Forbes offers remedies for slump

Forbes offers remedies for slump

Turnaround possible by the spring, he says

Friday, November 21, 2008 By Jaquetta White

Magazine editor and economic prognosticator Steve Forbes said the crisis plaguing the country's economy could be washed away by spring if the federal government would suspend the mark-to-market accounting rule for financial institutions and insurers, get rid of the nation's weak-dollar policy, and lower home mortgage interest rates.

"This need not be something lasting two or three years," Forbes said. "Just a couple good policies and this thing will be turned around."

Forbes offered his candid commentary on how to right the economy during a lunch meeting hosted by Northwestern Mutual Financial Network of Louisiana on Thursday at the Sheraton New Orleans Hotel.

Forbes said the current economic state is the result of "a number of policy errors made by government" and namely, the Federal Reserve's 2004 decision to print money and at the same time depress interest rates. Forbes called that a "catastrophic error" that led to a rise in the price of commodities. Lax lending standards and the greed and gluttony that accompanied the housing market boom also are factors in the economic breakdown, he said.

But the crisis would not be as devastating as it has been if the mark-to-market accounting rule that calls for the severe markdown on the value of all subprime mortgages were repealed, Forbes said. Companies including Lehman Brothers and Bear Stearns would have been OK, he said, had that rule not required them to mark down the value of those loans because not all of them will default. The practice calls for companies to assign a current market value to an asset if its value is unknown or won't be known for several months. Since there is no market for subprime loans, regulators instructed companies to give it a low value.

"By normal standards these were not insolvent companies," Forbes said. "Almost all of it is book losses, not cash losses."

The Securities and Exchange Commission should formally suspend the mark-to-market rule before it impacts insurance companies, Forbes said. That would go a long way to pulling the country out of its financial crisis, he said.

The incoming administration also should reverse the weak-dollar policy of the Bush administration and the Federal Reserve, he said. The dollar instead should have a strong and consistent value, Forbes said.
"The weak-dollar policy was the biggest mistake of the current administration," Forbes said. "If weak money was the way to wealth, Zimbabwe and Argentina would own the world. But it just doesn't work that way."

Additionally, Forbes said Fannie Mae and Freddie Mac should announce 4.5 percent mortgage interest rates to bring confidence to the housing market. Forbes believes that the lower rate would create an incentive for home buying and refinancing and make mortgage payments lower, thereby, staving off foreclosures.

 

Forbes is the only guy making any sense in all this mess.

The last paragraph is the biggie. He knows his shit.

The govt. borrows money at 3% and loans it out at 4.5%. Everybody wins.

He was on Wolf Blitzer this morning saying the feds should guarantee Freddie & Fannie's loans (not a bailout, just a guarantee!) and refinance everyone who wants it at 4.5%.

Amazingly simple solution that costs $0 to the taxpayer.

(FWIW, I really wanted Bush to appoint him as treasury secy. in 2000)

 

The CNN transcript. I am a big fan of Robert Reich, but found him to be a stammering fool and out of his league in this appearance.

BLITZER: Welcome back to “Late Edition.” I’m Wolf Blitzer in Washington.

We’ve heard from a lot of politicians, today, on how they feel the United States should be addressing its economy right now. For a change, let’s talk about the economy with a couple of experts on economic policy.

Joining us now, Steve Forbes. He ran for the Republican presidential nomination back in ‘96 and 2000. He’s the editor-in- chief of Forbes Magazine. He’s in our New York bureau.

And Robert Reich was the secretary of labor during the Clinton administration. He’s joining us from Berkeley, where he teaches public policy at the University of California. His latest book, by the way, is called “Supercapitalism.” It’s just been released in paperback.

Gentlemen, thanks very much for coming in.

Steve Forbes, I’ll start with you. Yesterday we heard Barack Obama , the president-elect, unveil a new economic stimulus package that he hopes could create about 2.5 million new jobs. Listen to what he said.

(BEGIN VIDEO CLIP)
OBAMA: I have already directed my economic team to come up with an economic recovery team that will mean 2.5 million more jobs by January of 2011. It will be a two-year, nationwide effort to jump- start job creation in America and lay the foundation for a strong and growing economy.
(END VIDEO CLIP)

BLITZER: No price tag announced for that economic stimulus package, Steve Forbes, but some say it could be $500 billion, $700 billion. Is it money well spent?

FORBES: Well, Japan had a lot of these stimulus packages, and while some of the projects, I’m sure, will be worthwhile, that’s not going to get this economy back on its feet.

First he has to deal with the credit crisis. There’s an arcane accounting rule that’s now destroying insurance companies, after it destroyed banks, called mark-to-market.

If he wants instant stimulus for the housing market, he should have Freddie and Fannie guarantee, explicitly, their debt and announce we’re going to refinance mortgages at 4.5 percent to 5 percent and do away -- bring back the uptick rule on short selling.

And on the economic side, if you reduce tax rates, say, for the middle class, from a rate of 25 percent to 15 percent, reduce business taxes, which are now the second worst in the developed world, from 35 percent to 25 percent, those measures together would help end the credit crisis and get the economy moving again.

BLITZER: All right. A lot to digest there. I know Robert Reich probably disagrees on most of it, but go ahead.

(LAUGHTER)

REICH: Well, look, I don’t want to take Steve on. I think that the most important thing right now, Wolf, is to understand that there’s not enough buying power in the economy right now.

The middle class has basically come to the end of their ropes. They can’t go into any more debt. Housing prices have declined, and therefore all the home equity loans. And refinancing is basically impossible.

So the only thing that people can do, right now, is rely on government, and government is the spender of last resort. We’re going to, and I hope, see -- I don’t have any inside knowledge on this -- a stimulus package in the range of $500 billion to $700 billion. That’s what I would expect. And that’s about 4 percent of the gross national product.

That’s what we need to get the economy going again.

BLITZER: All right. Let me bring back Steve Forbes. And I’m going to play for you a sound bite of what Henry Paulson, the Treasury secretary, said this week, out in California, on Thursday. Listen to this.

(BEGIN VIDEO CLIP)
SECRETARY OF THE TREASURY HENRY M. PAULSON JR.: By proactively addressing the problems we saw coming and being pragmatic enough to change strategy in the face of changed facts, and despite the inevitable criticism, we prevented a far worse financial crisis that would have severely damaged our economy and the economic being of all Americans.
(END VIDEO CLIP)

BLITZER: Steve Forbes, do you have confidence in Paulson?

FORBES: No, sadly, Wolf. He’s about the worst Treasury secretary we’ve had in modern times. For example, this arcane accounting rule that I mentioned, mark- to-market, which has destroyed bank balance sheets, if we’d had that when we had the S&L crisis in the early 90s, we would have had a Great Depression then.

It’s now wreaking havoc in the insurance industry. Nobody pays attention to it, but it’s devastating. Repeal it, or at least suspend the thing.

And in terms of reviving the housing market, Fannie and Freddie are now owned by the federal government, so get over it; explicitly guarantee that debt, and then announce those two agencies are going to start issuing mortgages, buying mortgages with a 30-year fixed rate of 4.5 percent, 5 percent.

After all, the Treasury can now borrow at 30 years with a little over 3 percent, so that’s doable. You do that, housing prices start to go up; people can refinance; monthly payments go down. What is there to lose?

BLITZER: All right. I want you to respond, Robert Reich, to both of those proposals.

But the first question, Paulson -- do you have confidence in him?

REICH: Well, look, he’s in a very, very difficult position. I don’t have a great deal of confidence in his policies. I think that the great bailout that he engineered was really sold to Congress on false pretenses.

He said he was going to establish a reverse auction to establish the values of a lot of these securities, mortgage-backed securities. And he switched courses to recapitalize banks, throw money in the direction of banks. And now he’s saying, basically, he’s going to punt on that, as well.

So Paulson has not been very transparent. He’s been very opaque. And it has riled markets.

Now, what we need to do, and here’s where I might agree with Steve, at least to some extent, what we need to do is make sure that this bank bailout money is used not for executive compensation and bonuses and not for dividends for shareholders, and not for allowing banks to buy up other enterprises, but to get money down to Main Street so that small businesses and troubled home owners, student who is need additional credit and others, can get the money they need, right now, if they are credit-worthy risks.

BLITZER: Steve Forbes, is Citigroup, this huge banking firm -- is it looking like it could possibly be going down?

FORBES: Well, it’s in deep, deep trouble. You can see it in the stock price. When that you have kind of crash in stock prices, boy, that is a bad signal.

But I think Citi is reflective of a larger problem out there. And that is, these balance sheets have been, gratuitously, many of them, destroyed by artificially marking down the value of their assets.

And this is, again, one of the most boring subjects in the world, but it is something that is easily correctable. The Europeans have backed off from it.

So, in the case of Citi, they’re probably going to have to make an injection. They might force it to eventually sell some of their assets. But you’ve got to deal, first, with the source of the crisis.

Banks aren’t going to lend, and insurance companies are certainly not going to lend in an environment where they fear for their survival.

So, get rid of these crazy accounting rules like mark-to-market and have Fannie and Freddie now finally play a constructive role in the housing crisis by offering 4.5 percent, 5 percent mortgages, and have Henry Paulson do at least one thing right, and that is, have the government explicitly guarantee the debt of Fannie and Freddie.

BLITZER: All right. Robert Reich, do you agree on those points?

REICH: Not entirely. I think Steve Forbes’ idea about getting rid of mark-to-market rules is not quite right, because one of the problem we’ve had is that we’ve been deregulating like mad. There’s insufficient capitalization.

A lot of these big banks, right now, are struggling because their creditors and their investors really are seeing that there’s not much there in the bank. You know, a lot of these toxic securities can’t be relied upon.

You know, the real interesting question, Wolf, is why should we be bailing out Wall Street at all, when we are going -- you know, twisting into pretzels about bailing out big companies like General Motors.

I mean, why not subject every one of these big, big companies to some modified form of Chapter 11; let them reorganize themselves; make sure that executives and employees an shareholders and creditors all put something into the pot.

REICH: And if necessary, if there are big social costs and benefits at stake, have taxpayers bear some of the residual burden.

BLITZER: Steve Forbes, what do you think? Should the federal government bail out the big three automakers?

FORBES: Well, the big three automakers, I think it’s very clear, need very real structure changes, including something, that is revising fuel efficiency standards.

Right now, those companies make very good cars overseas, small, fuel efficient, but they’re not allowed to bring them into the United States and have them count towards their own U.S. fuel efficiency standards.

So, they lose their shirts in North America and they’ve got to revise their labor agreements as well. But if they bring those kinds of structural changes, these companies outside of North America in normal times are very strong, profitable auto companies. So structural changes in North America, they can get back on their feet again.

BLITZER: Take look at these numbers. I’m going to put them up on the screen, both of you. The Dow Jones Industrial average, a little bit more than a year ago, it reached a high of 14,164. Right now, it closed on Friday, 8,046. That’s, what, a 40 percent drop, Steve Forbes.

What’s going on here? Because people are losing their portfolios, their pensions, their 401(k)s. It’s an enormous, an enormous drain on the country’s wealth.

FORBES: Well, it is, and it’s a reflection of how abysmally the administration has handled the credit crisis. First, it weakened the dollar, which made the housing bubble much weaker than it should have been. This arcane mark to market rule has devastated bank balance sheets. When historians look back, they’re going to say how in the world did they let that happen? Fannie and Freddie, not using them properly, and another thing they haven’t touched on is short selling. One of the dumbest things the Securities & Exchange Commission was eliminate the up tick rule, which said you have to wait for stock to go up in price, before you can sell it short. They eliminated that, market volatility ballooned.

BLITZER: Go ahead, Robert Reich. REICH: I disagree with Steve on this. I think the major problem here is that consumers were responsible for 77 percent of the economic activity in the United States, consumers basically reached the end of their ropes. Median wages have been dropping. Median family earnings have been dropping since 2000. Consumers have gone into debt. They could manage that debt as long as housing prices were going up. They could refinance and get home equity loans.

But the minute that housing bubble burst, consumers had no more money in their pockets. And you cannot run an economy where median wages are dropping and most of the benefits of the economy are going to the very top.

FORBES: Wolf, you cannot have a functioning economy if the credit system is broken, which it is today. And the $500 billion, $700 billion stimulus package, when you’re talking about assets of $40 trillion to $50 trillion, is just a drop in the bucket.

It didn’t work for Japan, it didn’t pull us out of the depression in the ‘30s. It won’t today. We’ve got to fix the credit system, and it doesn’t take much to fix it if they do some of the opposite things of what Hank Paulson has done, like on mark to market, like using Freddie and Fannie and this crazy up tick rule. Bring it back again.

BLITZER: Very quickly, because we’re out of time. Steve Forbes, first to you, Timothy Geithner, the new secretary of the treasury. It looks like that is going to happen tomorrow and Larry Summers, the former treasury secretary in the Clinton administration heading the National Economic Council in the Obama White House. Steve Forbes, are you confident in these two guys?

FORBES: Well, they both believe free trade, which I think is a very positive thing, but I want to see how they deal, first with the dollar, then this mark to market thing. If they deal effectively with those two things and utilize Fannie and Freddie, they’ll be heroes. I’ll gladly buy them a free lunch.

BLITZER: What about you, Robert Reich?

REICH: Well Geithner and Summers are a terrific, powerful team. I think they’ll put the financial market exactly in the right direction. Peter Orszag at OMB, you didn’t mention, he is also very, very talented, very competent.

But most importantly, we have a new president-elect who understands that it’s not just about finance, it’s not just about credit, it’s about Main Street. It’s about helping people get back on track and reversing the downward slide in median wages.

Again, I want to emphasize, one of the most important things, you can’t have a recovery unless you get that median wage slide reversed and people can actually go and buy things. Credit can be -- the whole credit market can be resolved and improved, but unless people have the power to actually borrow, you know, you’re whistling in the wrong direction.

BLITZER: Robert Reich, you’ve been an adviser to Barack Obama . You supported him. You coming back into the government?

REICH: No. I have no present plans to do that.

BLITZER: Sounds very diplomatic, the word present plans, always diplomatic. All right guys, thanks very much.

REICH: Thank you.

BLITZER: Robert Reich and Steve Forbes.

FORBES: Thanks, Wolf.

BLITZER: Always a good, intelligent discussion.

 

And in terms of reviving the housing market, Fannie and Freddie are now owned by the federal government, so get over it; explicitly guarantee that debt, and then announce those two agencies are going to start issuing mortgages, buying mortgages with a 30-year fixed rate of 4.5 percent, 5 percent.

After all, the Treasury can now borrow at 30 years with a little over 3 percent, so that’s doable. You do that, housing prices start to go up; people can refinance; monthly payments go down. What is there to lose?

 

If we get rid of the illegal alien force, who's going to build all those infrastructure projects Obama and the Democrats want to build?

Seriously.

 

<sarcasm > Sure. < /sarcasm>

Why not raise the minimum wage to $100/hr? That'll put more Legal Citizens out of work who'll be desperate for those govt. jobs building infrastructure.