You can't fix stupid - but you can enable it

By DAVID MOON, Moon Capital Management
August 26, 2007

A Croatian teenager was rushed to a hospital in January 2002 following an explosion in his face. It seems the curious lad had somehow managed to become the owner of a hand grenade.

He thought it would be a great source of firecrackers for his planned New Year's Eve celebration, if he could figure out how to retrieve the explosives from inside the protective casing. When his first efforts to open the shell failed, he decided more drastic measures were needed.

He attacked the problem with a chainsaw.

Now admit that somewhere in your callous subconscious it crossed your mind that removing this young man's DNA from the human gene pool was not a step backward for intellectual evolution. People who do stupid things often suffer painful consequences. It serves as motivation for the rest of us.

How much are you willing to bet that in the last five years, not a single Croatian teenager has tried to open a hand grenade with a chainsaw? Lesson learned.

The same thing will happen with lending practices in the U.S.

For years, banks and borrowers have been playing with dynamite. The subprime hand grenade has blown up in their face and now they have gone to the hospital wanting TennCare or Medicaid to pay for their treatment.

If we don't let them die, what are we telling future would-be debt-grenade experimenters about the consequences of their actions? Heads, you win? Tails, I lose?

Stocks are declining in the face of loan defaults. Mortgage foreclosures in July were almost double those of a year ago.

Commentators and investors are calling for the Federal Reserve Board to do something. Cut interest rates so homeowners with adjustable-rate mortgages won't have to face higher payments. Anything. Just save the day.

Please, pay our hospital bill.

But that's not the role of the Fed.

There are several things Ben Bernanke & Co. is supposed to do: Manage the supply of money in a way that maximizes economic production; try to maximize employment; create moderate-to-no inflation; and maintain moderate long-term interest rates.

According to the Federal Reserve Act, that's it. Nowhere in there does it say prop up the stock market or save real estate developers.

That is, unless you interpret the part about increasing employment to mean saving the jobs of people in the real estate sector. Of course, if that was the Fed's goal, then it could just drive interest rates to zero and provide everyone a job in real estate. Wait a minute, that would create inflation, which runs counter to another of its goals. This is a balancing act.

Like a teenager alternately wanting to be an adult and a child ' when it suits his purposes ' too many businesses want the government to leave them alone when business is good, then beg for intervention when the grenade blows up.

In Voltaire's 'Candy,' he noted that the British shoot an admiral from time to time to keep the others in line. Sometimes we need to remove some business DNA from the gene pool.

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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