Proposal to prop up stock prices

By DAVID MOON, Moon Capital Management, LLC
October 5, 2008

When the U.S. House voted to kill a federal bill aimed at providing $700 billion to buy illiquid and perhaps financially toxic assets from banks and other institutions last week, investors were disappointed.

I was among those disappointed.

Too many people, however, were upset because the elected officials let the Dow Jones Industrial Average drop 778 points that day.

News flash: while there is much that the federal government can do to help the economy (especially now), propping up stock prices shouldn't be at the top of Secretary Paulson's ' or anyone else's ' list.

But you'd never know it from some of Washington's recent actions.

One of the things the feds have done to support the general level of stock prices was to place certain restrictions on selling hundreds of stocks short. On September 23, SEC chairman Christopher Cox referred to the need to curb 'abusive short selling,' presumably as opposed to the non-abusive type of short selling, or possibly somewhat akin to the 'abusive buying' of the late 1990s.

No one ever complains about abusive buying.

If the key to avoiding another Great Depression is as simple as supporting stock prices, this should be a relatively easy problem to address. I have a modest proposal.

Let's quit skirting the issue. Let's simply make it illegal for stock prices to decline.

If short selling is part of the problem, let's outlaw all forms of selling. Investors should no longer be allowed to sell stocks, bonds or any type of security. Only purchases should be allowed.

I have already anticipated your first objection. You may be wondering who will sell stocks to the buyers, since selling will be illegal? Good question, but it exposes a shallow understanding of this new-age accounting.

This is the double positive part of the plan.

Rather than buy stocks from other investors, companies will issue new shares to investors interested in buying them. This keeps existing shareholders from having to sell their shares (and thus becoming criminals) and has the added benefit of providing additional capital to shore up the balance sheets of the companies issuing the shares!

It's like magic. But why stop there?

Another problem is that investors focus on bad news ' so the government should encourage companies to highlight the positive news about their businesses. If company executives want to exaggerate a bit about how well things are going, that's OK as long as they think they will eventually meet those rosy forecasts.

In accounting terms, it would be like abandoning marking asset values to market prices. If we know that there should eventually be some good news ' like a bond maturity ' let's not get too uptight about messy little details in the interim.

If it's merely a matter of timing ' a few months, years or decades ' they might as well go ahead and get that good news out there.

As silly as these suggestions are, the actual actions and suggestions coming from Washington aren't sounding much better.

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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