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Rick Santelli Is A Crazy (Bleep)…But Not A Dumb One…

March 11th, 2009 · No Comments
Econ 101 · Policy

I am guessing that a number of you have seen this already (albeit without my lovely color commentary), but below is the video clip of Rick Santelli ranting against various parts of Obama’s economic plan. (I must admit that I found this more intriguing before I realized that Santelli was a regular on-air editor for CNBC rather than just some random schmoe reporting from a trading floor who turned out to be nuts.)


(Here is the video directly from CNBC if you prefer.)

My favorite part is when the random guy on the side chimes in with a comment about moral hazard, though I also think it’s funny that Santelli points to the trading floor (The Chicago board of Trade or something like that) and claims that the people there are a good statistical cross-section of Americans. Not sure what America *he’s* living in…

Let’s think about the moral hazard issue for a second. According to Wikipedia, moral hazard is “the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions.” So why is this brought up here? Let me give an example: I am (regrettably) a homeowner, and thankfully I am able to pay my mortgage every month. (Gracias, roommates.) Now, part of the reason that I pay my mortgage every month is that my home would get taken away if I didn’t. (Never underestimate the incentive of being out on the street in a Cambridge winter!) Now consider the effect of potential legislation that would make it harder to kick people out of their homes for not paying their mortgages. This seems “fair” and “nice” on the surface, and what politician wants to appear to not give a rat’s ass whether people are getting kicked out of their homes? However, by providing any sort of selective assistance to people who can’t pay their mortgages, you are implicitly punishing those who are sucking it up and finding a way to make their bills work on their own. Taken that way, the fairness value of the legislation isn’t so clear. But economists (myself included) don’t generally like to dabble in the grey area of fairness, and I digress.

Coming back to moral hazard…even if you take the fairness issue off the table, most legislation intended to aid defaulting homeowners is going to lessen the incentive for the “good” homeowners to continue to be good. Maybe if I knew that I couldn’t be kicked out of my apartment those mortgage payments would start coming in later and later! (I in fact had a boyfriend once who bought his mom’s condo and had her pay him rent…he mentioned once that she had never been late with her rent before but was now getting behind once she was paying it to him. I tried to avoid giving the old “I told you so”, but I may not have been able to resist.) Now, with the increase in defaults, more assistance would be needed for those poor people who “can’t afford” their mortgages. And with more assistance comes a larger incentive to default, and the problem grows…and grows. Luckily, people don’t seem to be perfectly functioning economic robots, and most do have at least some sense of morality. This morality should serve as a mitigating force in the above scenario. That said, how many people are defaulting on mortgages not because they can’t pay but because it’s not worth it, given the sharp decline in the value of the house? Should those people be bailed out? I honestly don’t even know what side to take on that one, but I at least see the need for a more nuanced policy instrument than the blunt sticks currently being thrown around. (Developing good economic policy wouldn’t be nearly as interesting if it were easy!) The overarching goals should be:

  1. Provide assistance to those who geniunely need it (yes, I am nice like that, for both fairness and economic reasons)
  2. Provide as little incentive as possible for those who don’t need assistance to impersonate those who do
  3. Fund this all in a way that the “good” homeowners don’t feel like they are directly subsidizing the “bad” ones

Now THAT creates the $420 billion question. :)

Coming back to the video, Santelli does make somewhat of a reasonable, though still exaggerated, point at the end, that the government can’t “buy its way to prosperity” through spending, and that the fact that the multiplier on government spending is greater that 1 does not necessary impliy that the government should spend without bound. I agree, but that is topic for a future post.

Tags: Econ 101 · Policy

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