Steve Forbes Predicts Six Months of Recession
Following herewith is the exclusive interview, which took place in Virginia Beach, Va., on Oct. 24, where Forbes and several leading Republicans debated several leading Democrats on the issues of the day.
(Editor’s note: Some of the questions from CNSNews.com were edited for space.)
CNSNews.com: “In one of your ‘Fact and Comment’ columns [in Forbes] from earlier in the year, you identified some of the government policies that, in your view, put the U.S. economy where it is now. Would you describe for us some of the practices that you object to and what the Forbes plan would be for rejuvenating and re-energizing the American economy?”
Steve Forbes: “I think one of the things to keep in mind is that this was a totally unnecessary crisis. There were a lot of problems out there, but they shouldn’t have threatened the very financial system here and around the world. Big mistakes were made. The first one was the federal reserve printing too much money – debasing the dollar, weakening the dollar, that always leads to problems. That was big mistake number one. Sort of like the equivalent to flooding the engine of an automobile. You can have a fine vehicle, but if you abuse it with too much fuel, you’re going to have a problem.
“Second, Fannie and Freddie. Freddie Mac and Fannie Mae had created an environment where they helped fan this housing bubble, which was created by too many dollars, by buying up these sub-prime mortgages, less-than-prime mortgages – over $1 trillion dollars worth.
“So those two things led to a mammoth bubble, the likes of which we haven’t seen before. Then, just to make the thing more interesting, after the bubble burst – a little over a year ago – the government did a crazy thing in accounting that’s a boring subject but had deadly consequences called ‘market to market,’ which had the effect of forcing banks and insurance companies to continuously mark down the values of assets for which there was no market. So, pick a number. So the auditors, regulators said, keep marking it down where there is no market, and so you had all of these artificial losses.
“If you look at all – all of the losses that have been announced, $600 billion, almost all of them are book losses, not cash. And then we removed barriers to short sellers who’ve been pounding these stocks. We let them do it. So you put it all together: Abuses on short selling because the SEC didn’t enforce the rules. Market to market insanity, which would have, you know, if we had that 15 years ago we’d have destroyed the banks in this country - and then Freddie and Fannie too much money. If you put it together, as we say it today, ‘a perfect storm.’”
CNSNews.com: “Did we arrive at a point where the bailout just became necessary – however much conservatives might object to government intervention – it just reached a point where, in your view, maybe we just had to fall back on that position?”
Steve Forbes: “Well, it was the equivalent to a disaster. When you have a disaster, you rush in the food. You rush in the clean water, temporary housing and tents to take care of the situation. Those are temporary emergency measures. What’s been done in terms of the bailout – pumping equity into the banks whose balance sheets have been destroyed by all of this – that is a necessary thing if we want them to stop clutching their cash and start to get into a position where they can start lending again.
“Already, real damage has been done to our economy and around the world. We are in a recession. We will be in one for about six months or more. But if we continue with these recovery programs and don’t do anything foolish like raising taxes or going on another round of trashing the dollar, by spring we should start to see signs of recovery.”
CNSNews.com: “In one of your columns you also identified the geopolitical fallout connected with the weak dollar policies, in a column entitled “Bush’s Boo-boo.” What sort of geopolitical ramifications are connected with weak dollar prices in terms of some of our adversarial nations?”
Steve Forbes: “Well, this is a critical thing: the geopolitical fallout. It’s not just our own economy. It’s not just facing the prospect of more unemployment and people losing their businesses, as shattering though that is. It has geopolitical consequences. It gave windfall revenues, weakening the dollar. But higher oil prices gave hundreds of billons to some of the worst characters in the world - the lunatic running Venezuela, the murderous mullahs running Iran. Russia began to act very belligerent in foreign policy. So it had fall out from that. And, at the same time, it weakened the United States’ economy, which is not a good thing for the world.
“And you can look at the past. Look at what happened in the 1930s, went through the Great Depression and the hideous things that resulted from that. The Nazis never would have come to power in Germany if it hadn’t been for the Depression, which led to a second World War. In the 1970s, when we had this wild inflation, America looked weak, and we withdrew from the world, and Communists took over in Nicaragua. The mullahs took over in Iran, and so you can see the same pattern is starting again.
“Thankfully, in 1981, Ronald Reagan took office and made abrupt, enormous changes both on the economy, massive tax cuts and other measures – rebuilding our shattered military. And guess what we became once again? The most vibrant economy in the world, and we won the Cold War. That’s what we have to look to, a Reaganesque approach. How do we get out of this and go to new levels of strength.”
CNSNews.com: “Over on the foreign policy side of the ledger, I know you were very close to Caspar Weinberger, Reagan’s defense secretary. With Daniel Ortega back in Nicaragua and with Hugo Chavez in Venezuela, what can we learn from the example of Caspar Weinberger and his philosophy of national defense?”
Steve Forbes: “Well, first you need a strong national defense and you devote the resources needed to do it. Don’t try to do it on the cheap – that just costs you more in the long run and sacrifices unnecessarily Americans lives – and do it right. He, what he also made very clear was, you go on offense against these people. Now, if you want to talk to them, you have an agenda. And if they don’t adhere to the agenda, you back it up with other measures such as true sanctions, such as military force, so they know you mean business.
“I remember 1981, a lot of so-called experts thought, ‘Well, it’s inevitable that El Salvador will go to communism and the rest of the Latin America.’ Nothing could be done about it, they said. Well, it was reversed, and we ended up winning the Cold War when people thought at best we might get a draw.”