Fed Should Cut Rates By 100 Basis Pts: Forbes

Source : The Business Times, September 10, 2007

Make it clear Fed will provide liquidity so financial system doesn't 'seize up'

IF Steve Forbes had his way, the US Federal Reserve would cut interest rates by 100 basis points or more.

'(Fed chairman Ben) Bernanke should stop acting like Hamlet and start acting like a central banker and make it clear the Fed will provide liquidity to solve the short-term crisis,' he said at a lunch talk at Raffles Hotel yesterday.

Mr Forbes, chief executive officer of Forbes and editor-in-chief of Forbes magazine, is in town for the three-day Forbes Global CEO Conference, which kicks off today.

Monetary disturbance: Mr Forbes (second from left, with fellow CEOs - from left - William Adamopoulos, Robert Bird and Pierre Baer) at yesterday's pre-conference media briefing. Talking about the US economy, Mr Forbes said today's credit crunch really started three years ago, when the Fed created too much money and commodity prices went up across the board. Usually, some commodity prices will go up while others come down - but, in that instance, they all went up at once.

He said the Fed should temporarily shift away from targetting inflation and instead focus on making sure the financial system does not 'seize up'.

For example, it's too late to tell banks to tighten lending standards, Mr Forbes said. In the present context, this would only make it more difficult for solvent borrowers to obtain liquidity. Rather, the Fed should make sure the solvent borrowers do not go down with the insolvent, he said.

Only after contagion is stopped will markets be able to properly price assets, said Mr Forbes. This is critical, since markets are presently jittery, precisely because they are uncertain about how much assets are really worth.

According to him, today's credit crunch really started three years ago, when the Fed created too much money and commodity prices went up across the board. Usually, some commodity prices will go up while others come down, but in that instance, they all went up at once - which is 'a sign of monetary disturbance', he said.

For example, today's high oil prices are not due to fundamental issues of demand and supply, but to 'inflation and the speculation generated by inflation'.

But inflation was not reflected in the consumer price index, because improving productivity kept prices of daily goods down. Instead, the excess liquidity led to rising asset prices and lower standards of credit.

Mr Forbes also discussed the 2008 US elections, in which he backs New York City ex-mayor Rudy Giuliani.

Key to this choice is Mr Forbes' belief that protectionist sentiment in the US, in both the Republican and Democrat parties, has grown much stronger since the 1990s. Even Hillary Clinton - whom he believes will win the Democratic nomination - will face difficulty in backing free trade, he said.

Though her husband, former president Bill Clinton, pushed a free-trade agreement (FTA) with Mexico through Congress in the 1990s in the face of opposition from his own Democratic Party, he succeeded only with overwhelming Republican support, said Mr Forbes.

But times have changed; a year ago, a Republican-dominated House of Representatives passed FTAs with Central American countries by only a single vote. But Mr Giuliani, as mayor of New York, pushed through tax and budget cuts despite governing a state where people are 9-to-1 Democrat, said Mr Forbes. 'He won't win a cuddly bear contest on Oprah, but he's not afraid to go against the grain.'