Who's your daddy?

By DAVID MOON, Moon Capital Management
October 14, 2007

Just because so-called wisdom is conventional doesn't mean that it is correct. Sometimes we labor under false assumptions for years.

A goal of many in my parents' generation was to work to own their own home, free and clear of any mortgage. Believe it or not, some of the offspring in the subsequent generation did inherit that mindset. They saved for down payments and were careful to buy only as much house as they could afford ' and often much less.

How na've! They should have borrowed, borrowed, borrowed! If things got bad, someone would bail them out.

This surprising news came last week from none other than Sheila Bair, the chairman of the Federal Deposit Insurance Corporation. She had some unsolicited advice for how mortgage lenders should deal with folks who had adjustable-rate mortgages and couldn't afford the upward adjustments:

"Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it."

Remember, these adjustable-rate mortgages with the low initial teaser rates are designed to eventually adjust to above-market rates. Now the person in charge of FDIC bank insurance wants to reward the folks who bought more house than they could afford or didn't make enough down payment to produce a reasonable monthly mortgage obligation.

It doesn't make me feel very warm and fuzzy about the state of my FDIC protection. I wonder how she treats banks that make other crazy loans or otherwise lose their depositors' money?

OK, now you know that if you saved for your house and borrowed as little money as possible you were silly. Are there any other areas of your life where you should have been letting someone else take care of you?

How about your retirement? All these years you've been socking away thousands of dollars into your retirement plan. Now we discover that the government might come along and help solve our retirement woes by giving us an outright gift to put into our IRA. And it only takes $1,000 a year to make a difference.

One of the presidential candidates is proposing that the federal government make a $1,000 annual deposit into the IRAs of all adults. The candidate notes that fewer than half of the people in the U.S. have savings plans and even many of the others aren't doing enough.

What a joke. After 30 years, an annual contribution of $1,000 earning 8 percent would provide someone today's equivalent of about $2,200 a year in annual income.

So why would a candidate make a proposal that has such an obviously minimal economic impact?

The nontaxable grant would be available to individuals making up to $30,000 a year or married couples making up to $60,000. In 2006, the median family household income in the U.S. was $59,894.

I'm sure that's only a coincidence.

If a parent continues to bail out a child who keeps getting into trouble, the child has little incentive to ever quit getting into trouble. I suspect that axiom holds as the child grows into an adult ' with the government replacing the parent.

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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