We had a conversation about this in the comments recently. The tea party is so closely associated now with its opposition to the Obama administration’s conservative, private industry-based health-insurance reform law that the rage mobs’ true genesis has become obscured.

In fact, the government proposal — it was never acted upon — that so agitated middle-aged, middle-class white Republicans that they finally got up off their couches and flooded the nation’s parks and streets was a plan floated by the Obama administration that would have used taxpayer dollars to help mortgage-holders who were underwater.

It was not explicit then, but on a dog-whistle level, there was undercurrent beneath the outrage that suggested that what really had these nascent tea partyists so agitated was a paranoid suspicion that the nation’s first black president, who’d just been inaugurated three weeks earlier, was creating the mortgage-relief program as a back-door reparations program for African-Americans.

Writing in the Washington Post yesterday, Ezra Klein recalls the rant by CNBC’s Rick Santelli’s against the proposed mortgage program, a tirade that lit the tea party bonfires nationwide:

In [the post-September 2008 financial] crisis, the “debt” in question is housing debt. Home prices have fallen almost 33 percent since the beginning of the crisis. All together, the nation’s housing stock is worth $8 trillion less than it was in 2006. And we’re not done. Morgan Stanley estimates there are more than 2.2 million homes sitting vacant, and 7.5 million more facing foreclosure. It is housing debt that has weakened the banks, and mortgage debt that is keeping consumers from spending.

In late 2008, when the economy was cratering, [McCain-Palin economics adviser Doug] Holtz-Eakin convinced McCain that the way out of a housing crisis was to tackle housing debt directly. “What we proposed at the time was to buy up the troubled mortgages, pay them off and let people refinance at the lower rates,” he recalls. “That would have filled up the negative equity and healed bank balance sheets.”

To this day, Holtz-Eakin thinks the proposal made sense. There was one problem. “No one liked that plan,” he says. “In fact, they hated it. The politics on housing are hideous.”

The Obama administration, perhaps cognizant of the politics, was not nearly so bold. It focused on stimulus rather than housing debt. The idea was that if people could keep their jobs and pay their bills, they could pay their mortgages. But today, few on the Obama team will mount much of a defense of its housing policy.

Its efforts to heal the troubled market at the core of the financial crisis are widely considered weak and ineffective. The Home Affordable Modification Program, which proposed to pay mortgage servicers to renegotiate with financially stressed homeowners, couldn’t persuade the servicers to play ball and so has left most of its $75 billion unspent. The Home Affordable Refinance Program was projected to help 5 million underwater homeowners. It has reached fewer than 1 million.

Even so, the administration rejects the more radical solutions that are occasionally floated. The problem, it says, is that the choices are mostly between timid and unworkable…

The most politically appealing plans are the ones that force the banks to eat the debt, or at least appear to do so. “Cramdown,” in which judges simply reduce the principal owed by underwater homeowners, works this way. But any plan that leads to massive debt forgiveness would blow a massive hole in the banks. The worry would move from “What do we do about all this housing debt?” to “What do we do about all these failing banks?” And we know what we do about failing banks amid a recession: We bail them out to keep the credit markets from freezing up. There was no appetite for a second Lehman Brothers in late 2009.

Which means that the ultimate question was how much housing debt the American taxpayer was willing to shoulder. Whether that debt came in the form of nationalizing the banks and taking the bad assets off their books — a policy the administration estimated could cost taxpayers a trillion dollars — or simply paying off the debt directly was more of a political question than an economic one. And it wasn’t a political question anyone really knew how to answer.

On first blush, there are few groups more sympathetic than underwater homeowners or foreclosed families. They remain so until about two seconds after their neighbors are asked to pay their mortgages. Recall that Rick Santelli’s famous CNBC rant wasn’t about big government or high taxes or creeping socialism. It was about a modest program the White House was proposing to help certain homeowners restructure their mortgages. It had Santelli screaming bloody murder.

“This is America!” he shouted from the trading floor at the Chicago Board of Trade. “How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills? Raise their hand.” The traders around him began booing loudly. “President Obama, are you listening?”

If you believe Santelli’s rant kicked off the tea party, then that’s what the tea party was originally about: forgiving housing debt.

Ultimately, concerns about the politics and policy questions behind widespread debt forgiveness were sufficient to scare the administration off of the policy. It’s a decision some ex-members of the White House regret.

“If we had thought harder about Rogoff and Reinhart, we might have made some different trade-offs regarding debt reduction,” [former Vice Pres. Joe Biden adviser Jared] Bernstein says. “Moral hazard is a big problem when you’re making policy regarding write-offs and principal cramdowns. It was always in the room when you were trying to help one underwater homeowner write off some debt while the person next door was playing by the rules and paying their mortgage every month. But with hindsight, I might have argued more rigorously against the risk of it.”

It should also be noted here that, as Klein suggested, this may well have been the first instance in which the Obama administration caved to the Republican Party’s extreme right, sending a signal of weakness that may have emboldened deep-pocketed Republican operatives like the Koch brothers and their minions to astroturf the movement and direct its energy into becoming the pro-corporatist faction it is today.

Transcript of Santelli’s Rant via C-Pol.blogspot.com:

RICK SANTELLI: The government is promoting bad behavior. Because we certainly don’t want to put stimulus forth and give people a whopping $8 or $10 in their check, and think that they ought to save it, and in terms of modifications… I’ll tell you what, I have an idea.

You know, the new administration’s big on computers and technology– How about this, President and new administration? Why don’t you put up a website to have people vote on the Internet as a referendum to see if we really want to subsidize the losers’ mortgages; or would we like to at least buy cars and buy houses in foreclosure and give them to people that might have a chance to actually prosper down the road, and reward people that could carry the water instead of drink the water?

TRADER ON FLOOR: That’s a novel idea.

(Applause, cheering)

JOE KERNEN: Hey, Rick… Oh, boy. They’re like putty in your hands. Did you hear…?

SANTELLI: No they’re not, Joe. They’re not like putty in our hands. This is America! How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills? Raise their hand.

(Booing)

President Obama, are you listening?

TRADER: How ’bout we all stop paying our mortgage? It’s a moral hazard.

KERNEN: It’s like mob rule here. I’m getting scared. I’m glad I’m…

CARL QUINTANILLA: Get some bricks and bats…

SANTELLI: Don’t get scared, Joe. They’re already scaring you. You know, Cuba used to have mansions and a relatively decent economy. They moved from the individual to the collective. Now, they’re driving ’54 Chevys, maybe the last great car to come out of Detroit.

KERNEN: They’re driving them on water, too, which is a little strange to watch.

SANTELLI: There you go.

KERNEN: Hey Rick, how about the notion that, Wilbur pointed out, you can go down to 2% on the mortgage…

SANTELLI: You could go down to -2%. They can’t afford the house.

KERNEN: …and still have 40%, and still have 40% not be able to do it. So why are they in the house? Why are we trying to keep them in the house?

SANTELLI: I know Mr. Summers is a great economist, but boy, I’d love the answer to that one.

REBECCA QUICK: Wow. Wilbur, you get people fired up.

SANTELLI: We’re thinking of having a Chicago Tea Party in July. All you capitalists that want to show up to Lake Michigan, I’m gonna start organizing.

(Whistling, cheering)

QUICK: What are you dumping in, what are you dumping in this time? Housing…?

SANTELLI: We’re going to be dumping in some derivative securities. What do you think about that?

QUINTANILLA: Mayor Daley is marshaling the police right now.

KERNEN: Rabble-rouser.

QUINTANILLA: The National Guard.

After Jason Roney of Sharmac Capital makes some comments, it’s back to Santelli.

QUINTANILLA: You know, Rick, one of our producers says if Roland Burris steps down, man, “Senator Santelli,” the junior senator from Illinois. It’s a possibility. I’m just saying…

SANTELLI: Do you think I want to take a shower every hour? The last place I’m ever gonna live or work is D.C.

KERNEN: Have you raised any money for Blago?

SANTELLI: No, but I think that somebody’s gonna have to start raising money for us.

QUICK: Hey, Rick? Can you do that one more time, just get the mob behind you again?

QUINATILLA: Have the camera pull way out.

QUICK: Yeah, pull way out. Everybody listen to Rick Santelli.

KERNEN: He can’t… I don’t think… You can’t just do it at will, can you Rick? I mean, you have to say something.

QUICK: No, do it at will. Let’s see.

SANTELLI: Listen, all’s I know is, is that there’s only about 5% of the floor population here right now, and I talk loud enough they can all hear me. So if you want to ask ‘em anything, let me know. These guys are pretty straight forward, and my guess is, a pretty good statistical cross-section of America, the silent majority.

QUICK: Not so silent majority today. So Rick, are they opposed to the housing thing, to the stimulus package, to everything out there?

SANTELLI: You know, they’re pretty much of the notion that you can’t buy your way into prosperity, and if the multiplier that all of these Washington economists are selling us is over… that we never have to worry about the economy again. The government should spend a trillion dollars an hour because we’ll get 1.5 trillion back.

WILBUR ROSS: Rick, I congratulate you on your new incarnation as a revolutionary leader.

SANTELLI: Somebody needs one. I’ll tell you what, if you read our founding fathers, people like Benjamin Franklin and Jefferson,… What we’re doing in this country now is making them roll over in their graves.

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