Does gravity cause plane crashes?
Thursday, Oct 29, 2009
Steve Forbes is editor-in-chief of Forbes magazine and President and CEO of Forbes. Dennis McQuisition asks all the big questions.
Steve Forbes: The key thing here, in terms of greed, as somebody said, blaming this on greed is like saying, "Gravity causes airplane crashes." Now it was a contributing factor, but not they key factor. Again, if the government floods the economy with money, bad things will happen and people will do things they normally would not have done. It doesn't excuse things they did, but bad things are gonna happen.
Dennis McQuisition: It's hard to turn on a television without somebody saying, "We have a whole breakdown here in free market capitalism, and that's what caused the problem." Is that true?
Steve Forbes: Well, it's like a guy shooting somebody and then blaming the victim for getting shot. Most of the great economic crises, including this one, are caused by huge government errors. In this case, the Federal Reserve printing too much money; keeping money artificially cheap. If the Fed hadn't churned out so much liquidity there's no way you could have had a bubble of this size. Add to that to the mix, Freddie and Fannie -- Fannie Mae and Freddie Mac-- underwriting hundreds of billions of dollars of junk mortgages. Then when the crisis hit, things like mark-to-market accounting and regulatory mistakes turned a flood into a tsunami. Then, of course, they blame the victim. In this case, it's amazing, as you know Dennis, in the private sector, if you make a mistake, you fail; you pay a price for it. With Government, when they make a mistake, they get bigger and more powerful. Absolutely perverse-- the opposite of capitalism.
Dennis McQuisition: Well, I hear that and I have some sympathy for it... but all the subprime mortgage companies couldn't have done all of that stuff without having Wall Street... underwriting all this stuff and then securitizing it world wide, and what does that have to do with Government?
Steve Forbes: Well, again, if the Government didn't print the money, they couldn't have done what they did. If the bartender doesn't give you the booz, you can't get drunk. And, in this case, they have a monopoly on the booz. And they just kept churning it out. So whether it went to Wall Street, or somewhere else, when you print too much money, as we saw in the 1970s, bad things will happen. You may not know where it's gonna happen, but you know strange things are gonna happen. And they have nothing to do with the free market. They distort the free market. They distort prices.
Dennis McQuisition: I've read what Alan Greenspan said in the Wall Street Journal... Greenspan and Bernanke will say that it wasn't them turning on the money machine... there was a tsunami of liquidity coming from China and other places.
Thomas Woods: ... we can point out that Asian savings remained pretty high throughout the housing boom and bust... whereas if you look at the interest rate picture, that tracks more closely to what we see in the real world.
Dennis McQuisition: ...one of the complaints that these greedy capitalist pigs in New York made sure all the regulations went away.
Steve Forbes: The banking industry is probably the most regulated industry in the United States... where do the biggest disasters take place? Where supposedly they are being overseen by the regulators. They were drinking their own Koolaid. They really believed this was a new era, that securitization and other measures had taken away risk. Now in any of these disasters, instruments that are normally good such as securitization-- spreading risks, lowers interest rates, good thing-- misused, becomes a disaster, like an automobile. If you misuse that, it can become a lethal vehicle.
Tim Geithner admits that interest rates were a critical factor in the financial crisis:
Congressman... I think you're right to say that this crisis was not just about the judgment of individuals to borrow too much or banks to lend too much; it wasn't just about failures in regulation or supervision. It was partly because you had a set of policies pursued around the world that created a large credit boom and asset price boom. And I think you're right to emphasize that getting those judgments better in the future is an important part of the solution.
October 29, 2009, http://www.youtube.com/watch?v=vYNeY2VngII