Thursday, February 20, 2020

Housing: Part 362 - The Odd Case of the Elites vs. the Masses

It is strange that a rant from Rick Santelli delivered from the floor of the Chicago Mercantile Exchange, where he was being cheered on by a bunch of securities traders, is referenced as the founding moment of the Tea Party.  Wall Street style trading floors aren't usually associated with populist anti-Elite moments.

But, the strangeness doesn't end there.  He's complaining about a new Obama proposal to modify mortgages for struggling homeowners.  Now, I'm not necessarily a huge fan of the modification idea.  What really would have been better would have been to stop the horrendous combination of tight monetary policy and newly very tight lending which would have helped to stabilize housing markets.  It's a very distant second-best plan to keep pounding down on housing markets and then to construct some sort of program contrived to help and/or hurt various actors affected by the process.  It's like tying concrete blocks to a guy's ankles, pushing him off a boat, and then throwing him a lifesaver.

But, it's just so odd that there was so much anger toward speculators and banks that it was considered populist to wish that people would lose their homes.  The elites didn't dare to suggest that home prices should stabilize or that part of the solution should be stabilizing the lending market so that people who could have been borrowers for much of the past few decades could still get loans.  But, they did dare to suggest finding ways to keep families in their homes, which caused Santelli's ire.

Here's the kicker.  Most of the damage done to working class home equity was done after the Santelli rant.  Since punishing homeowners and tying the hands of lenders was the rallying cry of the day, low tier home prices crashed in the years after the Santelli rant.  From February 2009, when he made his appearance, to early 2012, home prices in low tier Atlanta neighborhoods, for example, lost about 30% of their values - about twice the decline they had experienced before February 2009.  None of that drop, especially after February 2009, was inevitable, natural, helpful, or an unwinding of anything unsustainable that had happened before.

What percentage of the homeowners in those neighborhoods had bought their homes in 2006 and 2007 with inappropriate mortgages?  A couple percent?

Santelli and his trader friends were very concerned about moral hazard.  "Don't throw the lifesaver to the guy with the blocks around his ankles! If you do, he'll never bother to learn how to swim!"

What's the opposite of moral hazard? Sadism?

Jim Cramer also had a famous rant on CNBC. It was more timely, prescient, and would have been helpful to those Atlanta homeowners.  About the same time that Santelli was ranting, Cramer was being hounded by Jon Stewart and others for being one of the elites that caused this mess.

If only we were better at choosing our populist champions.  Instead, American populists are complaining about what big paddles the elites have, after spending a decade bending over and yelling, "Thank you sir, may I have another."  It seems to me that a reason that a crisis happens every now and then is because every now and then a crisis becomes inexplicably popular.


  1. Egads.

    Home owners should lose their homes, and depositors should lose their savings, so that we may earnestly genuflect to the Moral Hazard Totem in the Orthodox Temple of Macroeconomic Theology.

    US macroeconomists go postal over Trump's trade tariffs on a single trading partner....but just can't seem to understand housing markets. Conversable Economist has charts in recent post showing declining homeownership rates and rising rents.

    Oh, that.

    What is important is the tariffs on China!

    So...we see a populist or a socialist in the White House. The sad part is, the socialist or the populist might actually run the country better than the establishment.

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