Yesterday, I had the opportunity to attend a lecture by Steve Forbes, CEO of Forbes and Editor-in-Chief of Forbes magazine. It was quite enlightening to get his take on the financial crisis. Although he is a Republican who ran for president in 1996 and 2000, he presented his views with a clarity that did not smack of partisanship, with the exception of a veiled shoutout to John McCain.
In discussing the cause of the current crisis, Forbes avoided the simplistic blame game the media has been focusing on and took the crowd through failed monetary policy and lax regulations that combined to create what he termed, "a perfect storm."
The time line according to Forbes:
2004 The Fed printed too much money, kept interest rates artificially low in order to shore up an economy they deemed was weak. (Forbes said economy was actually strong.) As a result, the price of commodities went through the roof; oil, lumber, steel, copper, etc. Inflation was up. (others say it was due to speculation on the market. Potatoes, potahtoes.)
Extra money from the dot com bubble is flooded into housing. Borrowing standards are lowered, these loans are then bundled and sold on the market, the growth of FannieMae and FreddieMac and then . . .
August 2007 the credit crisis hit. The Fed prints more money.
2008 Regulators and banks panic.
Forbes went on to describe mark-to-market accounting that forced banks to value these new fangled securities in a panic.
According to Daniel Gross of Slate Magazine, mark-to-market accounting is not a problem for mutual funds who must do so daily. It involves placing an actual value to securties owned and if the value is lower, let's say 85 cents on the dollar then you "mark-down" that asset by 15 cents on the dollar. Mark-to-market accounting, according to Gross, is necessary for financial transparency in trading. Well, if you are trading in crazy new securities that have a questionable value like mortgage-backed securities then you dread the mark-to-market.
To value them, many outfits slipped the surly bonds of mark-to-market and assigned a value to them based on so-called mark-to-model. (In other words, educated guesses based on algorithms.
So now these securites are worth less and banks and companies are forced to increase their solvency by increasing capital or going under. Many went under.
Now Steve Forbes called for a 12-month suspension on mark-to-market valuation in his column. In his speech last night, he equated it to trying to sell your home in 3-days as opposed to a year. You will not get as much for it in a "fire sell". Others state that you shouldn't say your home is worth a million, get a loan on it for a million, and when the debtor wants his money say wait, it may not be worth a million now but give it time to appreciate in value then I'll pay you.
Needless to say, I was not quite drinking the Steve Forbes Koolaid but he is is a successful guy and you have to respect his point of view.
The rest of the evening descended into policy stuff such as the flat tax, privatization of social security, health savings accounts. It's kind of hard to sell your brand of economics when the markets are tanking under the Republican guard, but the night was entertainging nonetheless.
Thank God for independent thought.