03/28/2009 05:12 am ET Updated May 25, 2011

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.