WALSH: Review and Comment

REVIEW AND COMMENT

As always, Forbes tells it like it is

by Matt Walsh, Editor and Publisher

Although he's not running for preside nt this time, Steve Forbes still makes more sense than any of the pretenders.

For more than a decade, Steve Forbes has made the most sense of any presidential candidate. He ran unsuccessfully for the Republican nominations in 1996 and 2000. This time around, he is Rudy Giuliani's finance chairman. Too bad, it should be the other way around.

Forbes still makes more sense than any of the candidates - especially on economic issues.

To that end, Forbes, who has a Florida connection with a home in Naples, spoke Nov. 30 in Sarasota as the keynote for Wall Street Live, a one-day investment conference benefiting Sarasota children's charities. And as is often his modus operandi on these occasions, Forbes delivered an hour-long talk that bluntly criticized - often with cutting humor - the bumbling of Washington policymakers. He also offered simple, sensible prescriptions that would keep the U.S. economy the strongest in the world.

In short, Forbes advised Americans not to let the subprime mortgage crash send them into panic. "We shouldn't give in to fear," he said.

Put things in perspective, he said. The subprime meltdown is smaller in dollars than the 1980s savings and loan crisis and smaller than the 1990s tech crash.

"We'll have a slowdown in the fourth and first quarter," Forbes said, "but there's no reason the economic expansion shouldn't go on. Right now we're in a tough period, but the fundamentals are there. If we don't panic, this thing should be through in a few months."

Forbes said markets are seizing up because of fear of the unknown. "People don't know what's out there," he said.

He compared it to consumer reaction to reports of a consumer buying a bad bag of spinach at a grocery. Even though the vast majority of the spinach on the market is good, that one bag spooks everyone into ceasing to buy spinach.

In contrast, Forbes said, evidence exists that we're living in a Golden Age. Productivity and living standards are rising throughout the world faster than ever, he said. In the past four years alone, the U.S. economy expanded in dollar value the equivalent of the entire Chinese economy. Capital is still pouring into U.S. hedge funds. And in spite of the subprime crisis, "American households still have more financial assets than the rest of the world put together," Forbes said.

Forbes laid the blame for Americans' economic worries on the Federal Reserve Bank and former Chairman Alan Greenspan.

"This is not to excuse the subprime lending and not to excuse the [investment banks] from investing to get their big fees from the subprime mortgages," he said. "But the Federal Reserve mucked up."

As he often does, Forbes invoked the metaphor of regulating the amount of gas in a car's engine - with too much gas, it stalls; with not enough, it chokes and chugs as well.

"If you pump in too much money as happened three years ago, you get strange things in the economy," Forbes said. "When the Fed made its mistakes [lowered interest rates too far and increased the money supply too much - creating easy credit], the housing market went on steroids."

Watch the price of gold, Forbes said. If the U.S. price goes below $300 an ounce, the U.S. economy will stall. If it's at $400 to $450 an ounce, that's OK. "But when it goes above that [it was $794 an ounce on Dec. 3], you're flooding the economy with excess liquidity."

"If gold prices stay where they are," Forbes said, "tighten your seat belts for more turbulence."

The key to steady, long-term economic growth, Forbes said, is a stable dollar. Since January 2006, the British pound vis-à-vis the dollar has increased in value from $1.80 to $2.13 - a result of an oversupply of dollars and the Fed's resetting of interest rates.

Forbes compared the gyrations of the dollar to changing the number of hours in a day or the number of inches in a foot. "If it's 12 inches one day, eight inches the next and 16 inches the next, you'd have a hard time figuring out how to build a house," he said.

"If trashing your money was the way to wealth," he said, "Argentina and Zimbabwe would own the world today."

Forbes' prescriptions to guide the U.S. economy back to stability and growth included the following steps:

• The Federal Reserve Bank should quit pegging interest rates. "Let interest rates float," he said. Let the market determine the rates and use gold as the guide. Reduce the money supply gradually. These steps would stabilize and strengthen the value of the dollar.

• Don't overregulate and shut off bank lending - the steps that worsened the savings-and-loan industry collapse in the 1980s. "Regulators should make sure the banking system doesn't get overreligious. The regulators should say [to banks]: 'Don't stop lending.'" Don't shut off credit-worthy customers out of fear.

"What regulators should be doing is asking banks 'How much cash are you putting out there?'" Forbes urged bankers to be willing to renegotiate loans.

• Hold to maturity. Likewise, he urged investment houses and pensions funds holding "suspect paper" not to mark the value of these investments to market "unless you've actually experienced a loss." Forbes urged the holders of paper to hold them to maturity, predicting that in many instances the losses, if they occur, would be only pennies on the dollar.

• Cut taxes. "One of the things [Congress] should do but won't is cut taxes," he said. Taxes are a cost, Forbes said. If you raise the price of that cost, you'll get less - the government and economy will get less income. "If you lower the price, you get more," he said.

"Why not put in something like a flat tax?" Forbes said. This has topped his economic recommendations since he made his first bid for a presidential nomination in 1996.

A flat tax, Forbes said, would eliminate the need for the IRS and free up billions of dollars Americans spend on lawyers and accountants maneuvering through what he calls a corrupt tax system and tax code.

Forbes rejects a national sales tax. Enforcement would be difficult. Another challenge is determining what qualifies as a business. He used the example of a home furniture-maker going to a home-improvement store to buy wood. Should the furniture maker pay sales tax and then charge sales tax when he sells his product?

The biggest challenge with the sales tax, Forbes said, is the 16th Amendment, which permits the income tax. Unless it were repealed, Americans could count on Congress imposing a national sales tax and the income tax.

For his final word on taxes, Forbes advocated the eliminationof the death tax. The Founding Fathers opposed taxation without representation. The death tax, Forbes said, is "taxation without respiration."

FORBES THE COMEDIAN

In Steve Forbes' more than two decades of delivering speeches worldwide on the U.S. and world economies and America, the bookish historian and magazine editor has perfected the art of delivering extemporaneous one-liners.

In his speech in Sarasota, Forbes made his audience of nearly 400 laugh out loud several times. A taste of the Forbes off-the-cuff humor:

• While lamenting the recent unfortunate dismissal of Citicorp's chief executive officer and the banking company's bailout with $7 billion from Abu Dabi, a seemingly amazed Forbes said, "What's next, Scooby Doo?"

• Referring to Congress' penchant for wanting to tax the rich, Forbes said, "In Washington, that means anyone who makes money."

• On the Alternative Minimum Tax, he called it "the Alternative Maximum Tax."

• On the Fed's poor handling of the value of the U.S. dollar: "If trashing your money was a way to wealth, Argentina and Zimbabwe would own the world."

• On the muddled, indecipherable language often used by former Federal Reserve Bank Chairman Alan Greenspan and his successor, Ben Bernanke, Forbes said, "Greenspan gets an $8 million book advance and suddenly he speaks English again."

DEVALUED DOLLAR

The table shows how many dollars are needed to buy a British pound and a Euro.

Pound Euro

Jan. 1, 2004 $1.857 $1.308

June 30, 2004 1.879 1.256

Dec. 31, 2004 2.003 1.418

June 30, 2005 1.876 1.254

Dec. 31, 2005 1.789 1.231

June 30, 2006 1.888 1.305

Dec. 31, 2006 2.037 1.373

June 30, 2007 2.084 1.401

Dec. 4, 2007 2.142 1.524

Source: OANDA.com

EXCESS MONEY

The table shows the growth in the United States' M2 money supply, which consists of existing currency, traveler's checks, demand deposits, retail money market mutual funds, savings, small time deposits. In billions of dollars. The percentage change is the change from year to year.

M2 Supply % Chg.

Jan. '04 $6,072.0

June 6,280.7

Jan. '05 6,424.3 5.8

June 6,524.6

Jan. '06 6,734.0 10.9

June 6,836.4

Jan. '07 7,085.7 5.2

June 7,250.0

Oct. 7,395.6 4.4

Total growth 21.8%

Source: Federal Reserve Bank