Page 90 - Forbes Magazine-October 31, 2018

FACT & COMMENT
“With all thy getting, get understanding”

THE DISASTER OF 2008

WHY IT CAN HAPPEN AGAIN

BY STEVE FORBES, EDITOR-IN-CHIEF

COUNTLESS COMMENTARIES and matic, destructive example of that process
articles are marking the tenth anniversary was in the housing market. To one degree
of the panic of 2008. Yet almost all ignore or another, other currencies followed the
the root cause of the crisis: a weak dollar. dollar’s bad example. Thus, the artificial
A wobbly, volatile currency always begets housing expansion—and bust—became a
economic upheavals. If we don’t grasp that worldwide occurrence.
fundamental lesson, we will inevitably get t 8BTIJOHUPO T JODPOTJTUFODZ CSJOHT PO
into trouble again, big time, in the future. ĕOBODJBM NBSLFU QBSBMZTJT The inevi-
Moreover, these retrospectives overlook table reckoning turned into a panic that
or downplay two other major blunders by nearly brought the financial system into
the federal government. Here are the three. catastrophic cardiac arrest. In the spring
t %BNBHJOH UIF EPMMBS Precipitated by the of 2008 Wall Street’s fifth-largest invest-
popping of the high-tech bubble, the economy weakened in ment bank collapsed, loaded with junk mortgages and other
2000 and went into a formal recession the following year. In questionable assets. Bear Stearns was hardly a linchpin insti-
response, the Federal Reserve started to cut interest rates. Then tution, yet the Bush administration decided to bail out the
it and the Treasury Department (which by law is in charge of firm’s creditors. The two politically powerful and recklessly
the dollar) began to undermine the value of the greenback. run government-sponsored enterprises, Fannie Mae and
That was a catastrophic mistake. The theory behind this Freddie Mac, which were bulked up with subprime mort-
move was that a gradual devaluation of the dollar would gages, teetered during that summer. Washington came to
boost exports, which would help stimulate the economy. their rescue. Then Washington let Lehman Brothers, a
That theory is nonsense: Countries with unstable currencies far larger and more important institution than Bear Stearns,
always, over time, roundly underperform those with sound fail. “No more bailouts!” was the message. And then the first
currencies. Compare Switzerland, which has had the best- money market ever created, having become overly aggres-
managed currency over the past 100 years, with Argentina, sive, was hit with losses. A run on money market funds,
which has had one of the worst. Switzerland has expanded which had over $2 trillion in assets, ensued. Simultaneously,
impressively, while Argentina has stagnated, even though it AIG, the world’s largest commercial insurance company,
was once a global economic powerhouse. needed a huge infusion of emergency cash.
The reason for such a dramatic divergence is simple. Prog- Panic erupted as everyone clutched cash in desperation.
ress depends on investing, and productive investing is aided Washington reversed course again, granting federal guaran-
immeasurably when money’s value is stable, just as markets tees for money market funds and bailouts for selected banks.
operate far more efficiently and fruitfully when there are fixed AIG and Citigroup were, in effect, nationalized.
weights and measures for commodities. For example, the t "O BDDPVOUJOH SVMF CFDBNF B XFBQPO PG NBTT EFTUSVD-
amount of liquid that constitutes a gallon doesn’t fluctuate. UJPO In 2007 regulators resurrected an accounting rule, dubbed
Money measures value the way a yardstick measures length. “mark-to-market accounting,” that had been abolished during
Funny money distorts prices, which are the absolutely the Great Depression. Its effect was to constantly and relent-
crucial conveyors of information—supply and demand—that lessly artificially depress the value of bank capital at a time
enables free markets to function. Like a virus in a computer, when these institutions were in precarious condition.
a distorted currency corrupts the information. As the green- The Bush administration was obstinately oblivious to the
back was gradually gutted, commodity prices soared. Oil perniciousness of this decree. Finally, in early March 2009,
gushed from $20 to $25 a barrel to over $100. Gold ballooned thanks to the efforts of a handful of enlightened individu-
from under $300 an ounce to a peak of $1,900. When money als, the House of Representatives held a hearing that made it
becomes unreliable, people turn to hard assets. The most dra- sharply clear that this edict had to go. Regulators got the mes-

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