Losses still mount in housing market

By DAVID MOON, Moon Capital Management, LLC
June 6, 2010


In a recent Financial Times editorial, columnist Martin Wolf juxtaposes Aesop's grasshopper and ant fable on the interrelated problems facing the world's developed countries and economies.

In the original fable, the grasshopper is lazy and spends his summer singing and playing, while the ant saves food for the winter. When winter arrives, the grasshopper begs the ant for food.

Wolf compares the Germans, Chinese and Japanese to the ant. They produce goods that people want to buy. They are net savers.

The Americans, British, Greeks, Irish and Spanish are grasshoppers. We borrow money. We sing. We generally enjoy ourselves - often to excess.

Ants are frugal and good at manufacturing things. Grasshoppers are affluent and willingly allow the ants to supply them with everything from consumer goods to investment capital.

Everything works fine as long as the grasshoppers make the interest and principal payments they owe the ants. Once that part of the system breaks down, however, the entire house of cards begins to fall.

Obviously the metaphor holds true for individuals and businesses as well as sovereignties. It's not just the grasshoppers who suffer when debt burdens become unbearable.

And to the extent that consequences can temporarily be shifted from grasshoppers to ants, it is the ants who will solely bear both sides of the losses. The residential housing market in the US is a great example where many of the grasshoppers continue to be able to shift consequences to the ants.

This can't - and won't - last forever.

Declining home prices have stabilized, but losses continue to mount at Fannie Mae and Freddie Mac. These now fully-consolidated government subsidies are little more than conduits used to prop up a false currency: housing prices. It is the equivalent of strong European countries weakening their own balance sheets in order to bail out Greece in hopes of saving the euro.

The boat is sinking. And the deckhands are pouring buckets of water from the front of the boat into the back. This type of maritime masturbation might look like productive activity, but it accomplishes nothing.

This should be obvious.

Martin Wolf concludes his column with his own moral: if an ant wishes to accumulate enduring wealth, he shouldn't lend to grasshoppers.

I prefer a different grasshopper moral.

In the 1970s television show Kung Fu, Master Po, a blind lao shi (teacher,) meets Kwai Chang Kaine, a young student, for the first time. The old man extols the youngster to never assume that because a man has no eyes he cannot see. “Close your eyes,” he instructs the pupil. “What do you hear?”

The youngster hears the obvious – things like the running water and a singing bird. The obvious things are easy.

Master Po asks, “Can you hear your own heartbeat? Do you not hear the grasshopper at your feet?”

The youngster is amazed. “Old man, how is it that you hear these things?”

Master Po replies, “Young man, how is it that you do not?”

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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