The Poop Bank

As many of you know, I write catalog and web copy for a decent-sized privately held company. Sometimes in the course of my duties I am asked to write catalog copy for gag gifts. One of the products I wrote for an upcoming catalog is the "Poop Bank," which is a coin bank that is shaped like a pile of, well, poop. Rest assured, my presentation of this item was tastefully rendered and you'll be able to see it for yourself when the catalog comes out in the fall. (By the way, the link is to our vendor).

As it turned out, I wasn't the only person writing about poop banks this week. A couple of reporters for the Washington Post were describing a steaming pile as well:

The Obama administration plans to overhaul how it is tackling the foreclosure crisis, in part by requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed, senior officials said Thursday.

Banks and other lenders would have to reduce the payments to no more than 31 percent of a borrower's income, which would typically be the amount of unemployment insurance, for three to six months. In some cases, administration officials said, a lender could allow a borrower to skip payments altogether.

This is madness, of course. Let us count just some of the ways:

• Perhaps I'm simply being provincial here and haven't gotten wise to the new realities, but there was a time, really not that long ago, when the government viewed one of its duties to be helping to enforce legal contracts, rather than abrogating them.
• Once again, let's go back to one of the most important issues in any economic system: moral hazard, which can be defined as follows: the risk that the presence of a contract will affect on the behavior of one or more parties. The classic example is in the insurance industry, where coverage against a loss might increase the risk-taking behavior of the insured.
• When the federal government inserts itself into a mortgage contract and changes the terms, it is inviting moral hazard up the wazoo. Let's be honest here: why should anyone be prudent and buy less home, or save for a rainy day, when the government is willing to rewrite a mortgage to your benefit if you are laid off? Why not just live large instead? Uncle Sam will hook you up.
• If you were a prudent banker, and yes there are still a few of them extant, how would this ruling affect your bank's underwriting and decisionmaking process? Would you even want to make a loan to anyone who isn't gold-plated and as risk-averse as a prudent banker would be?
• And where is the money coming from? Do we simply expect the banks to eat the costs? Or will they be made whole somehow? What are the chances we'll have the money, now or in the future?

The Post article claims the money is there to make the banks whole:

Officials said the new initiatives will take effect over the next six months and be funded out of $50 billion previously allocated for foreclosure relief in the emergency bailout program for the financial system. No new taxpayer funds will be needed, the officials said.

Do you believe that? Everyone knows that while the money may have been previously allocated, it's simply money that the government borrowed from someplace else.

Let's do the math here: according to this document (note: it's a PDF) from the Bureau of Labor Statistics, there are somewhere in the neighborhood of 14.9 million people who are currently unemployed in the United States. According to this piece on MSN, the average weekly unemployment benefit in the United States is $293. At 4 weeks per month, that works out to $1172.

If the limit on a mortgage payment is 31% of that, it would mean that, on average, the maximum mortgage payment an unemployed person would make is $363.32. At the height of the housing bubble in 2006, the average monthly mortgage payment was $1,687. If we assume that in 2010, housing values have dropped by, say, 25%, we could assume that the average mortgage payment is also about 25% less, which would be about $1,265. That means that the banks would have, on average, about a $902 shortfall per month. Presumably the government would make the banks whole for this shortfall.

If the benefit lasted for six months, that would mean each taxpayer affected would receive a benefit of about $5,412. Let's assume that 60% of the unemployed are homeowners with mortgages -- that would mean about 8.9 million homeowners would receive a benefit of $5,412. How much money is that? $48.4 billion, just shy of the $50 billion that is available.

But riddle me this: does anyone assume that the benefit would go away after 6 months? Or would it continue? I think we know the answer to this one. And does anyone think that unemployment is going to abate any time soon? Not even the Obama administration believes that.

We are broke now. The government thinks it can afford to do things like this program, but it can't. And the government can't assume that foreign investors are going to continue to pay for our profligacy, because it's simply not true.

Then again, if the government has no trouble abrogating existing contracts, perhaps they won't hesitate to abrogate the arrangements they have made with its lenders, right? There are other people who worry about these things, too, and their views matter a lot more than mine do.

We have some serious issues, folks. And the people who are currently running the federal government don't appear to be thinking through the implications of the commitments they are making.