Saturday, February 21, 2009

Santelli Nails It Again

In public life, you know you are doing something right when your actions are officially rebuked.

This is exactly what happened to CNBC's Rick Santelli today for his indignant invective against the Obama Administration's mortgage bail-out plan.

The rebuke came from White House Press Secretary Robert Gibbs, who offered to buy Santelli a cup of coffee...decaf. Cute. Really cute.

Well, I think we should all buy Santelli coffee, whiskey, Chianti, Upper 10 (remember that?) or whatever the hell he wants to drink. Why? Because he has continued his streak as probably the most on-the-money (pun intended) financial reporter out there.

He has had it right-on over issue after issue. To wit:
  • Santelli takes down the odious Jim Cramer over his market predictions in 2007.
  • Santelli speaks the truth about the bank bailouts.
  • Santelli calls it on the Fed and interest rates.
  • Santelli explains why speculation didn't cause high oil prices last year.

Now, I know that those clips were filled with financial jargon and guys in ties yelling at each other, but I hope you can forgive me for that...it's the world I used to live in.

He was right on those issues in the past, but his insight was more technical and based on his background. This background is what make me like him so much. He cut his teeth trading bond futures at the Chicago Board of Trade. To do that well, one needs an understanding of the wider economy and enough knowledge of the credit markets themselves to trade successfully. In other words, this guy paid his bills because of how well he knew credit markets.

This time, though, he is right because he simply states the idea of moral hazard. This idea basically says that people who are sheltered from a risk behave differently than those who are not. The hazard part comes in when the party doing the sheltering has to choose who to shelter and who to leave aside.

Put very simply, Santelli, myself and I suspect a lot of people don't want to pay for the mistakes of others. People took out mortgages at insane terms that they could never pay back? Too bad...that's their problem. Banks lent too much and leveraged themselves to a ridiculous level? Tough shit, that's the game.

Now, I know what you are thinking: "Will, you always jump in to defend the big capitalist interests against the little guy. Aren't you a little guy? You aren't one of these pirates in neckties on Wall Street, are you? Why the sympathy for them? They got their bailout, now why can't we get ours?"

Well, to that I say that, in this situation, neither big capitalist interests nor the little guy are blameless. In a perfect world, I would say that we bail neither of them out. This is not, however, possible.

Why? Systemic risk. Just how this was defined and implemented (remember all the talk about "too big to fail?) was a bit of a muddle and was charged into without any idea of a coordinated plan or a desired outcome. For a great telling of that tale and it's implications, watch this great episode of Frontline from this past week.

I just thought that Santelli was expressing the frustration of people caught up in this financial crisis and also expressing the idea that was leading to that frustration.

And for that, I say, "Amen and preach on, Brother Santelli!"

3 comments:

Lost A Sock said...

I couldn't agree more. If our country spent half its energy giving incentives to (or minimally, not taking a dump on) citizens on the right path- those trying to do the honest thing, instead of always bailing out those who screwed up, we'd be in an infinitely better place. I know that sounds awfully cold, and believe me, there is most a definite place for charity. But there are far too many people crying wolf, expecting a bail out (and I don't just mean in the mortgage crisis) instead of taking responsibility for their own lives & decisions. We too were caught in the real estate mess. We did the best we could with what we have and never tapped the government's (nor anyone else's, for that matter) bank account. Remember when there was a sense of accomplishment in the world for making it through hard times on your own?

Off my soap box. ;o)

the iNDefatigable mjenks said...

I saw a headline yesterday on CNN.com that said something to the effect of "Why the experts didn't see the crash coming."

Um. Maybe their experts missed it. I remember reading down here about how, when the housing bubble burst, things would go downhill fast.

Also, Mike Munger--Duke professor of Economics and former Libertarian Candidate for Governor in North Carolina--talked about how he pulled out of the markets in August of 2007 because things look like they were about to take a turn for the worst.

So, when I hear about how the so-called "experts" missed it, I snort derisively. But then again, this is CNN we're talking about.

Josh Giblin Gedacht said...

Mr. Shannon,

Glad you enjoyed that episode of Frontline. I also found it highly illuminating, and I especially liked its straightforward examination of moral hazard versus systemic risk.

However, I would take issue with some of the points you raise:

1.) I found Rick Santelli's intemperate rant troubling, particular in regard to his oozing contempt for "losers." I, for one, would like to think that we as a nation are capable of helping people who get in over their heads. People almost always lack perfect information, and everybody is capable of making mistakes. For decades now it has been the American dream to own a house, and I think the longing for this dream goes far beyond any rational evaluation of self-interest. Moreover, housing gets to real, personal issues of family, livelihood, security and the like. How can we continue to bailout banks and let individual homeowners foreclose--they'll just show up on the public dole somewhere else down the line, and in considerably diminished circumstances to boot. I am glad my tax dollars will help people with housing problems, and this comes from somebody who rents and derives no discernible benefit from the proposal.

2.) I know, you would say, that this will skewer incentives and encourage people to persist in foolish behavior. But in a building recession, won't risk-taking--that venerable fount of economic growth, entrepreneurship, and capitalism-- get crushed? If the government doesn't intervene, things will just keep unraveling.

3.) Perhaps reflecting our respective ideological blinders, I took more or less the opposite take home point from the Frontline episode. It seems to me that Paulson let his guilt over moral hazard produce a muddled response and get in the way of bailing out Lehman Brothers. If he had been unapologetic in his interventionism, things would have turned out better.

That's it for now....