A Moral Hazard - Housing Fable (So simple even a child could understand it!)

By
Real Estate Agent with RE/MAX Preferred Properties

Jack & Jill bought a house in a nice neighborhood.  It was the largest and nicest house in the whole neighborhood.  Jack's family stretched beyond their budget to buy it, but business was good, the economy was great and all his advisers, even his neighbor, Sammy Stockbroker, urged him to "go for it." After getting moved in, he invited his business associates, friends and neighbors over for a housewarming party.  Everyone brought a dish to share.  Jack's friend and confidant, Billy Banker brought fondue in a beautiful chafing dish and set it on the buffet table.

While everyone was chatting and socializing, something went amiss with the sterno can underneath Billy Banker's fondue, and the tablecloth caught on fire.  Every one of Jack's guests noticed that they smelled something funny, but nobody said anything to Jack or Billy - until the dining table was on fire.  But when everyone saw that the fire had started, they just stood back and complained, "Somebody should do something." 

After the fire began to spread from the table to the curtains, Jack's friend Ben went to get his bucket of Fed-water to try to help.  But Ben didn't want to pour out the whole bucket at once (just in case a little would do the trick,) so he poured a little Fed-water on the fire and stood back to gauge the effect.  While Ben was watching and waiting, Sammy Stockbroker pulled Ben aside and convinced Ben to give him some of the Fed-water too, since it was only fair and Sammy might have a fire some day and need it.

Seeing that the fire was getting worse, Jack's friends, Henry and Tim, (with their Treasury of ideas) jumped in and tried to organize Billy Banker and the other guests to each do their part in putting out the fire.  But Sammy and his broker-buddies chanted that Henry had no business trying to organize anyone and that his stupid plan was a waste of time; and it wouldn't be enough to save the Jack's house . . . even if everyone did what Henry said.

Sooner than anyone expected, the fire spread to the ceiling and started to burn through the second floor into Jack's bedroom. 

All the guests fled to the front lawn to watch the fire in horror.  All the while, murmuring, "Why doesn't somebody do something?"  Sammy, being an authoritative, take-charge kind of fellow, addressed the crowd and told them that there was nothing that could be done, or should be done, to save Jack's home.  Sammy went on to tell the crowd that it was Jack's fault for buying the house and then having a party.  Sammy's analyst buddies said "in fact none of this would have happened if Billy's bank hadn't loaned Jack the money to buy the house in the first place (at least without requiring Jack to take classes in fire prevention and firefighting.")

From the sidewalk, Sammy continued to mock Ben and Henry's efforts as undeserved, unfair to everyone else, and "too little, too late." The crowd became a mob. From the front lawn they jeered at Jack, Billy, Ben, Henry and Tim . . . "It's all of your faults.  This house deserves to burn down."

While Jack's house was burning out of control, Sammy cavalierly said "Forget Jack! - He's finished." and invited the crowd to come next door to his house.  He assured them that they would be safe because he already had a bad stock-market-fire at the beginning of the decade and he knew about such things.  Plus, Sammy reminded everyone that he still had some of Ben's special Fed-water, just in case.

So everyone went next door to Sammy's house to continue the party.  As one might expect, the chit-chat in every corner of every room was about Jack's house burning and how Jack and his other friends were really to blame. "Did you see what a wimpy effort Ben made, and where do Henry and Tim get-off trying to organize a rescue group," was the banter.  "Let it burn" they said, "It wasn't that great a house anyway and it wasn't worth what Jack paid." "Jack was just irresponsible to buy it in the first place."  "I think Billy should go to jail for making the loan."

Later, Ben, Henry  and Tim stopped by at Sammy's and asked everyone why they didn't do anything to help save Jack's house.  Ben and Henry explained, "We never expected to be able to save Jack's house by ourselves."  "We were trying to do our part and help as much as we could."  "If any of you had helped too, instead of standing by and criticizing we could have contained the fire, by working together."  Sammy and his friends became more incensed at the two and demanded that Ben and Henry leave, and take their silly ideas with them.  "We didn't start the fire - let it burn!" they shouted.  "There's a moral hazard here and we can't reward people for making mistakes!" said Sammy.

Everyone was having a great time at Sammy's house, eating, drinking and dancing, without a care in the world.  "Now Sammy really knows how to throw a party" everyone said.  Sammy's house was "packed," standing room only.  It was the party to beat all parties.  It seemed to just get better and better.  More succulent food, finer wine and truly decadent deserts - no one had ever had such an exhilarating time.  Each was heard to say, "Sammy is my new best friend."

When the party had been in full-swing, Sammy's wife pulled Sammy aside and told him that the thermostat wasn't working properly and she had tried to open the windows to get some fresh air into the house, but they were all stuck closed.  It was getting quite stuffy inside.  After fiddling, unsuccessfully with the thermostat, Sammy went to start opening some windows.  As Sammy tugged and tugged on the first window, he looked up and saw that the fire that had started at Jack's house had spread to his house.  Sammy's house was on fire too!  As he gazed out the window, he could see that the whole neighborhood was burning.  Everything, as far as the eye could see, was on fire.  Sammy ran to get his guests to help save his house.  But they all said, "Let it burn Sammy."  "Bring us more of that steak and wine."  Someone from the back of the room shouted to Sammy, "Use the special Fed-water you got from Ben!"  But Sammy said, "I can't.   I used all of it to mix your cocktails, so everybody could have a good time . . . there's none left."

"Somebody, anybody, call Ben . . . call Henry & Tim" shrieked Sammy, "tell them "my" house is on fire and I need their help . . . now! - Remind them that they helped me before when the stock market caught on fire" "Call Jack, he'll help - he's my neighbor, that's what neighbors do!"

One of Sammy's friends turned on the TV and everyone watched in absolute shock - the fire had spread to every corner of the country.  The nation was on fire.

Just then the phone rang.  It was Sammy's boss, Mr. Churn, telling Sammy that all the businesses Sammy had invested in were now on fire too, the market was tumbling and Sammy had a huge margin call.  Churn said, "If you don't meet your margin call by tomorrow morning the brokerage will seize all your assets, and you'll be fired.  Sammy groaned, but said he would cover the margin call from his home equity line of credit.  He quickly called Billy Banker to tell him about the situation.  Billy said, "I'd love to help you, but we had to cancel your line of credit."  "When Jack's house started to burn down, the property values in the neighborhood immediately fell, and now you don't have any equity left either.  Nobody does."  "What!" gasped Sammy?  Sammy was ruined.  Everyone was ruined, Sammy, his friends, his neighbors, his clients - everyone.

"This is all Jack's fault, and Billy's too," said Sammy.  "If he hadn't bought that house and Billy hadn't loaned him the money, none of this would have happened."  Sammy's wife, her face filled with tears, put her hand on Sammy's shoulder and said, "Honey, you're probably right, if Billy hadn't helped Jack buy that big-old house this wouldn't have happened."  "They both should have known better." "But Sammy, don't you get it?" . . . she said, . . . "if you hadn't turned your back on Jack, Billy, Ben, Henry and Tim, and helped them instead of ridiculing them for your own pride, principle and gain . . . this wouldn't have happened at all."  "Jack might not have been able to afford to rebuild, but at least we'd still have our home and the country wouldn't have burned to the ground."

The fire could have been contained.  . . . So "Where was the real moral hazard?"

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