Saturday, February 21, 2009

Rick Santelli - Will Atlas Shrug?

Rick Santelli is a self-professed Ayn Randian libertarian who believes the free market should be left to work things out and the more the government fiddles, the worse things may become. He is the bond reporter for CNBC and is well known for his opposition for all the bailouts and in this video he is speaking against President Obama's plan to bail out home owners who got themselves in too deep who shouldn't have. This video has unleashed a tremendous reaction from Republicans, Democrats, Libertarians and average Joe's who feel their voice has been silenced.

As much as I hate the Republican's for taking on the loony social Christian right (perhaps as a convenience rather than for ideological reasons) I do favour the traditional Republican economic values. In the enlightenment they fought for the separation of Church and State. I believe in the separation of Economics and State. Given states will always have budgets and will always collect taxes, the most optimal scenario is to have low taxes with small governments who provide necessities the free market cannot reasonably be asked to own (ie health care, education, defence, etc).

Ayn Randian "objectivist" philosophy states that its a good thing for man to be selfish - but not selfish in the traditional sense of the word. Traditionally selfish would mean someone who stole or leeched off someone. In objectivism, a leech cannot be selfish because they are not helping themselves. By relying on others all it takes is for the other person to leave the picture and the leech is screwed! This philosophy has been the backbone of modern capitalism despite its obvious antagonistic view with traditional Christian values. (An irony I find amusing considering the links between the Republican Party and their Christian affiliation)

When Rick talks about people "carrying the water" he is talking about all the Ayn Randian selfish people who are generating the GDP, creating jobs and working hard - the people who are "Real Americans". On the other hand those who "drink the water" are those members of society who do not help themselves (I'm only talking about those who can, not those who cannot) and rely on the hard work of others to get by. The classic example of a water drinker is the single woman who recently had eight more IVF children despite having no job and six more at home.

I remember an anecdote from someone who explains why hippy communes did not succeed. It was simple - there were too many people doing too little, too few people doing too much, and those resented those who did little. It works against the human spirit of "fairness", but does not go against the will of humans to help others who are truly at need.

The question Ayn Rand posed in Atlas Shrugged was that, what if those who carried the world on their shoulders (mirroring the Greek God Atlas) were to give up (shrug). Well clearly society would cease to function and the basis on to which capitalism has been so successful (the drive to better oneself) is removed. The unintended consequence or "moral hazard" of communism is the reduction in desire to work hard.

So what are these important "moral hazards"? They are an interesting pair of words which explains what happens when one party loses its incentive to proceed as it would if something wasn't done. Would you still lock your car if you had car insurance? Well perhaps, but there is less incentive to. A moral hazard would exist when one takings out insurance, doesn't lock their car and relies on the insurance company to give them a new car. Their behaviour has changed, to the detriment of the insurer. Would you act with less risk if the government will bail you out if you are "too big to fall"?

Moral hazard is perhaps the best explanation as to the current failure of the markets. There was no risk with writing or taking peoples mortgages because they were passed on like a game of "pass the parcel" until the music stopped and people were left with rubbish. The mortgage brokers had the benefits of the commissions with no risk - giving them carte-blanch to falsify information. The banks didn't care because they would pass the mortgage on (taking a commission with them) and so on and so forth.

All these hyper-inflated house prices were artificial. Those who bought high should shoulder the burden of their mistake. The government is taking pity on them and giving them money to reduce the principle so they can refinance away from their stupid decision to get a loan which starts off low in repayments and resets to normal after a few years. (An ARM loan) Let me put this in another way. Should the government compensate those who lost money in the tech bubble which burst because it was unseen and dramatic for those involved?

There are plenty of people (myself included) who did not jump in the red hot market - or missed the opportunity to get in. Now that the markets are bound to reduce to their pre-hyper-inflated values, why can't people like myself jump into the market and pick up a bargain thanks to the bad decisions made by people who shouldn't have gotten a loan in the first place? This is the way the free market works and this is what Rick Santelli and most people want! The more the prices are kept artificially high, the less affordable they are.

Larry Kudlow (who I do not agree with on his Keynesian policies) noted that in California where prices have fallen, sales are rising! This is exactly the free market working. The same free market others are claiming is not working. Rick at another time noticed correctly "the market isn't working the way the government wants it to work".

The average Joe's are highly supportive of Santelli - why? Because they have had enough of those people in society who "drink the water" - and they all know who they are. Too many irresponsible people were treating their houses like a bank, getting second mortgages, a second car, spending their money on crap (thanks to Bush's spend your way out of a recession) and many of those who didn't do that - who were responsible are not having to foot the bill. Let's not forget the moral hazard!!

Those "water drinkers" include all the CEO's and bankers who got money for nothing or money for risk and high leverage. They aren't the Ayn Randian selfish people - they are just simply morons! Rick was there from day one saying no to the bank bailouts, no to reckless government spending on his (and others - including his kid's kid's) dime.

Many nay-sayers think its a bit rich for Santelli and his trading buddy's to be rallying against this cause. They believe those traders are either highly paid or speculators, the people who got us into this mess. Are they right? No! Those traders (in the pits in Chicago trading treasuries, eurodollars, etc) are simply the cogs in the wheel of capitalism. The role of speculators is highly controversial. Those traders certainly weren't the ones who were buying up houses on the premise that "house prices would never go down". No one complains about speculators in oil when the prices are driven down (if one can even say the role of speculators is anything other than marginal price movements - supply and demand is far more of a factor).

The democrats who have gone in to bat for Obama have said that this plan helps those whose equity is negative or low to refinance! The problems with this is
a) If their equity is negative - too bad - you bought too high.
b) If they cannot repay now - why did they get the bad contract to start with? (ARM's etc...)
c) Many of those people will not be able to repay regardless - these are the liars and fools who should never had gotten a loan to start with.

Obama's supporters say we need this to get the markets going again. The only problem is - the stock market has spoken and today we broke below a twelve year low! (If you invested twelve years ago you might have lost money today) Things are getting worse and the market is not confident with these plans. Some say we need to do something - but its worse to do something quick without thinking and make things worse. Santelli and co can see this is a bad idea. I won't pretend I have the answers, but there are thousands of intelligent people out there - doesn't one of them have an idea and a voice?

So I ask the question - Will Atlas shrug? Will we get to July and Santelli's Tea (or T-bill) Party comes where millions of American's speak their voice and say "NO" - we will not support the slackers in society - this is America where we value hard work over handouts - investing over speculation. The good news is...Obama IS listening Santelli. I have hope Obama will converge on the "right" idea - even if we go through ten or more bad ones. If you do not have hope - what else do you have?

On behalf of all hard working, penny saving libertarians - I raise a cup of tea to Santelli and his courage.

PS - As an Australian I find this fascinating. It's a completely different culture and ethic, one which I am not sure would work worldwide. Heartless capitalism, in my opinion, yields far more heart in the long run than heartful socialism.

1 comment:

Vinny said...

Santelli frequently talks about well the trading pits from which he reports have operated throughout the credit crisis compared to the unregulated markets for mortage back securities and credit default swaps. I wonder if it occurs to him that that the unregulated markets were supported and defended by Alan Greenspan who suckled on objectivism at Ayn's very own breasts. When Congress asked Greenspan about MBS and CDS, he testified that the markets should be allowed to allocate risks as it saw fit.