CNBC Fail
- Posted by ryan on February 20th, 2009 filed in Economics
I don’t really know why anyone cares what CNBC’s Rick Santelli thinks about anything, but apparently his rant about how he and his rich friends are having trouble staying rich because Barack Obama is trying to help 10 million households avoid foreclosure struck some kind of nerve. His position on this is dead wrong, but then if I had a nickel for everytime some tool said something toolish on CNBC, I’d be rich enough that they’d let me come on air and say toolish things myself.
But just to give you an idea of the kind of intellect at work here, Santelli is currently on my television screen complaining a bit more about the state of things. He’s saying that people have also lost a lot of stock market wealth, for some of the same reasons they’ve lost wealth from declining home values, and what’s the difference? It’s almost like he has no idea how this whole mess began — like he’s never heard of a mortgage-backed security and is unaware of the process that lead to the assumption that Citigroup and Bank of America might have to be nationalized.
But the difference between the two is clear. Shrinking stock market wealth can be painful, as we saw during the tech bust. It can cause economic dislocations, contribute to reduced consumption, and alter expectations, particularly among older individuals.
But the housing bust is an entirely different game, for several key reasons. One is that homeowners — even the responsible ones — were highly leveraged in the housing market. A good buyer might have put down 20% of a home’s value, only to watch prices fall by 40%. Most investors can’t lose more in the market than they put in. That’s not true for homebuyers. It’s also the case that many homeowners were using housing wealth to directly fund consumption, something few stock market investors do.
What this means is that the economic viability of tens of millions of households, many of which weren’t even recent buyers or weren’t particularly irresponsible in their purchases, is threatened by the housing bust. And this threat continues to grow, because housing is in a vicious cycle — prices fall, households default, banks are forced to sell off their growing inventories of foreclosed homes at rock bottom prices, and this places pressure on a new round of owners, some of which will default, and so on. Meanwhile, there are all kinds of other nasty effects from massive foreclosures. Local and state budgets are devastated, forcing officials to pursue procyclical budget policies. Job markets suffer dislocations as residents leave. Pain spreads to commercial real estate and local retail. And loan losses continue to undermine the financial system.
It’s very serious indeed. But Santelli doesn’t seem to understand this, and probably wouldn’t care if he did. After all, he’s trying to make money! And so are his friends! And everyone knows that the best way to make money is to keep the government’s nose out of everyone’s business. Or something like that.
February 20th, 2009 at 3:19 pm
I don’t watch CNBC and don’t want to defend Santelli, but it was not only MBSs but also CDSs that went south, leading to a parallel problem. I bring that up for data purposes only.
February 20th, 2009 at 4:03 pm
Why does this argument not hold for student loans?
The equity value of my degree has been cut drastically by the terrible economic outlook. My student loans are at 8.5% — fully recourse to my income and not dischargable in bankruptcy — and I cannot refinance.
Where the hell is my government bailout? Why am I paying taxes to subsidize someone else’s consumption of housing? I haven’t heard a single word on student loans.
How is this fair or reasonable?
To use your words:
What this means is that the economic viability of tens of millions of degree holders, many of which weren’t even recent students or weren’t particularly irresponsible in their studies, is threatened by the employment crisis. And this threat continues to grow, because employment is in a vicious cycle — prices fall, revenues fall, companies are forced to lay off their growing inventories of employees, and this places pressure on new graduates, some of whom will not find jobs, and so on. Meanwhile, there are all kinds of other nasty effects from massive unemployment. Local and state budgets are devastated, forcing officials to pursue procyclical budget policies (like layoffs). Job market contacts suffer dislocations as alumni leave. Pain spreads to people with masters and professional degrees. And unemployment continues to undermine the financial system.
February 20th, 2009 at 4:40 pm
You are arguing that the government is not doing anything about unemployment?
February 20th, 2009 at 5:07 pm
They are specifically targeting those who invested in the housing stock over and above those who invested in education. This is picking winners and losers.
Anyone who owns (or in reality, owes on) a house will receive the same level of benefit from the stimulus bill (they need jobs too).
But in addition they get a massive refinancing program complete with direct annual $1k handouts from the government.
This is in addition to the massive tax advantages they enjoy (the rules on mortgage interest deductions are incredibly lenient, while those on student loans are capped).
Why the special treatment for home debtors, over student debtors?
February 20th, 2009 at 5:23 pm
The government isn’t intervening in housing markets because it likes getting folks out of debt. It’s intervening in housing markets because housing markets are at the center of the crisis.
The government is also using TANF to buy securitized student loan debt, in order to keep credit flowing to student borrowers. But the government’s goal here is to reduce the number of foreclosures as efficiently and fairly as possible, because that’s a critical part of economic recovery.
February 20th, 2009 at 6:12 pm
The crisis is a debt to income problem, not a housing problem. Household balance sheets are stretched; they cannot meet their debt service. A majority of this debt is mortgages. But looking at the flow of funds, trillions of dollars worth are not. Yet for some reason we are only worried about mortgage debt, even though it typically is the least onerous form of consumer debt. Compared to other types of debt, mortgage debt has lower rates, is entirely tax-deductible, has the longest maturity, and is non-recourse to borrower income. Yet the policy response is to subsidize this debt even more.
The problem with the current approach is that it assumes that the way to fix a collapsing housing bubble is to raise housing values back to bubble levels through direct government subsidization of debtors.
I do not think this is wise.
We face two paths:
1) Allow housing prices to fall to a level approximately where people on a median income can afford the median house, where the present value of rental income is roughly equivalent to equity rates + cost of carry. There will likely be overshooting, but that is what happens when you subsidize a bubble for half a decade. You will never have stability in housing until this equilibrium is reestablished - see Japan.
2) Set an artificial price floor in housing, subsidizing those already owning homes (subsidies which will need to be permanent absent a massive increase in median income), and shutting out those not already in the housing game. This works but it costs a lot of money, money which will come from all taxpayers (or really from those willing to buy USG debt).
We are racing down the second path, with little thought paid to the sort of commitments we are making, and the massive distortions it is placing in the marketplace.
This is welfare for people who chose to lever up and buy houses. Why we, as a society, heavily subsidize (and bail out!) this kind of “investment” vs. other kinds, I will never understand.
February 23rd, 2009 at 2:16 pm
Interesting debate. There are people making good arguments (Richard Florida, e.g.) that promoting homeownership, whether through affordability or subsidy is a foolish purpose for policy. The argument makes sense, although I’m one more 20% fall in housing prices from sea level. So, I’m desperately seeking an opposing rationale to believe.
February 23rd, 2009 at 6:23 pm
One immediate gut reaction: anyone using home-related wealth to fund consumption deserves whatever they have coming. I thought it was stupid when it was happening, and I think it’s doubly stupid now. Were all those flat-panel TVs and luxury SUVs worth it? The judgment of economic history seems to be no. In my view the best outcome for such folks is to be punished so mercilessly by the marketplace that they’re not tempted to make the same choices again.
As for folks like me, who’ve bought homes we plan to settle in (and, eight years and two kids later, totally are), and who started with 20% and are paying the rest of the balance as aggressively as finances allow, this entire tempest is entirely theoretical.
As with urbanism, as with transportation, as with all kinds of things, the older values of hard work, thrift and community are proven right yet again.