Panic Is The Real Danger

Main Street really isn't feeling the effects of the market crisis just yet. It may not have to, as long as the markets don't lose their cool over losing some of their value.

The government has a role to play in all this, but playing too much of a role is only setting us up for more woe. If Barack Obama is to be elected - which looks very possible at this point- it would be incredibly damaging to raise taxes in 2009. One hopes that he would have the good sense to postpone additional tax hikes until the Bush Tax-Cuts expire in 2010 or longer if necessary so that we can regain confidence. The absence of which is at the center of our current market problems.


Fact and Comment
Fear Will Subside
Steve Forbes 10.02.08, 6:00 PM ET
Forbes Magazine dated October 27, 2008


Although you'd never know it from market volatility, the financial fever in the U.S. may be about to break. The Treasury, of course, must move with alacrity in removing those impaired mortgages and other exotic instruments off of bank balance sheets. Just as important, the Administration must deal decisively with the insanity of mark-to-market, or so-called fair value, accounting that has forced institutions under severe pressure from regulators and accountants to maniacally mark down to absurdly low levels the value of unmarketable securities and assets, thus destroying entities that have positive cash flows. Congress has made its intent clear: It wants mark-to-market scrapped or at least suspended for a good, long time. Sensible reform here would sharply alleviate the severity of the credit crisis. Foot- dragging on this would be criminal as well as destructive. And the SEC should get its act together on short-selling.

Taken together, these measures will allow banks and financial institutions to catch their breath and not fear that they will be gratuitously plunged into insolvency. A recuperation will then begin, which would be hastened if the Administration abandoned its weak dollar policy. In fact, a strong dollar commitment would stem the panic.

Meanwhile, Europe and Asia will find ways to stop the contagion there, just as we are haltingly, clumsily doing here. The great danger going forward will be the political reaction. Will we apply growth-stunting regulations in the name of "never again"? Will we raise taxes in part to punish the "rich," harming the capital creation so necessary for growth? The answers will determine whether we have a Reaganesque recovery or the drawn-out stagnation of the 1930s.

Why a panic unseen in almost everyone's lifetime? Never before in American economic history have we undergone such a confluence of irresponsible behavior, of measures taken and not taken that have been demonstrably destructive. Recent shenanigans over the bailout bill defied credibility. Our financial system was on the verge of a Great Depression wreck. Policymakers in those days could at least plead ignorance in their disastrous decisions.

The U.S. economy is in recession, and the slide is gaining momentum. Europe is also in a recession, and Asia's growth rates are slowing down markedly. Yet Congress couldn't resist playing brinksmanship partisan politics. The Administration deserves a severe knuckle-rapping as well. More important, President Bush--not to mention Hank Paulson and Ben Bernanke--never convincingly explained to the American people why the legislation was a dire necessity, flawed as it was. Most Americans thought of it as a gratuitous handout to greedy Wall Street executives. Even so, House Republicans should have made sure the bill passed on Monday, Sept. 29. Occasionally members of the national legislature must act in the national interest even if--temporarily-- constituents don't realize the magnitude of the impending horror.

Put the bailout's $700 billion price tag in perspective: American households, until recently, had net assets of $56 trillion. A 2% decline in the value of those financial and hard assets overwhelms that $700 billion.

This whole crisis was absolutely unnecessary. The list of villains is long and ugly. The housing bubble and the promiscuous issuance of exotic junk securities would never have reached the level they did had the Fed not been so recklessly loose in its monetary policy. Our central bank behaved like a bartender who continues to ply low- to no-cost booze to already inebriated customers. The White House and Treasury Department went along with the Fed's weak-dollar policy, which wrought havoc on the world by creating a commodity bubble and a catastrophic loosening of lending standards and investing prudence.

The mark-to-market madness gratuitously destroyed Lehman Brothers and numerous other institutions.

The SEC should be criticized severely for doing away with the uptick rule on short-selling--no shorting of a stock unless it has moved up in price--and for its failure to enforce rules against naked short-selling--requiring a short seller to first borrow a stock before he shorts it.

Congress has long shielded the wild--and criminal--profligacy of Fannie Mae and Freddie Mac. These two monsters played a critical role in the horrible proliferation of subprime mortgages. Borrowers and speculators were given mortgages that no sane lender would ever have approved a few years ago. The rating agencies blissfully gave AAA status to this toxic material. Now, in the downturn, these agencies are going in the opposite direction--cutting ratings so that no one can accuse them of being too easy. It was just such a cut that sent AIG, the largest insurer in the world, right off the cliff. And the prospect of a downgrade destroyed Wachovia (nyse: WB - news - people ).

Sphere: Related Content