluence is going to be very shaky indeed.

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6 thoughts on “Mortgage bailouts and the Chicago Tea Party

  1. I feel what the government should across the board lower everyones mtg. to 4%. Based on a $200,000 at 6% you are paying $1200/mo and at 4% you are paying $954 and then just think what it would be if you paid it out over 40 yrs. Wouldn’t this help all the people, get the economy going again and just think if you had to buy a car just maybe you could now afford the payment. If we all have to pay this money back then why isn’t the gov’t doing something to help us all out. Why are we now paying for the mistakes the banks made so why can’t they now do something to correct their mistakes. Just a thought, what do I know.

  2. Is the right revolt for everyone to stop paying their mortgages? Maybe everyone in July skips their mortgage payment if this isn’t reversed. I would guess that would get everyone’s attention.

  3. Karen,

    And if you’ve been making double mortgage payments for years to pay off your house….and are now on the final few payments….say at a refinanced 6%….what do you get for your thrift and debt consciousness? You are still picking winners and losers.

  4. I think that it’s prima facia foolish to base anything on the points of view of commodity traders: They of course have a very short term planning horizon, they have a very simple objective function, and even so, aren’t very good at economics, much less ethics or social policy.

  5. The idea of debt forgiveness/restructuring is not a new one. From The Panic of 1819:

    The immediate and pressing problem for debtors was the legal judgments accumulating against them for payment of their debts. Consequently, they turned to state legislatures, which had jurisdiction over such contracts, to try and modify the provisions of payment. The proposed laws either postponed legal executions of property or prohibited the sales of debtors’ property below a certain minimum price. The moratoria were known as “stay laws” or “replevin laws”, which postponed execution of property when the debtor signed a pledge to make the payment at a certain date in the future. Minimum appraisal laws provided that no property could be sold for execution below a certain minimum price, the appraised value being generally set by a board of the debtors’ neighbors. Such laws had been an intermittent feature of American government since early colonial Virginia.

    And:

    A report strongly in the negative was delivered by Representative Joseph Hopkinson, and this served to send the bill down to a two and a half to one defeat in the House. The arguments of the Hopkinson report were a well considered statement, typical of the opposition to debtors’ relief legislation, as well as to proposals to increase the money supply. The report began with assurances that the committee was deeply sensitive to the prevailing financial embarrassments, and that they had given due weight to the numerous petitions for relief legislation. While the proposed legislation , however, would perhaps alleviate the condition of the debtors temporarily, it would, in the long run, make their distress worse. The contention that relief legislation would eventually intensify the depression was a central argument for the opposition in all the states. The Hopkinson Committee used a familiar medical analogy noting that “palliatives which may suspend the pain for a season, but do not remove the disease, are not restoratives of health; it is worse than useless to lessen the present pressure by means which will finally plunge us deeper in distress.” They added that it was their duty to be truthful with the people and not delude them with promises that could not be kept – even at the expense of their “immediate displeasure”…The report remarked that suffering men were disposed to complain about their lot and look for rapid remedies rather than admit that the only cure was slow and gradual.

    Sounds a lot like the argument we’re having today doesn’t it? There are two factors which are common to every economic crisis we’ve ever had in this country: overlending by banks for some speculative activity and monetary inflation.

    I’m ticked about the mortgage plan and every other bailout we’ve done over the last 18 months. Santelli, to his credit, has been consistently against them as well. We’ve had at least 8 of these types of panics in our history and we always manage to recover and survive as a nation. We’ll survive this one too.

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