By DAVID MOON, Moon Capital Management,
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
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
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
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
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).