The nation's outrage over the never ending Bush-Obama Bailout Parade is heating up fast. This week alone we've seen grassroots rallies in Seattle, Denver, Mesa, and Kansas. Then yesterday, CNBC editor Rick Santelli set off a virtual firestorm when his passionate critique of President Barack Obama's mortgage bailout plan inspired traders on the floor of the Chicago Board Options Exchange to stop their pre-trading preparations to voice their support. The video of Santelli's call for a "Chicago Tea Party" to protest the government's constant intervention in the free market has spread like wildfire across all media outlets. What caused Santelli's outburst?
National Review caught up with him:
NRO: When we posted a link to the video, we were swamped with e-mails in support, including a couple from traders at the Board of Trade in Chicago, who have been saying right on. How have the e-mails that you’ve been getting, how have they been running?
Santelli: I’ll be honest with you, I think I’ve gotten somewhere between 850-900, and I think I had three that were negative. ... The issue is, you can’t pick out 8 or 9 percent and give them things that weaken the 90 or 92 percent who are carrying the water. ... They need to quit picking winners and losers, and they have to quit alienating the classes. You have to figure out a way to float all boats, and I think that’s where the administration has gone wrong, and I think that’s the nerve I hit.
Santelli's criticism of the mortgage bailout plan is dead on: The plan treats borrowers who sacrificed to pay their mortgages on time the same as those who used their equity for a boat and stopped paying their loans. This moral hazard sends a clear message to our children that they can avoid the consequences of their actions. But this is only one reason the plan is bad policy.
The plan's mortgage cram down provision would only worsen the housing crisis in two ways: First it would increase the risk to lenders and lead to higher interest rates for people trying to buy homes today. Second, the policy would open the door to achieving mortgage reductions for tens of millions of homeowners who can afford their mortgage payments and whose homes are not at risk.
The plan will fail because too few people will qualify and many of those that do will default anyway. The housing bubble was caused in large part by speculators who bought homes planning to flip them for quick profit and other who out-right lied on their loan applications. The mortgage bailout will do nothing to stop these foreclosures. Furthermore, the re-default rates for people that have already participated in mortgage modifications show that as many as 50% of them go on to default again.
The plan risks another $275 billion in taxpayer funds. The Obama Administration claims their plan will only cost $75 billion, but that is only true if it works out perfectly. If the plan fails to stem the inevitable correction in housing prices taxpayers will lose a full $275 billion.
Closing his interview with National Review, Santelli also connected the mortgage bailout to the Obama Administration's stimulus plan:
At the end of the day, it’s simple. A lot of the president’s advisers are saying that there’s a multiplier effect to the government money, and it’s over one. Now if that’s true, then the government should spend non-stop for the rest of our lives, because we’ll get a positive return. And it makes no sense. ... I guess in the end, I believe in the founding fathers, and I believe that in America... the pursuit of happiness and to work hard and keep the fruits of your labor is something I believe in. And I’m not saying we should forget people who need help. But at the end of the day, Americans are strong and they’re charitable. I think what they have a problem with is that it’s force-fed via the government.