Financial Crisis: A Conversation with Steve Forbes

Publish On 2008-10-08 , 9:24 PM By Mary Caraccioli

October 8, 2008

 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 kcik start the flow of money by making it more profitable for banks to lend money. However, the stock market freefall continued. The dow jones industrial average sank another 2%. After the markets closed I spoke with steve forbes about the crisis, investing and politics.

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 Congress wants that rule repealed yet congress drags its feet.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 transparency? 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 thank you Steve. Always great to have you on the show.

Forbes: thanks Mary! 

Bailout Redux Publish On 2008-09-30 , 11:29 AM

By Mary Caraccioli

If you watched yesterday’s vote on the bailout plan by members of the house and the ensuing 777 point drop in the Dow Jones Industrial Average, you may be wondering whose jobs members of the house are trying to protect, yours or theirs.  To me its obvious, they are more worried about getting re-elected than keeping you and i employed.  To be clear, the financial crisis hitting us is complicated and it takes some real effort to try to explain it in plain English. But it can be done. I find a way to do it every night on my show. But house members did not even bother to try. They didn’t want to look like apologists for Wall Street fat-cats, so they instead decided to let their constituents stay misinformed about the economic storm ahead, a join the chorus let Wall Street hang. 

The problem is, its not about those fat cats anymore. The crisis at hand is about you and I and the companies big and small where we work. There is a credit crisis going on. That means businesses are having a very hard time borrowing money. If they can’t borrow money, which is part of the normal course of doing business, they will have to at the very least scale back..  That means fewer purchases made, fewer people hired and more people laid off.  If you are a retailer, this is the time you are purchasing inventory for the holiday season. No inventory, no holiday workforce needed. No inventory, no profits. No profits, no business.  See, it really isn’t that hard to understand.

The Bailout

The plan should get a new vote Thursday. The Senate should show bipartisan leadership and vote first, sending a signal to the House to vote to protect American jobs — not their own. On Monday no House member did anything to get themselves into a revised edition of Profiles in Courage.

I asked U.S. Rep. Joseph Sestak, D-Pa., a member of the small business committee, if he would call on the Senate to pass the bill (as is) on Thursday. He, in fact, did and also voted in favor of the bill. He said additional sweeteners could get more democrats and republicans on board. Here are two he suggested: Democrats want bankruptcy reform, while Republicans want an insurance plan, so when companies fail, people get their money back.  Economists and small business owners have both told me that if the credit markets remain frozen, business spending will dry up. They rely on lines of credit to continue operations. That means more people losing jobs. I believe members of congress need to be more concerned with the loss of these jobs, than the loss of their own.

If there’s one silver lining, it’s this: The dialogue has started and political posturing we saw Monday now seems as outdated as flipping homes for profit. The dialogue has broadened the public’s thinking about the crisis. Two ideas gaining traction are: changing accounting rules and lowering capital gains taxes.  I can see merit with both. However, the crisis at hand is both a crisis in capital (cash) and confidence. Those ideas would help in raising capital but would not help increase confidence.  The banks aren’t lending to each other because they don’t know “whose next.”  With the toxic assets off their balance sheets that confidence will be restored.   That is why I think the bailout package should still be approved.

Still, the reality is that the bailout plan won’t keep the nation out of recession. What it will do is stabilize our banking and credit system so that a recession doesn’t become a deeper and more prolonged economic drain. The White House and Congress did a poor job communicating that to Main Street, and the non-business media showed its lack of understanding of how the system worked, by calling it a Wall Street bailout.

Of course, everyone remains responsible for their personal finances. Given the tough days ahead here’s what you can do to avoid getting burned:

 –Don’t put your head in the sand. Know your finances. How much do you owe? What are your payments? What’s in your 401(k)? If you have lots of company stock in a 401(k), don’t dump the shares tomorrow, but devise a strategy to sell shares and create a more diversified portfolio.

 –Prepare for a pink slip. Unemployment is rising. Unless you know your company’s balance sheet, you don’t really know how well it can weather this storm. Assume the worst. Get your resume together, start looking for other jobs and cut your household spending as if you’re already fired. If you do get laid off, ask for more. If you are offered a buyout package, ask to have that payment deferred until 2009. It will help avoid an ugly tax bill next year.

 –If you are laid off and the markets remain low, talk to your accountant about possibly rolling your 401(k) into a Roth IRA. Taxes will go up, so pay them now at the lower rate and get that money tax free at retirement.

  –Communicate! If you get fired or face trouble paying your bills, call your mortgage provider, utility or credit card company immediately and try to get help before missing a payment. There are things they can do now to help you.

 –Should you switch banks, follow your gut. If you don’t like the new bank taking over your bank feel free to move your accounts elsewhere. Don’t panic. Shop around and select a bank not in the headlines for money problems.

 –Don’t seek stock market bargains until you’ve paid off your credit cards. Good credit has never been more important.

 –Keep paying into your 401(k). This is when stocks are cheap.

The Blame Game Publish On 2008-09-22 , 8:46 AM

The blame game has begun. Everyone from Capital Hill to Wall Street is pointing fingers as to who is to blame and who should be thrown behind bars for creating this current crisis, the worst financial crisis in this nation since the Great Depression. Before pointing fingers, look in the mirror. Those of us that screamed anytime there was talk of better oversight or regulation, those of us that demanded cheap money with no strings attached, and those of us who spent more than we made and let our government spent more than it brought in, are to blame. The “smartest people in the room types” on wall street that gamed the system were doing what many Americans were doing on a smaller scale, spending other people’s money without concern about risk. We all know people who continued to refinance home loans, until they had 125% of the equity in their home financed. The banks made it easy for us to do. Home Equity loan deals filled our mailboxes even more than credit card offers. So why not take the money and run. That is exactly what some on Wall street did. They got money lent to them on very easy terms and found very lucrative ways to take that borrowed money and have it give them big returns. They call it leverage. When the music stopped, some companies were smart enough to get a chair, Goldman Sachs certainly played it right. They continued to make a profit a year into this credit crisis. But they played the game, they played it better than anyone, but they played the game just like the the others. That game has now imploded on all the players, and many of us who didn’t play. Goldman’s prize for playing the game well is that they still exist and Lehman doesn’t. But as of yesterday, they now face more scrutiny through regulation, will be able to do less risky deals and will, at least for the short-term, be less profitable. So what now? Less risk is not a bad idea, but no risk is plain stupid. America’s many small businesses take risks everyday and they need financing to stay in business. Risk, in itself, is not evil, rewarding high risk with the same easy terms as no risk, is the fuel that created the credit crisis. For those who abused the system knowingly, deserve to be put in jail. I have no dubt the perp walks will start as soon as the crisis at hand passes.

Your Green Ideas 

Publish On 2007-11-04 , 2:11 PM

Thank you all for generously sharing your ideas to become more environmentally friendly.  If you haven’t sent your idea yet, its not too late to contribute. I’d love to hear from you! Just email me your ideas.  Send them to: Info@maryandmoney.com   -Mary Caraccioli 

Get the kids involved!! I always keep a few, or a lot, of clean cloth bags folded in my purse. When I am shopping I use them instead of getting a bag from the store. I have a big cloth bag in my pantry where I keep my coupons, I grab it when I walk out of the door to go to the grocery store or market. I get 3 cents/bag. I made it a game for my kids and they get to keep the change we save for using our cloth bags! They always remind me to take our cloth bags. ~ Judy, PA

Instead of throwing away large plastic shower liners, try throwing them in a washing machine with a towel to get more usage. Reduce, Reuse, Recycle ~ Jenelle,  NJ

Use public transport and avoid using car for daily transit ~ Vaseem, MA 

Buy locally grown organic foods! This helps cut down on the toxic chemicals going into the sea, when we eat more locally grown foods vs. food brought in from out of town. I also find this to be more fresher and just a better way to eat and live healthy! ~ JoAnn, MA

With the help of my condo board, I am laying the foundation to bring my entire condo building up to LEED standards. LEED (leadership in energy and environmental design) has a subcategory called LEED-EB (existing buildings), and I want to get my condo building certified to LEED-EB as soon as possible. We are controlling light pollution inside and outside the building, we are installing solar panels, wind turbines, and green on the roof, we are selecting low-VOC paint for all public areas, we are investing in carbon offsets as one huge condo, to reap huge environmental rewards; and we are managing our trash very efficiently, hoping to reduce the volume by 1/2 within 3 years! We are using economies of scale to have a greater impact than one person can have on the environment.~ John, VA

Buy second hand items when you can.~ Jeff, MA

If everyone would unplug all appliances in the morning before they leave for work , school, etc. even cell phone chargers, printers, coffee makers with the time microwaves etc it would save an enormous amount of energy it is a pain and inconvenience but its worth it. Also, its old fashioned,  but if people really make the effort car pool and start consolidating errand running into one day. That’s hard when taking kids to practices, etc. Put kids on school buses instead of driving them ~ Ellen, VA

By substituting a 27 watt fluorescent light bulb for a 100 watt incandescent light bulb, you can conserve a lot of energy. Fluorescent light bulbs cost a little bit more than the typical light bulb but in the long run, you save money and energy.~ Timothy, V 

Instead of using disposable coffee cups, bring your own travel mug when you go to Dunkin’ Donuts, Wawa, etc. ~ Sue, PA

Use one less napkin a day and you will throw away 365 LESS napkins each year! Instead of grabbing a handful, just grab one or two. It’s an easy thing that makes a big difference. ~ Audrey, PA

I work in the “green industry” manufacturing composted soil and mulch products. One of the best tips I have is to take vegetative food waste and throw them in a small container on your counter. At the end of the week or when the container is full place the scraps into a compost pile in your back yard. The composted waste can then be used as a natural fertilizer for the garden. ~ Scott, DE

My grandmother’s memories of wartime green tips caused me to reflect on my own, modern-day sentiments on how I honor our Earth. She always dried paper towels using the assortment of rungs in her apartment. And, I cannot remember seeing her throw a plastic ziploc bag away, even once! Upon hearing this story, my friend made me a wooden board filled with dowels where – to this day – my own ziploc bags now dry after being hand-washed. ~ Laura, NH

I think having various start times (example not all jobs starting @ 8:30, or 9:00, M-F) would improve traffic and road problems and conserve gas waste. Companies should evaluate what employee’s jobs require early start time and plan accordingly.  ~ Jennifer, DE

Shop at consignment and thrift stores for clothes…this is pretty simple…you probably don’t think of this as a typical “green ” thing to do but think of the fuel involved in shipping new clothes to all the stores across the country or world…and the factories and warehouses involved, etc….there are enough beautiful clothes out there you just need to look! Or try a clothing swap with friends and family!!! fyi I do however buy new underwear!!!~ Jaime, PA

Stop using paper cups! Buy some inexpensive plastic cups that can be reused forever, instead of using paper cups…really adds up! ~Amy, MA

That each plastic bag from stores, supermarkets etc. should have a five cent cost. That would make me remember to bring my own bag each visit. ~ Rita, MA

We save all of our fruit and veggie scraps and add them to our compost pile in our garden.~ Jill, PA

Use plastic shopping bags as liners for the wastebasket. ~ Sharon, PA

After using dryer don’t through lint away sprinkle into compost to be recycled.~ Jackie, PA

SAVE TREES! At work, school and home save files/reports on your PC (and remember to back up!) Rather than hard copy paperwork- scan and send or email. Schools should encourage teachers to have students email assignments as well.  E.M., NJ 

My favorite green tip has been to change all of my light bulbs to the new energy efficient ones. It’s an easy way for even the most hardcore energy waster to contribute to saving our environment. ~ Aislynn, NJ 

Soy candles burn clean. I love them from Home & Garden! ~ Rebecca, MD

One can be environmentally friendly and animal friendly if one were to cut back on animal products, go vegetarian, or go vegan. Just producing animals and animal products creates pollution. ~ Anna, PA  

I have a very active 20 month old whom I am trying to teach good environment skills to so that someday she will not have to worry about the environment. Some of the ways we do that is to reuse things around the house that would normally be considered garbage for projects. For instance, old soda bottles become musical instruments, old books become coloring books for gifts, old clothing gets swapped or used as cleaning materials and smocks, meat and egg trays become painting supplies, and cans/jars get painted and “glitterfied” as gifts. There is always a way to keep the “garbage” out of the garbage can! ~ Melissa, NJ 

A few months ago, I noticed that my fitness club, a very large franchise, was not recycling our plastic water bottles. There was an inordinate amount of plastic bottles going directly to the dump. I approached the management to encourage them to recycle. Today, the club recycles. Just think of all the business establishments who sell water bottles and they are not currently recycling. They could use a little prodding from their customers to encourage recycling.~ Maria,NJ 

I bring my own reusable, washable plastic lidded containers to restaurants to hold my leftovers. I prefer this to the disposable foams or aluminum containers.  Barbara, NJ 

One: Turn off the water while you brush your teeth or brush in the shower! Two: Use “gray water”=example=Put stopper in kitchen sink-use old teakettle water and water used to boil for spaghetti or macaroni to rinse dishes or degrease pans before putting into dishwasher. Don’t just dump the water down the drain–find ways to recycle starting with you–at home–develop these habits and change the world!!!  ~ Paula, VA