By David Moon, Moon Capital
December 9, 2007
Almost seven years ago,
stock prices started a multiyear decline that eventually saw the bellwether
S&P 500 index decline 50 percent over 2 ' years. The largest stock in that
index, Microsoft, was owned by millions of Americans, including a vast number of
institutional investors and fund managers responsible for billions, if not
trillions, of dollars. Microsoft declined 67 percent and still sits 45 percent
below its December 1999 level.
But it didn't have to be that way. It seems that then Treasury
Secretary Lawrence Summers missed a golden opportunity to implement a federal
economic enabler plan, or FEE plan.
The purpose of the FEE plan would have been to prevent much of the
economic malaise that resulted from the collapse of prices in 2000. Assume an
unlucky investor bought a stock that subsequently declined in price. He had to
buy the stock from a lucky investor who somehow managed to sell the stock at a
Well, that's not very fair.
The FEE plan would have called for the federal government to
somehow make the lucky investor give some money to the unlucky investor. The
unlucky guy shouldn't have to lose his money simply because he bought his stock
at the wrong time. That's not his fault.
Some investors were even doubly unlucky. They borrowed money to
buy stocks that declined in price. The government should have renegotiated the
terms of those loans so they wouldn't lose their collateral ' the stock that was
declining in value.
If the lucky investors weren't willing to share their lucky gains
with the unlucky folks, the state or local governments could have borrowed money
to make up the difference.
Of course, the FEE plan might not seem quite fair to the folks who
didn't own Microsoft in 1999. And there is the risk that the unlucky investors
might be tempted to continue to disregard all reason and buy stocks like
Microsoft at 80 times earnings. Why shouldn't they? Heads they win. Tails you
Under the FEE plan, however, stock prices might never go down
again. The government would simply ban corrections.
That is, until it ran out of borrowing capacity, or inflation
became so rampant that investors actually welcomed a stock price
Does the FEE plan sound silly and far-fetched? Absolutely. But
that doesn't mean that it isn't real.
Just substitute real estate for stock prices.
At a housing conference
on Monday, Treasury Secretary Henry Paulson said he was 'aggressively pursuing'
an agreement that would let certain borrowers freeze the interest rates on their
adjustable-rate mortgages. Generally these would be homeowners who can make
their payments at the current teaser rates, but would not be able to afford the
higher payments once the rates reset to market rates.
Paulson said that his plan 'does not, and will not, include
spending taxpayer money on funding subsidies for industry participants or
Later in his speech, he said that state and local governments
should be prepared to issue bonds to temporarily help some
I suppose he forgot that taxpayers also pay state and local taxes,
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).