Wednesday, October 8, 2008

Financial Crisis (Still!) Related to Houses And Confidence

As six central banks cooperated in a rate cut this morning, ultra conservative Steve Forbes weighs in on the credit crisis in this video, laying much of the blame at the feet of the Fed and (remarkably!) agreeing with my post the other day that we're facing a confidence crisis, not a financial crisis.

Steve Forbes Video Highlights & Quotes

  • "One [problem in the past was] the Fed being much too easy on money".... [combined with people thinking they could leverage their investments at a 30 to 1 rate].... "We had a drinking binge combined with an excess of serving of booze by the bartender - the Federal Reserve - and the result is a severe morning hangover."

  • "The world is awash in liquidity. What we have today is a crisis of confidence, not a lack of liquidity."

  • "Mr. Paulson ... has been completely blind as to the importance of stabilizing the dollar..."

  • "As for Mr. Bernanke... he still can't get away from his academic theories that if you just throw enough money at it, it'll cure itself. Clearly that hasn't worked."

Forbes' solution? Stabilize the dollar, and tell the regulators to stop the mark-to-market process because "there's no way we can get a realistic price" for those troubled assets in this environment.

I have to admit I'm unsure how one accomplishes the task of "stabilize the dollar" but two of my knowledgeable Canadian investors (including one who trades currencies for a living) says this is paramount. And Paul Krugman has spoken before about the mark-to-market process and how it's more important to establish the price paid for troubled assets than whether or not the federal government should be the buyer. Krugman recently blogged, "What prices will taxpayers pay to take over some of that toxic waste? How much equity will they get in return? Those numbers will make all the difference."

In another venue, last night Presidential candidate Senator John McCain tried to turn our focus back to the root of the problem, the housing market. McCain says the government should directly help homeowners by buying up bad mortgages and helping homeowners renegotiate mortgages they can't afford. However, it's worth noting that Senator Barack Obama proposed just this sort of plan way back in April. Further, since Fannie Mae and Freddie Mac were recently 'nationalized', Treasury Secretary Henry Paulson already has the power to do what McCain presented as a new idea at last night's debates.