This morning central banks around the globe pulled off the difficult feat of a coordinated interest rate cut. The idea behind the cut is to help thaw the frozen credit markets. Banks won’t lend because they don’t have confidence that borrowers (including other banks) will pay them back. The result is the worst financial crisis we have seen since the great depression. This morning’s choreographed global show of unity by the central banks, was supposed to help kick start the flow of money by making it more profitable for banks to lend money. However, the stock market free fall continued. The Dow Jones industrial average sank another 2%. After the markets closed I spoke with Steve Forbes about the crisis, investing and politics.
by Mary Caraccioli
Mary Caraccioli: you’ve been a student of the economy and the markets for many years. But many americans have just become aware of the intersection between wall street and main street in the last four weeks. Let’s put this into perspective…Where are we right now in this crisis?
Steve Forbes: that depends on where the government goes from here. As you know there’s been a hug sell-off in the past year. The market has lost 30-35 percent of it’s value. Hank paulson’s announcement that it’s going to be weeks before he gets this 700 billion dollar bailout goin was a real downer. What he should do is treat this as an emergency not just a corporation and start putting that money to work right away, even if it means buying preferred stock which he’s allowed to do. Yes they’ll have congressional hearings five years from now, but we are in an emergency and you take emergency measures. The other thing that really matters is if the scc and the treasury finally bury mark to market which has artificially lowered the value of stocks between their real worth and a firesale price. That has wreaked havock on companies like lehman brothers and aig. Congress wants that rule repealed yet congress drags its feet. It should deal with rightaway and market will surely turn.
MC: beyond the auctions there are things he can do right now.
Forbes: well he’s got some flexibility and I don’t know why he thinks it takes several weeks to set up an auction process. The treasury dept. Manages the national debt which is the 10 trillion held by the public…So their doing auctions for money markets each and every day whether it’s treasury notes or treasury bonds…Those are ongoing operations, so I don’t know why they don’t grab some personal and start it with this other paper….Just do it.
MC: let’s talk about your second point. Mark to market. An accounting rule means that companies have to mark their assets to the market price. Your argument right now is get rid of that right now so they can mark these at a more realistic level.
Forbes: there is no market. It would be as if you had an automobile and say it’s worth 10-thousand. And your told you have to sell it in the next five minutes what kind of a price do you think your going to get for it? Well that’s what’s happening here. If you take the 500 million banks have written off…Almost all of that is book writeoffs. Not cash. Lehman brothers was cash positive to the end. You’ve got to go out and raise new capital which puts enormous pressure on companies. So it destroys innocent companies.
MC: let’s make the assumption you get the sec to do exactly what your calling for…. Are you concerned about the unintended consequenses that might occur if managers have more discretion and a little less transparancy. After all this is a crisis in confidence.
Forbes: well that’s the thing nobody still knows for sure what’s really there. If you mark this down to so called market you’re going to destroy a company so that’s a greenlight to the short sellers. If we’d had the rule in place in the early 1990s most of the large commercial banks would have been destroyed. We would have had a great depression in the 1990s with this rule. So the key thing is to have the market confident that these companies are not going to be artificially put out of business. They won’t feel that they have to horde the cash…They’ll feel they can function like bankers again.
Another ideal thing would be if the fed announced when this thing is over…It is going to work positively to make sure the dollar stays strong and if the two pres. Candidates would announce that you’re going to get big reaganesqe tax cuts this crisis would be over in five minutes.
MC: you ran for pres in 1996 and 2000…Are you sorry you didn’t run again given the major changes we are seeing in the financial infrastructure at this time. Your tax plan may have more of a chance of gaining traction in this environment?
Forbes: no I gave it a try. It’s one thing to think well this is an ideal environment…Quite another to get out there and do the job and so I gave it a shot. Tried it twice, now i’m trying to get others to do it…Trying to educate, agitage and it’s amazing….25 Other countries around the world have tried this tax simplification has worked everywhere it’s been tried and the american people would applaud across the board. Democrats, republican independent. They all know this tax code is a horror. A real deadweight on the american economy.
MC: and of course if people don’t know…Steve forbes is a long proponent of the flat tax.
MC: now let’s move back to investments and the stock market. How close do you think we are to a bottom?
Forbes: I think pretty close to a bottom. People who need the cash have sold in distress and that’s people’s moods are getting darker and darker and that’s usually a time when the market is reaching a bottom. So in terms of a of bottom at least in this leg…I think we’re almost at it if we’re not at it already. There are real bargains out there. There are survivors in the financial industry. There are some very big companies out there selling at distressed prices. You look at other industry. Look at boeing. Flush with cash selling at bargain prices. Look at what warren buffet is doing. He’s a smart guy. He plunked 3 billion into ge…5 Billion into goldman sachs. He’s probably looking at other bargains out there.
MC: is there any sector that’s immune to the downturn?
Forbes: you may find pieces here and there. You look at retailing. Walmart is growing a little bit…Not much but people do buy things. It may not be luxury items… But people do buythe essentials. You may find movies you may find some forms of entertainment that may do well in this environment. Export markets that are still working may do ok. But overall it’s a real downer and it’s not that the economy was inherently bad before this crisis hit… What we had was freezing up in credit. It’s similar to what you’d have if you couldn’t get water anymore. The reservoir is full…But the pipes are clogged.
MC: how long will this downturn last?
Forbes: the basic strengths of the economy are there…But we will be in a recession this quarter. I think it started in september if not august…It will go to early next year, but then things should start to really improve.
MC: what advice would give the small business to get through the next nine months successfully?
Forbes: watch that cash flow as never before. Small business people know better than big companies which is why some big companies get in trouble. Cash flow is the be all end all.
MC: how do we get an end to the housing crisis?
Forbes: well I think we’re near a bottom now. Before the credit crisis hit, which could have been avoidable. In calif. Bankers were noticing that when they sold foreclosed homes…The number of bidders that were coming was going up…So the bottom was beginning to be reached. If we just get a few things moving…This thing will start to heal.
MC: all right thanks. Always great to have you.
Forbes: thanks mary!