Prevention best way to effect a cure

By DAVID MOON, Moon Capital Management, LLC
April 6, 2008

Memo to Washington: A problem cannot be solved with the same mind-set that created it.

The government first reacted to the increased mortgage defaults by trying to strong-arm lenders into restructuring the mortgages of homeowners who might default on their loans. This attempt was akin to trying to borrow your way out of debt.

It was terribly unfair to the folks who bought houses they could afford and those who committed to fixed-rate mortgages that didn't have low initial teaser rates.

Washington's next attempt was a regulatory fix. President Bush has proposed sweeping changes in the oversight of financial institutions, particularly in times that the Federal Reserve deems risky or threatening. The Fed would be given significantly increased powers to maintain stable financial markets.

Treasury Secretary Henry Paulson, a former college football player, described the proposed role of the Fed like that of a free safety, able to roam the field and attack where needed.

That sounds like the job description of an army, not a financial regulator. We use armies on our enemies, not our businesses.

It's also more than a bit ironic that one proposed 'solution' to the problems in the housing area is to expand the powers of the Federal Reserve. Remember, it was former Federal Reserve Chairman Alan Greenspan who, in a 2004 speech to the Credit Union National Association, suggested that consumers would be better off with adjustable-rate mortgages and other less traditional forms of mortgage products.

This was only a couple of years before homeowners began losing their homes in circumstances related to their ill-advised use of adjustable rates and other less traditional mortgage products.

The problems that we see in the housing market aren't much different than those we saw in the stock market bubble in 2000. The mortgage borrowing frenzy reflected the same type of mentality that drove people to liquidate their well-diversified IRAs and 'invest' the entire proceeds in some unproven, overhyped idea that caused their retirement plans to evaporate.

It's called short-term thinking.

When people mostly died in their 20s and 30s, the penalty for forgoing long-term results in favor of short-term pleasure might typically last only a few years.

Today, however, when a 40- or 50- or even 60-year-old makes a silly decision in an attempt to cut short the fairly well-marked path to wealth, he or she will probably have to live with the consequences for decades.

It is easy to blame the financial or mortgage industry for home-loan problems. You may believe that mortgage brokers and bankers have a duty to protect consumers from borrowing more money than they ought to.

If that's true, however, then we also need automobile financing reform. How many people suffer cash-flow problems because of exorbitant car payments?

How much of today's mortgage woes are the result of excess credit-card payments on balances charged at fancy restaurants and vacation spots? Perhaps we need hotel and grocery-store reform, too.

If you have a grave medical condition, your doctor can't cure you by merely treating your symptoms. That may make you feel better, but it won't help you become healthy.

It won't work in the economy, either.

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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