Sunday, December 9, 2007

Hope Now, Vote Later

There is that thing in economics we call “moral hazard,” which is really an attitude: A riskier, sloppier, “je m’en fous” attitude (yes, that’s French.. meaning “I don’t give a damn!”) you adopt when you know someone will come to your rescue if you screw up. So let’s see how you can employ the term as part of your daily vocabulary:

Say you’re at a party, and your husband is getting wasted on his nth shot of vodka. Now, he knows that each shot makes him a rising threat to the streets and, importantly, to his gleaming BMW M5. But he also knows that you’ll be there to drive him home, to save him from prison and yourself from the humiliation of him “having to crash” on someone else’s bed.

So as your girlfriends watch you with pity, you keep your cool, take a slow sip of your first (and last) lemon-drop and say, nonchalantly, "It’s just moral hazard!"

Thanks to Treasury Secretary Hank Paulson, “moral-hazard” talk is hitting the catwalks in full force. The context is “Hope Now”, Paulson’s scheme to “encourage” lenders to help out a select group of individuals who were lured (or, better, lured themselves) into home loans they could not afford.

Under the scheme, this select group would enjoy low, “teaser” interest rates on their mortgages for another 5 years, rather than face sharp rate increases over the coming months and be forced into foreclosure. It’s only a “minor” detail that these increases had been already envisaged in the contracts these folks signed.

Now, while I welcome the passion that Paulson’s plan has stirred at dinner parties, “moral hazard” is being wrongly employed here. Given how few the potential beneficiaries are (150,000-200,000 households), and how confusing, to homeowners, the eligibility criteria appear to be, it would be a stretch to claim that Hope Now would encourage riskier borrowing in the future that counts on a blanket government bail out.

Still, the plan serves to dust off some other words in our vocabulary: “Futile”, “cosmetic” and… “inequitable.” Futile because its limited scale is unlikely to stem the spiraling down of house prices as inventories and foreclosures build up. Cosmetic because it helps too few to be meaningfully altruistic, though it does add political points for the administration! (I confess, “saving families from foreclosure!” has more political oomph than “protecting the sanctity of contracts!”)

But how about fairness? Why should you, with your wife, two kids and impending payment hikes be eligible for Hope? While your neighbor, with his own wife, three kids, and precarious job, who only a month ago sold his only car to be able to afford the rise in his (already adjusted) mortgage payments, is not?

But I know your answer already: “As long as I’m bailed out, je m’en fous!”

Glossary: Moral hazard, equity, contractual sanctity, political oomph, teaser rates, “je m’en fous!”

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