The View From 1776
Tuesday, November 06, 2007
Financial Hurricane Ahead
Steve Forbes, in the current issue of Forbes Magazine, gives us a rough weather forecast.
Mr. Forbes writes:
While markets focus on the subprime mortgage crisis, an even bigger one is looming: the ever weakening dollar.
Twenty years ago we experienced the worst one-day stock market decline in history, a crash caused by the dollar and fears of trade protectionism. When both the Treasury Department and the Federal Reserve, under its new chairman, Alan Greenspan, seemed to signal that we wanted a feeble dollar, everyone suddenly wanted out of dollar-denominated assets.
Today gold in particular and commodities in general are blaring out that there are too many dollars in the market. The Fed shouldn’t increase interest rates, it should float them. Ben Bernanke & Co. should soak up the excess liquidity—over a 12-to 18-month period—until gold drops below $500 an ounce. More immediately the Fed should announce that this is what it’s doing so that markets can adjust in an orderly way to a newly stable dollar. The Fed can simultaneously make clear that it and bank regulators will make sure the financial system doesn’t abandon solvent borrowers.
Along the same lines, see: