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Monday, September 29, 2008

Forbes: Mishandling of dollar partly to blame for crisis

MISTAKES in managing the US dollar, dating back to 2004, is one of the main causes for the present financial mayhem in the United States. There are signs that the US dollar is strengthening but conscious and consistent policies are required for a sustained uptrend, said Steve Forbes, chairman, CEO and editor-in-chief of Forbes.

His advice is for the Fed to buy US dollars in the forex markets, garner allies for coordinated action and cease printing new US dollars.
But, at this juncture of severe financial crisis, would the Fed even consider such an action, especially given the rising spate of bailouts and financial failures?

Steve Forbes (pic) advise is for the US Fed to buys
US dollars in the forex markets, garner allies
for coordinated action
and cease printing new US dollars.


“I hope so. I don’t know how long they will continue to make mistakes. When you are in the hospital and the doctor keeps hurting patients, at some point, the doctor must realise and change his activities,’’ he told StarBiz in an interview in Singapore recently.

To him, Alan Greenspan (when he was the Fed chairman) had thought the task of the Fed was to guard the US economy. Greenspan “felt the economy was weak, there was danger of deflation and the remedy was to print more money.”

“He miscalculated the strength of the economy. They printed too many dollars and that contributed to the dollar commodity inflation. Due to that, the prices of oil, copper and rice went up and it was very distorting.’’

To him, even the Bush administration had favoured a weak dollar as they thought it would help the trade balance.

“The Bush administration did not recognise that with a weak dollar, there is a lot more damage than gains from increased exports. First, you pay more for imported commodities, primarily oil, but you distort investments in the domestic economy. That is how the housing market went crazy in the US.

“A weak dollar is more damaging to the economy,’’ he said.

“What they should do is to have an open and active strong dollar policy and that would reduce the inflationary pressures that you see in Malaysia, Vietnam, China, Singapore and elsewhere. When the dollar is weak, it has a global impact,’’ he added.
The US has witnessed several collapses and bailouts in the past weeks. How deep can the present credit crisis get?

“The impact is more disruptive than we have ever seen and there are global repercussions. It is like an earthquake and its after shocks. A stronger dollar will take a lot of the pressure off inflation and help end the credit crisis. When you have a stable currency, businesses will be more confident to invest. You will also see bargain hunters starting to buy houses and distressed properties and from there on, the start of the recovery process,’’ he said.

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