Greenspan, pigs and drips of water

By DAVID MOON, Moon Capital Management
September 24, 2006

A couple of weeks ago the deputy chairman of Russia's central bank, Andrei Kozlov, was assassinated, possibly in retribution for his work to weed out banks with ties to the Russian mafia. As Mr. Kozlov left an employee soccer match (I guess they don't have company softball teams in Russia), he was gunned down outside the stadium.

Anything is possible, but it is nice to live in a country where people disgruntled with central bankers typically don't express their displeasure with drive-by shootings.

If they did, I would hate to be Alan Greenspan.

Most of the former Federal Reserve Board chairman's positive handling of the U.S. economy over his almost two decades of heading the central bank happened at sophisticated, complicated macro levels, usually unseen and unfelt by most individuals until the trickle-down effect eventually reached consumers.

But in a 2004 speech to the Credit Union National Association, Dr. Greenspan made comments that could have easily been interpreted to suggest that homeowners should exchange their fixed-rate mortgages for the adjustable type: 'American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. Many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade.'

Perhaps it was good economics. But it was horrible timing.

Since then, mortgage rates have increased along with all interest rates. Some holders of adjustable-rate mortgages are about to experience a doubling of their monthly house payment.

Theoretically it might make sense in the long term to accept the more volatile lower initial rates on adjustable-rate mortgages. But people don't pay their bills in the long term; they pay them every month.

For some people, it is worth the higher fixed rate to guarantee against the risk that shifting rates might make their monthly payments unaffordable.

When I was in the 10th grade, I had a coach who warned of blindly accepting the opinions of every so-called expert we would encounter in life. 'Look at the word,' he said. 'Ex' means former. 'Spurt' is something like a drip of water. (Coach Sizemore was wise, but he was not above manipulating a word's spelling to prove a point.) 'So the word expert literally means 'a former drip.'' Don't be so quick to blindly accept the opinion of a drip, or even a reformed, former drip.

Thanks, Coach. It's been good advice for years.

In 1961, newly inaugurated president John Kennedy, relying on CIA intelligence, approved a U.S.-sponsored Cuban invasion aimed at overthrowing the two-year-old government of Cuban dictator Fidel Castro. Cuban officials probably got hold of the plans of the attack; they killed or captured the entire invasion force. After this Bay of Pigs disaster, Kennedy lamented, 'How could I have been so foolish to have trusted the experts?'


David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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