DEFENDING CNBC’S RESIDENT CASSANDRA

3/1/09

In a 3/1/09 Chicago Tribune commentary piece, Mike Zucker, a stockbroker who resides in South Lake Tahoe, California, excoriates CNBC futures reporter Rick Santelli for Mr. Santelli’s expression of exasperation at the government’s plan to bail out millions of underwater and/or behind on their payments “homeowners.” Mr. Santelli, making perfect sense, said of the Obama administration’s plan “The government is promoting bad behavior!” Then Mr. Santelli went on to ask if “we really want to subsidize the losers’ mortgage.” While the word “loser” was poorly chosen, and one suspects Mr. Santelli regrets using it, Mr. Santelli’s major point was absolutely right; the Obama administration’s proposal is yet another in a long line of government schemes designed to punish the responsible to bail out the irresponsible.

Mr. Zucker disagrees, but his arguments are specious. He says that

“Nobody’s suggesting paying for neighbors’ mortgages or extra bathrooms. The proposal deals with a shared government/lender concept of moderating some mortgage rates and possibly some minor principal.”

Who exactly does Mr. Zucker think the “government” is in a “shared government/lender concept”? The government is indeed the taxpayer, the responsible taxpayer who pays his or her mortgage on time because he or she didn’t feel the need to look down his nose at others by an ostentatious display of wealth s/he did not have in the form of a house s/he could not afford.

Mr. Zucker, while castigating Mr. Santelli for not having read the Obama plan, is apparently a little short himself on the plan’s details. One component is a refinance plan, allowing Fannie Mae and Freddie Mac, both now wards of the state, to lend up to 105% of the value of home, up from the previous 80% of a home’s value. Who is on the hook for the $200 billion the government will put up to back these risky mortgages? The taxpayer. The second major component, of the plan, with a price tag of $75 billion, is to persuade lenders (if they can be identified, but that is another issue) to reduce the monthly principal and interest payment on a mortgage to 38% of borrower’s income. If the lenders do that, the government (i.e., the taxpayer) will provide a further subsidy to bring down the P&I to 31% of a homeowner’s income. The first component of the Obama plan puts the taxpayer on the hook for untold liabilities, the second goes right into the taxpayer’s pocket to, indeed, bail out his neighbor’s extra bathrooms and outrageous spending.

Mr. Zucker argues that not all lenders are in trouble because they bought too much house. This argument is ridiculous. If you can’t afford your mortgage payment, you bought too much house, and/or borrowed too much against your house, by definition. Even outside the most outrageous cases (e.g., the (perhaps, but probably not, apocryphal) guy who makes $50,000 and has $350,000 (or more) in mortgage debt and a home equity financed Lexus or two in the driveway), even those few people whom Mr. Zucker cites who actually put down 20% on a conventional mortgage and are now in default are, by definition, in more house than they can afford. When one buys a house, one does not spend to the absolute limit of one’s income and assume everything will at least stay the same, or, in most cases, improve, financially. A prudent buyer buys less house than s/he can afford and puts money aside just in case things take a turn for the worse on the financial and economic front. I’m sure those in favor of bailing out the irresponsible can find a few people who applied such quaint logic to their home purchases and subsequent spending habits but who still find themselves in danger of default, but I’d be willing to bet a very few. If this program were designed only to help out such responsible borrowers, it would be so small it would escape all but the most ardent political junkie’s notice.

Mr. Zucker, who apparently doesn’t watch CNBC and thus doesn’t know Rick Santelli’s position on the overall bailout mania in Washington, comes up with the following:

“Rick, rewarding bad behavior is giving huge subsidies to financial institutions that use them to buy other companies, or to treat their incapable executives to expensive junkets…”etc., etc.

Perhaps to Mr. Zucker’s surprise, this is a point on which he, I, and Mr. Santelli agree. Rick Santelli has consistently opposed every bailout that has come down the pike, and has done so to the strong opposition of his CNBC colleagues who, with a few exceptions, have been all for the bailouts that constitute the Bush/Obama financial policy.

The responsible are already bailing out the irresponsible through the low interest rates we receive on our savings, low interest rates that prevail largely because Obsequious Ben Bernanke and his colleagues at the Fed simply can’t bear to see any borrower, especially big borrowers with impressive sounding Wall Street names, fail. Now Mr. Obama is following in Mr. Bush’s bail out footsteps by proposing a massive government spending program, ultimately coming out of the taxpayers’ pockets, designed to bail out more people who simply borrowed too much money to buy too much house and too many toys. Again, the responsible will be forced to pick up the tab for the irresponsible.

And people wonder why the ranks of the responsible continue to shrink.