There’s always something to howl about

The three little pigs and the housing rescue plan, a modern fable

Once upon a time there were three little pigs, and, although they were brothers and looked a lot a like, they could not have been more different.

The first little pig was hard-working and thrifty. He spent very little of his income, saving and investing as much money as he could. He lived with his mother well into adulthood, helping her with her expenses. He finally bought a home of his own when he could afford to pay for it all in cash. As you might expect, the thrifty little pig’s home wasn’t flashy, but it was all his, free and clear.

The second little pig didn’t save very much of his income, but he earned a lot of money as a rising executive, and he had an uncanny luck in the housing market. He bought a condominium on his 18th birthday, then traded up to his first single-family home before he was 21. By the time he was 30, the lucky little pig owned a very stately executive home — and he had been able to make a whopping 50% down-payment.

The third little pig wasn’t very good at working hard, and he had never kept a job long enough to get a raise. He wasn’t at all good at saving money, but he could borrow and spend it better than any little pig anywhere. Like the lucky little pig, he moved away from home early, but he just kept moving — from apartments to friends’ couches to rental homes and then to one girlfriend’s house after another.

If you are a liberal, you may be thinking of the third brother as the unfortunate little pig. If you are a conservative, you will want to call him the lazy little pig — or worse. To keep the peace, let’s just call him the puerile little pig — the little brother who never quite grew up.

The original version of this story was about construction quality as a metaphor for planning ahead, anticipating disasters so they don’t take you by surprise. But the world of real estate has changed a lot since then. The most important change was that the big bad wolf ran for congress and discovered that he could stay in office forever by mucking with the housing economy.

What did he do? He imposed taxes on incomes but gave back a lot of that tax money as a reward for buying a house — buying a house on credit, that is.

The income taxes didn’t hurt the thrifty little pig too much, but he didn’t get any tax break for owning his home, since he didn’t have a mortgage. The lucky little pig suffered a huge bite on his income taxes, but he was able to recoup some of that loss with his 50% mortgage. The puerile little pig didn’t have any income to tax, nor any house payments to deduct from his tax bill.

But big bad wolves don’t just stand around with their thumbs in their suspenders, do they? The thrifty little pig had an ovine nature, and he usually voted for the sheep party. The lucky little pig wasn’t as much lupine as he was thoughtless, so he almost always voted for the wolf party. And, of course, the puerile little pig could never get out of bed in time to vote at all.

The big bad wolf figured out that, if he could muck with the real estate market enough, he could get the puerile little pig a home of his own — and then he could count on his vote forever.

So the big bad wolf leaned on bankers to lower their standards so much that even the puerile little pig could afford to buy a home — for nothing down, all closing costs paid, and with no mortgage insurance premium. It was just as if all the bankers were sleep-walking, doing the kinds of crazy things bankers only do in dreams. All across the land, bankers gave mortgages to puerile folks who had never saved a penny in their lives and never once paid a bill that hadn’t come in a red-bordered envelope.

And for the first month, everything was fine. And so, too, for the second month. But on the first day of the third month, a banker noticed that the puerile little pig wasn’t paying his mortgage. All across the land, bankers found that their puerile borrowers were defaulting on their loans, even though those loans had been so easy to obtain.

Well, the newspaper reporters huffed and the television pundits puffed, but nobody could keep the house of cards from crashing down. The banks had to take back houses for which there were no buyers. The only way they could get them sold was by slashing prices. And because of those fire-sale prices for the foreclosed homes, the values of all homes went down.

The thrifty little pig had never seen his home as an investment. It was just something he needed to live, like his clothing or his car or his work tools. He had never expected that his home would gain in value, but he also never expected it to lose half its value.

The lucky little pig had always seen housing as an investment, just like stocks or bonds or rare baseball cards. But he had never given a moment’s thought to the idea that home prices could go down and not just up. Even so, his house lost half its value, eating up his entire down-payment.

The puerile little pig — call him unfortunate or call him lazy — lost nothing. Since he had paid nothing to get his house, and since he had made no payments on his mortgage, he actually came out ahead. He took his new girlfriend to Las Vegas for the weekend, then moved into her apartment — paying nothing for rent, of course.

Now if this were really a fable, everyone would learn their lesson — possibly issuing an apology to the grasshopper and the ant for invading their turf. But this is real life, where just about anyone will believe just about anything, provided it’s an obvious, bald-faced, ludicrous lie. So the reporters and the pundits had a field day, blaming the housing crisis on the thrifty little pig, on the lucky little pig, even on the puerile little pig. They blamed everyone except the big bad wolf, because that would have been the truth.

But the big bad wolf was a step ahead of everyone, anyway. With great fanfare, he announced his housing rescue plan. Bankers would be forced to lend borrowers 105% of their current loan balances, with the goal being to reduce the payments for everyone who qualified.

The puerile little pig might have qualified, except he had already lost his home.

The lucky little pig could have qualified, except that he would end up owing even more money for his home. Meanwhile, his 50% down-payment was gone just as if he had burned it.

The thrifty little pig could not qualify for the rescue plan, since he didn’t owe anything on his home. Even so, half of the value of his house was gone, too.

And while we might like to imagine that life just goes on as it always has before, that’s never really the case. Things do change, just so slowly that we tend not to notice — particularly if we’re already steadfastly committed to obvious, bald-faced, ludicrous lies.

So what happened in the end?

The thrifty little pig took what was left of his savings and moved to a tidy little tax haven in the Caribbean. He never really learned how to let his tail uncurl, so to speak, but he manages his investments by laptop from the beach — paying no taxes to the big bad wolf.

The lucky little pig became the tipsy little pig, taking a certain comfort in asking, “What’s the use?” of anyone who would listen to him. Eventually he lost his job. He mailed his house keys in to his banker and moved in with his girlfriend, who lives on welfare and child support from the three little fathers of her own three little pigs.

And the puerile little pig? He ran out of jobs, first, then girlfriends, then friends. Without thrifty investors and big-income-earning lucky executives, the economy got worse year after year, but, the truth is — call him unfortunate or call him lazy — the puerile little pig had never been much good at paying his own way in life.

So he lived in a cardboard box and he ate from garbage dumpsters. He wore whatever clothes he could find, spending his days collecting empty soda cans to sell to recyclers. He talked to himself a lot, and he bathed so rarely that no one ever came too near him.

But every election day, there he was at the polls, pulling every lever for the wolf party — the only people who had ever given him a chance to own a home of his own.

And if you’re the big bad wolf, that’s a very happy ending…


11 Comments so far

  1. Dave Shafer February 25th, 2009 7:13 am

    The problem with your little story is that you have mixed up who the big bad wolf was. You see facts are stubborn things and the fact is that Wall Street and its bankers issued far more sub-prime and alt-a mortgages than did Fannie and Freddie and FHA or CRA loans (I assume those are who your story is alluding too). So replace the government with Wall Street and you have the story right. Now, make your argument for allowing Wall Street and the Banks to fail bringing down the whole economy with them.

    Of course maybe you could use Chaos theory to make the argument over the CRA, you know the butterfly wings over China (CRA) causing the hurricane in the Atlantic (cratering of investment banks)! I would really like that argument as I am a big fan of Chaos Theory! But as it stands many researchers have pointed out there is no credible evidence of the CRA causing Wall Street and its banks to do sub-prime lending!

  2. Mark Green February 25th, 2009 7:17 am

    Thanks Greg, instead of reading my daughter Green Eggs and Ham tonight at bedtime, I’m going to substitute your fable. Then, maybe tomorrow night I’ll introduce her to Goldilocks and the Triple AAA Rated Mortgage Backed Securities! That ought to put her right to sleep 🙂

    Thanks again for making your take(s) so fun to read.

  3. Greg Swann February 25th, 2009 7:56 am

    > Thanks Greg, instead of reading my daughter Green Eggs and Ham tonight at bedtime, I’m going to substitute your fable.

    I wrote the same content yesterday for the Republic as a straight op-ed piece, but the emotional impact wasn’t there. Without laying claims to an equivalent stature, this is kind of a cross between Twain and Hazlitt, Austrian economics in one fable. The exodus of capital is what matters most — investment capital in exile and intellectual capital in surrender, the actual Atlas Shrugged effect in a condition of increasing tyranny. As you observe, there is none of this that a child cannot understand perfectly. It takes a good deal of schooling to affect to pretend to make believe that systemic theft can result in anything but pandemic poverty.

  4. Eileen Pettengill February 25th, 2009 8:19 am

    Greg-You forgot one important point: no one can come to Vegas anymore!

  5. Doug Quance February 25th, 2009 9:13 am

    Let’s not overlook that Fannie and Freddie were allowed – by law – to have far less reserves for the loans they were making. Wall St. didn’t get that break, and were simply competing with the Government Sponsored Entities in the equities markets.

    Let us also not forget that the Big Bad Wolf changed the tax laws so that second homes became a tax shelter… in addition to the principal residence. That’s just more government meddling in the markets. Or that welfare recipients could use their Section 8 vouchers as PROOF OF INCOME to purchase homes. That’s right – our government saw fit to create loan programs to not only put uncreditworthy people into homes… but to put people who could not even feed themselves into homes.

    Let’s face facts. The government has used it’s influence through regulation and tax law to get us to where we are now. To expect the same government – run by the same clowns who got us here – to get us out of this mess is short-sighted, IMHO.

    The time for the FAIR TAX is long overdue.

  6. Mana Tulberg February 25th, 2009 9:33 am

    Hi Greg,
    Great story. I know so many people that will really enjoy your version of the 3 little pigs.

  7. Joe Strummer February 25th, 2009 9:48 am

    Wall Street greed is not the answer to the riddle. Greed is like gravity, a necessary but not sufficient explanation of why an apple falls from a tree.

    The issue of blame has also clouded the issue of incentives. Blaming Wall Street or Government is beside the point. The people at Fannie Mae or Freddie Mac are not any worse people than the people at Bank of America.

    The incentive problem is this: People rewarded for risks they take but never allowed to feel the consequences of losses they make, will always take risks and never avoid risks.

    So what are the incentive problems?

    1. Easy credit during the Bush era
    2. Fannie Mae and Freddie Mac guarantees
    3. Community Re-investment Act
    4. Mortgage interest rate deduction
    5. Bankruptcy anti-cramdown provision for primary homes
    6. Development of derivative trading instruments

  8. Dave Shafer February 25th, 2009 11:21 am

    Frankly, if you want to blame anyone it is the end-line investor who bought these collaterized loans. The truth is Wall Street was doing their best to sell these collaterized instruments as fast as they could, but got caught with way too much of them on their books when the house of cards fell.

    Doug the point is not that the government hasn’t pushed certain programs (with some bad outcomes as well as good outcomes), but what really drives the bus isn’t the government but capital. If capital took a real good look at these loans there would have been no buyers, at least at the price WS was getting for them. This at its base is a failure of risk models created by physics Ph.D.s working for Wall Street firms under the direction of the political conservatives (even though their politics is irrevelant to this story).

    Its a failure of the quant’s. I maintain, and have a preponderance of evidence to prove, that no one can predict outcomes when it comes to complex systems like our economy. Anyone that say’s they know how some input (the stimulus) will effect the system overall is only fooling themselves IMHO. Having said that you can view the stimulus package as interesting political theater but no more or less a cause of future events than 9/11 or the war or the CRA or any other thing people can point too as be causative. Maybe someday Chaos theory or dynamical systems theory will move beyond interesting math to being able to capture human behavior, but until then we will just have to live with what my mother-in-law calls the “miracle of the individual” (being the good conservative she is).

    Have a great day everyone!

  9. Doug Quance February 25th, 2009 11:35 am

    >Dave: I believe it was the Clinton administration who pushed for and got the banking deregulation that commingled those funds… but I digress.

    Conservatives were calling for reform four years ago – and Liberals blocked it. Now, the Liberals claim it was Conservative policies that sunk our economic ship.


    Stick this in your browser and smoke it:

    There were many factors that led us here… and blame is rightfully laid at the feet of both political parties. I maintain that the way out of debt is not to create even more of it.

    The cure is going to kill us.

  10. […] The three little pigs and the housing rescue plan, a modern fable Once upon a time there were three little pigs, and, although they were brothers and looked a lot a like, they could not have been more different. […]

  11. Jessica Horton February 26th, 2009 8:41 am

    This little piggy is going to go have some roast beef with her $13.00 stimulus and then go weee wee all the way home.