So far, response to Obama's new $275 billion mortgage bailout plan has been muted since nobody seems to understand it, including the Obama Administration. From the Washington Post's article "Mortgage Rescue Eligibility Still Being Finalized," we learn that the Obama brain trust has got all the details pulled together ... except for the absolutely essential one: Who gets the money?
A day after President Obama unveiled his $75 billion foreclosure prevention program, administration officials yesterday said they were still determining which homeowners should qualify.The administration is developing a standard for lenders to use in evaluating applicants that seeks to exclude homeowners who are not in real need or are too far behind in their payments to be saved.
That is a bit of a conundrum, isn't it? If you make eligibility too restrictive, it doesn't have all the wonderful effects of saving the economy like Obama claimed it would have in his announcement yesterday. But if you make eligibility too loose, it costs all the money in the world, and more, as you sink into the quicksand of moral hazard.
So, I'll give the Obama Administration some advice on how to determine eligibility, taken from FDR's New Deal, although I don't think Obama will like how FDR thought about moral hazard. When Aid to Families with Dependent Children (AFDC) was dreamed up in 1935 as part of the Social Security Act, Harry Hopkins wanted to make it a big program. But Roosevelt thought it would be nuts to subsidize single motherhood, so it ended up being mostly just for widows, until the 1960s, when suddenly everybody knew better than prejudiced old FDR.
So, here's how Obama can make his mortgage bailout plan moral hazard-proof: You get bailed out if your spouse died between January 1, 2007 and yesterday. (We don't want a sudden surge in dead spouses tomorrow.) That's it. No disability due to back injuries, depression, fibromylagia, or your old man upped and made a run for the border. Only an official death certificate will do.