Sunday, May 4, 2008

Doublethink from Steve Forbes

"The Bush Administration must take two steps immediately to quickly halt the unending, enervating credit crisis: shore up the anemic dollar and, for the time being suspend 'marking to market' those new financial instruments, such as packages of subprime mortgages. The weak dollar is pummeling equities, disrupting the economy, distorting global trade and giving hundreds of billions of dollars in windfall revenues--through skyrocketing commodity prices--to our adversaries such as Iran and Venezuela. ... The [Fed] can rally the markets for a day or two by finding some new mechanism through which to lend more money to banks and other financial insititutions. ... The U.S. Treasury Department could buy dollars in the currency exchange markets. Our allies would gladly cooperate with such an operation; their exports are being hurt more and more. ... The other measure: The Treasury Department and the Fed should get together with the SEC, the Comptroller of the Currency and other bank regulators and announce that financial institutions for the next 12 months will no longer have to write down the value of exotic financial instruments. ... Instead writedowns will occur only when there have been actual losses on those assets. If a mortgage defaults, a bank will then--and only then--recognize the loss. ... Such assets are being marked down to increasingly arbitraty low levels. ... Worse, when forced by panicky regulators and lawsuit-fearing accountants to write down the value of these securities, institutions will dump assets in a market where there are temporarily few or no buyers", Steve Forbes (SF) at Forbes, 7 April 2008.

"Why have U.S. stock markets been such relatively poor performers this decade? ... It isn't as if the U.S. economy has been laggard. ... The Bush Administration and the [Fed] believe a weak greenback means greater exports, fewer imports and thus a smaller trade deficit. In the short term they're right. ... The excess money created by the Fed led to the housing disaster and the return of inflation. ... The White House and the Fed should be less bullheaded about their misbegotten dollar policy and openly vow to take whatever steps necessary to buck up the buck", SF at Forbes, 21 April 2008.

I love SF. I have read Forbes for about 25 years. I consider "boy" Forbes a lucky boy. He is so smart, he knows what the "exotic" assets are worth. Sure! If he thinks they were written down to "arbitrary low levels", he should shut his mouth, pull out his checkbook and buy! On margin! I'm sure SF could get say, Citibank to sell him some mortgage-backed securities for 70% of par with 20% down. SF wants to change accounting concepts that have stood us well for over 100 years, like: writing down assets when the evidence indictates their value has been impaired. Why should our allies buy more Treasury debt? They're already drowning in it! SF wants the Fed to print more money and to strengthen the dollar at the same time. How? My idea Steve: let the SEC suspend the 10-K, 10-Q and 8-K requirements for financial institutions for the next 24 months. Imagine the market reaction to a financial institution availing itself of the new SEC rules.

All right genius. What should the Fed do? Hint: raise US interest rates. Imagine SF wrote these editorials two weeks apart.

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