When the financial crisis hit and Wise Men of both parties responded by backing bailouts that favored the wealthy and connected, the pot boiled over. Grassroots conservatives cast a wary eye at all new efforts to expand Washington’s reach and influence, fearing that every new program from the technocratic Obama administration was another power grab designed to reward Washington insiders. Republicans who worked with the new president were deemed traitors to the cause. The entire system had to be torn down and rebuilt according to America’s founding principles.
I get the anti-bailout anger. I also get why conservatives who had grown sick and tired of Bush were even more skeptical of Barack Obama, who seemed to double down on the notion that Washington knows best. What was lost in the immediate aftermath of the crisis, however, was that not all bailouts are created equal. When Rick Santelli, the CNBC personality widely credited with giving the Tea Party movement its name, raged against an Obama administration initiative designed to help underwater borrowers way back in February 2009, he claimed that it would force responsible taxpayers to reward irresponsible borrowers who bought more house than they could afford. And plenty of conservatives bought into the idea.
The problem with Santelli’s line of thinking is that the vast majority of low- and middle-income borrowers with underwater mortgages were responsible, hardworking taxpayers who were caught in a maelstrom. Real estate brokers lied about the value of homes, as did real estate appraisers, who worked with mortgage lenders to load families up with debt. Mortgage lenders then sold their mortgages to other investors, and thus didn’t bear the risks associated with their irresponsible lending. There was plenty of blame to go around. So why did Santelli insist that only borrowers should be left holding the bag? Why shouldn’t at least some of the TARP money that had been devoted to rescuing America’s financial system be used to ease the burden on borrowers?
There was at least one Republican who understood what had gone wrong and what it would take to fix it, but it wasn’t Michele Bachmann or Jim DeMint or some other Tea Party rabble-rouser. It was Glenn Hubbard, a paragon of the Republican establishment who had served as chairman of George W. Bush’s Council of Economic Advisors. As early as 2008, Hubbard realized that allowing low- and middle-income borrowers to go under would spark a vicious cycle. The first wave of foreclosures would depress housing values, sparking a second and a third wave. Cash-strapped families would be forced to tighten their belts, which in turn would cause spending to collapse. As spending collapsed, businesses would be forced to shrink their operations, lay off workers, and in some cases even go bankrupt. Unemployment would skyrocket, which would in turn lead to more foreclosures. If this scenario sounds familiar, that’s because it is exactly what happened during the Great Recession.
Starting in 2008, Hubbard and a number of his colleagues at Columbia University, Christopher Mayer most prominent among them, pressed the case for aiding homeowners. They argued that because Congress had, rightly or wrongly, already taken over so much of the mortgage market, the federal government ought to use its power on behalf of families who’d been devastated by the housing bust. Among other things, they called for writing down mortgages for responsible borrowers—not house-flippers or people who lied about their incomes on their mortgage applications, but working families doing their level best to make their payments—with the cost of the write-down to be borne equally by mortgage lenders and taxpayers. Though it might look as though lenders were being forced to make a sacrifice, this approach would have left them much better off, as it would have prevented even more of their loans from going bust. Taxpayers, meanwhile, would have saved enormous amounts of money, as sparing millions of families the pain of foreclosure and joblessness would have held down the costs of unemployment benefits, food stamps, and other transfers designed to keep struggling families afloat.
So why didn’t Hubbard and Mayer win the argument? Or, put another way: Why did Hubbard’s real populism lose out to the fake populism of Santelli and others who maintained that forcing mortgage lenders to accept their share of the blame for the crisis was somehow unfair? One theory is that it was because investors who’d snapped up underwater mortgages were making a huge profit off of them, and they didn’t want anyone to come and stop the gravy train.
Imagine if the Tea Party movement had taken Hubbard’s position and not Rick Santelli’s. The last few years of American politics would have looked very different. The Tea Party could still have made the case that President Obama’s fiscal stimulus and his health law were alarming examples of government overreach. Yet they also would have demonstrated their willingness to stand up to Wall Street, and their desire to protect the interests of those who’d been hurt most by the housing bust. They might have even helped prevent the catastrophic drop in Hispanic household wealth that, in my view, did far more to turn Latino voters against the GOP than conservative opposition to comprehensive immigration reform.
It is too late for the Tea Party to fully undo the damage caused by the Great Recession. But Tea Party conservatives can lead the charge to fix the inflexible debt contracts that are foisted on Americans by Fannie and Freddie and the tax code, and that threaten calamity the next time we have a recession. They can follow the lead of Louisiana Sen. David Vitter, who has called for tough new financial regulations to curb the power of the big banks, and Utah Sen. Mike Lee, who has declared war on corporate welfare. Instead of just paying lip service to fighting crony capitalism, the Tea Party can renew the GOP and American democracy by putting its money where its mouth is.
This piece has been edited for clarity.