Fixing the Economy vs. Fairness: The Critical Choice President Obama Has Not Yet Made

Once upon a time, you dressed so fine, threw the bums a dime, in your prime, didn't you?
People call, say "Beware, doll, you're bound to fall." You thought they were all kiddin' you.
You used to laugh about, everybody that was hangin' out. Now you don't talk so loud. Now you don't seem so proud. About having to be scroungin' for your next meal.

How does it feel? How does it feel? To be on your own. With no direction home....
You never had to live out on the street, But now you're gonna have to get used to it."(Bob Dylan: "Like a Rolling Stone")

President Obama's speech brilliantly set the agenda for the nation and Congress, and connected mandatory investments (energy, education, healthcare) to future prosperity.

Finally. After 8 long years of dissing science, phoneying budgets, bungling incompetence, lipservice coupled with inaction to major problems, we are now poised to hit the ground running.

But, unless we can overcome a major psychological barrier, we may find ourselves struggling to run in place.

CNBC's Rick Santelli's now infamous rant pitting homeowner against homeowner crystallized the choice President Obama faces as he moves to fix the economy. Although it would be comforting to believe that, as Obama Press Secretary Robert Gibbs said, support for Santelli's position was confined to derivative traders, but it would be highly misleading, and cause his boss to misjudge and thus not address, the strong political countercurrents flowing in the country.

The Santelli sentiment is not entirely ideological. Mike Barnicle of MSNBC, for example, heartily endorsed Santelli's position.

To illustrate the dilemma, let us consider a real-life case of a set of twins in their mid-30s, Bessie and Jessie (names changed). Bessie is a computer programmer, has worked hard, saved her money, but never had quite enough to make a downpayment on a home, and did not want to overextend herself with monthly payments beyond what she could afford. As housing prices soared, the promise of owning a home paradoxically became further and further out of reach despite her prudent savings.

Jessie is a stay-at-home mom whose neighbors in Florida were all purchasing properties with a minimal downpayments, renting the properties at a net-loss, but depending on rising values to enable them to take out second-mortgages and purchase additional properties. Not wanting to seem the fool in what appeared to be an easy path to wealth previously available only to the elite, Jessie joined the fray.

Today, Bessie might seem to be in pretty good shape. As housing prices plummet, she can purchase a larger home for less money, thus being "rewarded" for her prudence. Jessie, on the other hand, is underwater, and has to allow her rental properties to go into foreclosure, circle-her-financial-wagons, and try to maintain payments on her primary residence in which she now has negative equity (a higher mortgage principal than the home is now worth).

So far as this saga goes, all seems right. Bessie needs no help from others to realize her dream of a home of her own, whereas Jessie, who took the huge risks, has found that free market capitalism does not reward all risk-taking. Trees do not grow to heaven.

Well, not quite. Bessie still needs a secure job and income to qualify for a mortgage, and the contracting economy puts her job at risk. Jessie and her friends are no longer purchasing next-generation software, nor videogame boxes or videogames for their children. Software engineers, already struggling against lower-paid counterparts in Asia, are being laid off in record numbers, and the reduced sales of her products might put Bessie's job on the chopping block.

So, herein lies the dilemma: Should Bessie bailout Jessie, so that Jessie can stay in her home, have enough confidence and disposable income to spend on videogames, so that Bessie's career and job are secure, even if it means that Jessie reaps an "undeserved" benefit and Bessie may not be able to get that house at such a low price?

Santelli and Barnicle, and many others online, have said "no". Santelli in particular said that he was willing to see the value of his own home decline rather than provide help to people he called "losers". Note that Santelli is not complaining that Obama's plan will not work, but rather that, even if it did work, he would not want it.

But the question for Santelli, and his derivative trader cheerleaders, is whether he is willing to lose his job and his career to ensure his next-door neighbor who took out a second mortgage to pay for an extra bathroom and is now unable to pay is not bailed out. That is, is Santelli willing to become a "loser" himself?

My answer: yes. Here's why. Unfair though it is, if Bessie does not bailout Jessie in the short run, Bessie's own income and career, for which she has worked so hard, may be forever compromised. Multiply that by millions, and the vicious spiral of declining incomes, declining consumption, declining tax revenues, rising unemployment insurance, rising deficits, ruined lives and ruined careers, social disintegration and the psychological stress that causes (e.g., marriages decline, divorces increase) dwarf the implications of unjust enrichment.

In his speech and in his policies, President Obama seems to be trying to split the difference by providing relief for people who meet certain criteria of worthiness, but letting others fail.

The danger is that that may be a prescription for a triple-failure: it is insufficiently sweeping to fix the economy, it will not assuage the Santelli-ites anyhow, and its substantive failure may sour even more people on what really needs to be done to fix the economy.

This is a psychological issue, as the macro-economics are fairly clear: the economy must be fixed, the housing market needs to be fixed to accomplish that, and the vortex described above is the inevitable result of not fixing it.

Several weeks ago, I suggested that the President call upon the nation not just to service, but to sacrifice. ("Obama Has Called the Nation to Service; He Needs to Call it to Sacrifice", February 12, 2009). Since then, the Santelli episode has made the stakes of sacrifice very clear.

One place to start is this: instead of calling others "losers", perhaps we can begin by recognizing as FDIC Chair Blair said, there were some bad lenders, bad buyers, bad bankers (and bad politicians), and that, as Benjamin Franklin told us years ago, "we must all hang together or, most assuredly, we shall all hang separately".

No one is better than Barack Obama at sensing, addressing, and shaping psychology that appeals to a greater good.

The President needs to call upon those extraordinary skills to shape the discussion. The economy, and his Presidency, may depend upon it.

Comments

[Spesabsquemetu]

This would all make sense, if indeed - it were Jessie and Bessie who were benefitting in some way from this outrageous conduct.

Where are the questions concerning those TAX HAVENS operated by beneficiaries of the BAIL OUT?

Why are they not paying BACK TAXES?

And people wonder why the public feels scammed?
Where are the investigations into TAX HAVEN HEAVEN?
HAVEN for the tax haven users, and HELL for the rest of us?

[cylindar]

Obama will do well for us but the problem is that he cannot fix our problems. You and everyone else will suffer and have to live with that. We have been screwed and there is nothing that really can make it right again for lots of people because most people are not at the point that they will sacrifice.

[antaeus]

Define "sacrifice." I'm happy happy to give of myself for the common good. I support worthy charities and help my neighbors, and not always when it's convenient. But for any of us who watched what was happening in housing these past ten years, the notion that we now must "sacrifice" to help people who caused the problem is beyond maddening.

[Paul Abrams - Huffpost Blogger]

Maddening, yes.
The question is whether maddening should be the basis of policy if that policy is so self-destructive.

[Mover]

"Should Bessie bailout Jessie"

No, she should not. There is a better way than Bessie bailing out Jessie. Bessie is going to have enough trouble paying for the Bush/Obama/Dodd/Franks lending and Untrustworthy Co., Inc., (better known as TARP & The Stimulus Package) in future years.

The reason is that Jessie's problem was not caused by Bessie. Jessie's problem was caused by the US Congress and the President of the USA, current and ex.

As for Jessie, she can be protected from lenders who can't think past tomorrow's balance sheet. Congress needs laws that require banks to practically fail before they can repossess a home. They should have "payment forgiveness periods" to allow mortgagees to work out a payment plan or get back on their feet. If Jessie were a banker’s friend, such as Donald Trump, she would have been given a blank check by the bank just like they did for Trump. Also, the congress could create lending laws that require contract fulfillment, i.e., no “walking away” from an upside down loan under penalty of fines and prison.

Government should have allowed the bad actors to fail. If AIG had failed, there would have been no taxpayer funded bonuses or vacations. Jessie's mortgage could have been assigned to a mortgage company and the money Mr. Bush gave to his friends could have been used to prevent the massive job losses by keeping the system moving forward, instead of stalling like it has.

[vippy]

I am thinking no one wanted it to go forward, this all had been planned. This did not come overnight. But I have yet to figure what is the plan for us for the future?

[JakeMontero]

I agree with what I've read thus far -- "there were bad lenders, bad buyers, bad bankers. In the end, everybody was greedy.

[Mover]

Not everybody. Just politicians.

[MEN8v]

Apparently you've never seen the show "Flip This House"

[napolean]

There are two ways to make it in this world… you can either be a producer or you can steal from those who produce. I once thought our government “of the people, by the people and for the people” was tasked with keeping the criminals from stealing from the producers. The government has become the criminal. We are lost.

[antaeus]

" . . . vortex described above is the inevitable result of not ' fixing ' it. [emphasis mine]"

One major hurdle for many of us is an aura of dubiousness around this assertion.

Aren't over 95% of homeowners making their payments? Would the transferral of foreclosed properties after revaluation to new, more responsible owners really result in a "vortex" of collapse?

Or does this have a larger political component than is being openly admitted? Is it systemic collapse we are fearing if we don't give imprudent buyers a do-over, or is the televised spectacle of evictions the real fear here (which, by the way, I fully understand would be a concern for any administration)?

[Paul Abrams - Huffpost Blogger]

I can only speak for myself. I think the evidence thusfar is that subprime problems are spreading to the more conventional, and a continuing economic contraction will leave more people unable to pay what were once perfectly reasonable mortgage payments.

In November, I suggested that mortgage principals be reduced by the same percentage as the mortgage backed securities instruments have been written down by banks. That would apply to everyone, although randomly, depending on which MBS your mortgage is in. Its rewards are random, but widespread, and it costs the taxpayer nothing. The banks, having already written down the security, would have no further writedowns, so it would not even impact the banks.

Nonetheless, the banks would lose a potential future rise in their value. The remedy for this is to provide banks a percentage participation in the equity due only when the home is old.

[sdskelton03]

I disagree with your premise. I don't think the sky will fall if we let reckless real estate investors go under.

[Paul Abrams - Huffpost Blogger]

I agree, as far as you go. But, when the failures lead to further economic contraction, job losses, and thus spreads to the "non-reckless" there is a long-term impact on everyone. That's what some forbearance for the reckless would avoid.

[MEN8v]

Interesting comments. I definitely agree that there was no single cuplrit that lead us to this point. As you said (and I have posted in other comments), "there were some bad lenders, bad buyers, bad bankers (and bad politicians)."

My initial inclination was that the qualification requirements in President Obama's housing rescue plan were good. They seem fair -- don't reward bad behavior or rampant speculation. I hadn't considered that whether my inclination is correct might depend on how many foreclosures can be avoided given the qualification requirements and whether the requirements leave some markets still reeling due to the disproportionate share of overreaching and/or house flipping that occurred there (Florida, California, Texas, and Nevada come to mind). It still goes against my natural instincts to bail out every mortgage holder, and I'd like to see some disaggregated numbers before I concede your point, but you've given me something to think about. Thanks!

[IndianaJoyce]

Ditto your remarks, adding this:

Santelli, et al., are trying to make a simplistic arguement by identifying "irresponsible home buyers" as the culprit. Whenever we waste time figuring out who to blame and how much to punish them, we risk missing the opportunity to fix the problem before it gets out of hand. As you implied, there seems to be plenty of blame to go around.

Let's just do the best we can to solve the problem and be done with it. I believe that President Obama's outline is a good start.

[Valerie Tarico - Huffpost Blogger]

Well said!

Here's a thought: What if instead of Bessie bailing out Jessie (or her banker) she puts her bailout money into small businesses -- or venture capital for the new energy economy? James Boyce had an interesting piece today along these lines: http://www.huffingtonpost.com/james-boyce/i-may-be-a-complete-idiot_b_169770.html. The gist -- give the money to the innovators. Instead of trying to shore up the old (e.g. the auto industry et al) kick start the new.

[Paul Abrams - Huffpost Blogger]

True, but so many people have so much wrapped up in their homes that a spreading decline impacts the country's ability to respond to those new companies and innovations with purchases. I would not equate home ownership with the auto industry.

[TomSachdeva]

I love our President , I also say mine as he is the world president not just US. I respect him for having no fear in accepting the challenges of the depression .He is an excellent orator and I have listened to very few men in history who have the confidence and calmness around there aura.Salute to him.
http://www.TheTorontoRealEstate.com