I have now seen several instances of a video clip of Rick Santelli, a CNBC reporter at the Chicago Mercantile Exchange, ranting about the government bailing out homeowners. A short video clip has no context – the various media channels of all perceived political persuasions prefer short, sharp images without context because it arouses our attention and emotions. Context engages our reason and diminishes the emotional impact. Context takes time, time in which you might get bored and change the radio or TV channel.
So here, as the veteran broadcaster Paul Harvey (he just died this past week) used to say, is the “rest of the story”.
This was part of several exchanges I saw that morning about the entire scope of the bailout. Santelli has not been an advocate for any bailout, either Wall St. or Main St. As he said that morning, homeowners were taking a risk just as much as a person buying stock takes a risk.
What kind of moral hazard do we create when we reward people who took a risk and lost? Santelli asked (and this is a paraphrase – I don’t have the transcript) “Many of us have seen our 401K become a 201K. Why don’t we get a bailout?” He continued to ask the key question, “Why aren’t we helping the people who will contribute to the future GDP of this country? The doctors who graduate with a hundred thousand or more in loans? The engineers and scientists?” Then Santelli turned back to the traders on the Chicago floor and said “Wouldn’t you guys like some help with your student loans? How many people have loans?” Most of them nodded.
According to this news release in May 2008, “the average debt for medical school graduates is approximately $140,000, according to the American Medical Association (AMA)”. The debt load makes it financially difficult for a doctor to go into general practice. In 2005, the AMA listed 885,000 doctors. Of those, only 9.3% were degreed in Family Practice or Preventive Medicine. Only 8% were in General Pediatrics. 17% were licensed in Internal Medicine, in which a physician provides both general care and specializes in one of several fields like Gastroenterology.
Our compassion is stirred when we see a family with children about to lose their home. The TV images are all too frequent. We want to lend a hand because there is real need there. Little do we see the struggles of some of our best and brightest who will be able to lend a hand to us in the future, if we will only help them.
Innocent Investor 
I would agree with Santelli, as I am not a fan of any of the bailouts either — in large part because I don’t think that they will ultimately solve the problem. The ecomnomic diosaster is both wide and deep, and we cannot spend our way out of it. Note to Obama: FDR didn’t succeed in doing it, either. Keynes was wrong. But that’s a whole other issue.We, as a society, need not only to change the way we manage our lives and our priorities, we need to begin to question what have become some basic assumptions about American life.The change needs to start with our leaders in both parties. One cannot build prosperity based solely on debt. Future theoretical value is not equity.Until recently, the majority of Americans didn’t care what something was intrinsically worth or whether it was something a) necessary and/or b) affordable. They only cared about the amount of the monthly payment.Until the bubble burst, the message was that everyone should have the opportunity to live the American dream by buying a house. Until the bubble burst, people were offered opportunities to buy “more house” than they could afford, inflated appraisals, 110% financing, no money down deals with seller assistance (something that was once was not allowed as being tantamount to fraud),and ARMs with ridiculously low teaser starting rates.WaMu was the home of the flexble payment. They had three choices: pay everything you actually owe each month, pay interest only or — drum roll here — pay a fixed payment that was lower but meant that a portion of your monthly debt was being added onto the back end of the loan — negative equity.People living on SSDI were cajoled into purchasing condos with ARMs — as if their SSDI payments would ever increase enough to enable them to pay when the loan reset. We won’t talk anbout Alt-A’s or all the unscrupulous practices (such as not checking and/or falsifying credit apps). There were enough problems with the legitimate lending practices.Until the bubble burst we called this “providing affordable housing”. Now we have all become Red Queens and are screaming for everyone’s head.People purchased homes in which they not only had no equity — not even the meager 5% of the old days (a few years ago, when we bought our first houses) — they owed more than the house was worth at the time of purchase from day one.People who did have equity in their houses were encouraged to think of that house as a giant ATM machine. Home equity laons were not just used to put that brilliant kid through medical school or replace the leaky roof. They were used for debt consolidation, vacations and other items that should either have been financed differently or not purchased at all.Here’s the kicker. Something goes wrong — a job loss, illness, the loan resets and the payment goes up — and these folks are screwed beause they have no savings, no reserves to fall back on.They have been told for quite some time that their “savings” — in fact their entire net worth — is in the ever rising equity of their home.When the bubble bursts and suddenly there is no equity and no market to sell the house for the debt that is against it,they are totally screwed.Yes, they made bad choices, but let us not forget that in our consumer society, they were encouraged to do so. And that encouragement came from the top. Planes fly into buildings on Sept. 11th and what does GWB say “Don’t worry. Go shoppping.”I would suggest that we need to start talking about a) what something — anything — is worth. That includes the old debate about whether a basketball player should earn more money than a gyneclogist. And b)We need to think about whether a purchase is truy necessary or worthwhile. Does one need a 5,000 square foot house? Is it prudent to pay $300K for a place and then bring in a roll off and gut the house? Does one need a 42″ TV? Does one need and $80,000 Cadillac SUV? Or could one make due with something a tad more modest that one can actually afford.Perhaps because my father — who was 45 years old when I was born — was an adult during the Depression, I learned the lesson to never buy anything I ultimately couldn’t afford. Buying “on time” was OK as a convenience (and necessary for something like a house), but I was taught that it was foolhardy (if not downright irresponsible) to expect that some unforeseen ship would come in thus making it OK to buy that Caddy instead of a Saturn.It may be that with the passing of the Depression era parents, no one is taught that lesson.But I think this should truly be a wake up call for us, and we need to start thinking about our priorities. I would like to see much more assistance to people of any age who are looking to further their education, and I think it would ultimately be highly benficial to our country as a whole to give meaningful financial incentives (other than be-in-debt-forever student loans) to people who want to become doctors, teachers, and so forth. Maybe even plumbers. But not lawyers. :0)Or perhaps the incentives could be given to the universities to subsidize tuition.We have to ask ourselves what we value and where we go from here. Forget about the government bailing us out and leading us to the promised land. We don’t have time to wander around this particular desert for 40 years. That’s not what government does, and that’s not what Obama, McCain and the rest of the crew are in it for.I had hoped that Obama would be different, but so far I’m not seeing it. The feds are sending the wrong message to the people they are supposed to serve. The message needs to change.And so do we.PS: Second note to Mr. Obama: take a crash course on what it means to be the world’s key currency including why the Brits suckered us into taking over in 1924 and then a really good, hard look at American monetary policy which is what (not unscrupulous lending practices) actually got us into this mess in the first place.Anyone else’s comments welcome.Lydia
LikeLike