Publishing tycoon and former Republican presidential candidate Steve Forbes on Wednesday urged people to put the crisis on Wall Street in perspective, saying it “will quickly pass” so long as the Bush administration and financial regulators strengthen the dollar and enforce rules on the short-selling of securities.
“Put things in perspective: We will get over it,” Mr. Forbes said in a speech hosted by the Ad Club of Metropolitan Washington on Wednesday morning. “But if we continue doing dumb things like make monetary mistakes, raise taxes, do crazy things on the regulatory side, you can get a real disaster on your hands.”
While he said there is plenty of blame to go around, Mr. Forbes strongly criticized the Federal Reserve, calling it the “big enabler” that allowed the crisis to reach its current magnitude.
“Long story short, in 2004 the Federal Reserve, then headed by Alan Greenspan, made a fatal miscalculation,” he said. “They underestimated the U.S. economy. They printed a lot of money because they thought the economy needed it, and the engine flooded.”
As a result, Mr. Forbes said, commodity prices shot up and the domestic economy became distorted. Housing prices were already going up, and the influx of money led people to build and buy more houses, lending standards eroded and a subprime-mortgage crisis erupted, he said.
“It just went berserk; a classic bubble, and thanks to high technology, global economy, securitization, it took on proportions it had never done before in history,” he said. “So how did the Fed respond? Having gone on one drinking binge, it went on another: It cranked up the money press again.”
The Treasury Department should have told regulators to “back off” at that time, but instead praised the move, said Mr. Forbes, who called the country’s “weak-dollar policy” the “biggest mistake of the Bush administration.”
“If cheapening your money was the way to wealth, then Zimbabwe and Argentina would own the world,” he said.
He said the recent string of high-profile financial collapses — Bear Stearns & Co., Fannie Mae and Freddie Mac, Merrill Lynch & Co., Lehman Brothers and American International Group Inc. (AIG) — was complicated by the fact that the breadth of the problem was not initially known because the risk from subprime mortgages have been so spread out.
“When subprime hit … since it was spread all over the place, no one knew where the stuff was,” he said. “AIG didn’t know until this Sunday and Monday that they were in mortal peril. They didn’t know what they had.”
But despite the crisis, the markets have managed to hold up, he noted.
“If you had outlined six months ago, a year ago, that the fifth-largest investment bank would go under; fourth-largest would go under; Merrill Lynch would have to be taken over in a distressed sale; AIG, the biggest insurer in the world, would be on the brink; Fannie and Freddie would go under, [the reaction would have been] ‘Oh my God, the world is going to come to an end!’ It didn’t. There’s a lot of resilience out there.”
Moreover, recent losses may seem big, but people should put them in perspective, Mr. Forbes stressed.
“If you look at median net worth in the United States in the last 10 years, it’s gone up over 30 percent,” he said. “What’s happened in recent years is unprecedented in human history; never before in so many parts of the world have so many people advanced economically as happened in recent years. Each year, 50 [million] to 70 million people around the world join the middle class.”
The U.S. has weathered economic storms in the past and will make its way through the current crisis, he predicted, if the Fed redefines its mission as “focusing on a stable currency and dealing with panics.” It should start to soak up some of the excess money it created and the Treasury Department should announce a strong-dollar policy, he said, adding that financial regulators should try to standardize “these exotic instruments” that have been created by Wall Street.
“Make the dollar stable. It’s not that hard to do. Maybe I should write a book, ‘Central Banking for Dummies,’” he joked.
In the meantime, Mr. Forbes said, investors should stay calm.
“This is precisely the time [you] don’t give into your emotions. Your emotions are your enemy.”
Mr. Forbes is editor in chief of Forbes magazine and president and chief executive officer of its parent company, Forbes Inc., which his grandfather founded in 1917. He ran for the Republican presidential nomination in 1996 as well as 2000 and is widely known for advocating a flat income tax.