Rear window is often clearer than the windshield

By DAVID MOON, Moon Capital Management
March 9, 2008

FormerAuburnUniversity head football coach Pat Dye was criticized about a game-costing fourth-down decision to kick a field goal rather than go for a touchdown. His explanation was that hindsight is 50/50.

Fortunately, Coach Dye did not retire to become an optometrist.

Of course, the rear window often is much clearer than the windshield, but sometimes we simply fail to believe what we see in front of us. The economy, for example.

Two years ago, I pointed out in this column that a quarter of the prior three years' increase in the GDP was the result of consumers' spending money they had taken as cash-outs from home refinancings. With 50/50 hindsight, it's easy to understand how that sort of growth wasn't sustainable.

People couldn't keep adding to their mortgages and use the money to go out and eat. Eventually, they borrowed all of (or more than) their equity. Never mind that it's stupid to pay for dinner or a big-screen TV over 30 years.

Yet that's what consumers were doing. And that's the engine that drove a significant portion of our economic growth for the early 21st century.

Fuel needs to mix with oxygen to run an engine, and at high altitudes oxygen becomes scarce. As we relied more on borrowed funds for consumer purchases, the U.S. economy was running out of oxygen.

Federal Reserve Chairman Ben Bernanke says that his primary goal is fending off a possible recession. The Fed is likely going to continue to work for lower interest rates, in an effort to relieve pressure on the already debt-laden consumer. He wants lenders to consider reducing loan-principal amounts, artificially creating home equity. Tax rebate checks will start arriving soon, and with enough encouragement, perhaps Americans will go out and spend that money and help the weakened economy, rather than do something silly like pay off debt or stick the $600 windfalls into their savings accounts.

Wow. Does anyone else see a problem with that reasoning?

Imagine that you've put on an unneeded 20 or 30 pounds. Your clothes no longer fit, but that's the least of your problems. Your blood pressure, heart rate and cholesterol are now all in a danger zone. You turn to an expert, your doctor. After a thorough examination, he recommends a course of action: buy bigger clothes.

Fortunately, unlike the Fed, he doesn't go in front of Congress to deliver this silly advice.

Maybe you ought to drag your fat self to a gym. It seems like a little sweat is called for. Perhaps you ought to try some 'push-backs.' You don't have to have ice cream and mashed potatoes with every meal. Despite what you see on late-night TV, there are no easy answers to your health problems.

You are going to have to do some work. With a little foresight, Ben Bernanke might decide to encourage you.

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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