Everyone knows President Obama has inherited a tough situation, acknowledges Forbes CEO and editor in chief, Steve Forbes.
But Obama’s current drive to nationalize the banks, raise taxes, and go on a massive spending spree will only make matters worse, Forbes contends.
“We’ve seen what they did with Fannie and Freddie,” Forbes told Moneynews.com.
“We’ve seen what they’ve done botching up AIG, which could have been turned around if they’d separated the bad part from the very good parts.”
A much better solution for banks to is eliminating mark-to-market accounting, Forbes says.
“We got rid of this rule in the Great Depression, for a reason,” he notes.
“Let the banks rebuild their balance sheets so they can vigorously make loans again without fearing the regulators,” Forbes advises.
“Do that, then we can see what we need to do in a particular situation just as we’ve done in the past.”
Most of banks’ more than $800 billion in losses are book losses, Forbes says. In fact, banks today have more cash than they’ve ever had before.
Forbes favors breaking up troubled financial institutions like Citigroup so their good parts can become prosperous again, and he says that Bank of America doesn’t need government help.
He believes the Federal Reserve is contributing to the crushing the economy by lowering nominal interest rates to almost zero.
“The Federal Reserve has withdrawn $400 billion from the economy since December,” he says. While nominal rates are low, in the real world it’s still too tough for business to get loans.
“What the Fed should do short-term — and this takes a Federal Reserve chairman who knows what he’s doing, which clearly this one does not — is buy mortgage-backed securities from banks.”
Doing so would allow homeowners to refinance their mortgages at lower rates without government intrusion or court involvement.
Increasing taxes, meanwhile, will hurt everyone, especially lower-income and middle-income Americans, Forbes says, by making goods more expensive and imposing penalties on the very people who provide capital for new businesses and create new jobs.
“When you raise taxes on people — as Ronald Reagan could have told Mr. Obama — you get a weaker economy,” he observes.
The President’s complaints about inherited deficits don’t hold water, because his proposed spending will double if not triple them.
“We know from Japan that that kind of massive spending does not revive an economy,” Forbes says.
Despite his dismay at Washington’s actions, Forbes believes that low poll numbers brought on by unfavorable public opinion will eventually force politicians to change course.
As Reagan observed, “The best educator in Capitol Hill is the heat of public opinion,” Forbes says.
“I think in the next 12 months that is going to get hotter.”
Forbes also discussed his view of the U.S. dollar, oil prices, and gold as an investment.
• The dollar’s rise signifies its position as default currency, not investor faith, Forbes says.
“The (U.S.) Treasury markets are the most liquid markets in the world,” he says. “You can always get your cash, whereas with euros and others that’s still kind of a dicey question depending on what kind of paper you’re holding denominated in euros.”
• As long as the economy’s in a ditch, oil prices will remain low, Forbes says, but once the it gets back on track there’s no reason why oil wouldn’t go to $50 or $60 a barrel.
• Gold, meanwhile, makes a great insurance policy when kept to no more than 10 percent of a portfolio, Forbes says.
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