12 | FORBES ASIA OCTOBER 2018
“With all thy getting, get understanding”FACT & COMMENT
looned from under $300 an ounce to a
peak of $1,900. When money becomes
unreliable, people turn to hard assets. he
most dramatic, destructive example of
that process was in the housing market.
To one degree or another, other currencies
followed the dollar’s bad example. hus,
the artiicial housing expansion—and
bust—became a worldwide occurrence.
r8BTIJOHUPOTJODPOTJTUFODZCSJOHTPO
êOBODJBMNBSLFUQBSBMZTJThe inevi-
table reckoning turned into a panic that
nearly brought the inancial system into catastrophic car-
diac arrest. In the spring of 2008 Wall Street’s ith-largest
investment bank collapsed, loaded with junk mortgages
and other questionable assets. Bear Stearns was hardly a
linchpin institution, yet the Bush administration decided
to bail out the irm’s creditors. he two politically power-
ful and recklessly run government-sponsored enterprises,
Fannie Mae and Freddie Mac, which were bulked up
with subprime mortgages, teetered during that summer.
Washington came to their rescue. hen Washington let
Lehman Brothers, a far larger and more important institu-
tion than Bear Stearns, fail. “No more bailouts!” was the
message. And then the irst money market ever created,
having become overly aggressive, was hit with losses. A
run on money market funds, which had over $2 trillion
in assets, ensued. Simultaneously, AIG, the world’s largest
commercial insurance company, needed a huge infusion of
emergency cash.
Panic erupted as everyone clutched cash in desperation.
Washington reversed course again, granting federal guar-
antees for money market funds and bailouts for selected
banks. AIG and Citigroup were, in efect, nationalized.
r"OBDDPVOUJOHSVMFCFDBNFBXFBQPOPGNBTTEF-
TUSVDUJPOIn 2007 regulators resurrected an accounting
rule, dubbed “mark-to-market accounting,” that had been
abolished during the Great Depression. Its efect was to con-
stantly and relentlessly artiicially depress the value of bank
capital at a time when these institutions were in precarious
condition.
he Bush administration was obstinately oblivious to theCOUNTLESS COMMENTARIES and
articles are marking the tenth anniversary
of the panic of 2008. Yet almost all ignore
the root cause of the crisis: a weak dollar.
A wobbly, volatile currency always begets
economic upheavals. If we don’t grasp that
fundamental lesson, we will inevitably get
into trouble again, big time, in the future.
Moreover, these retrospectives overlook
or downplay two other major blunders by
the federal government. Here are the three.
r%BNBHJOHUIFEPMMBS Precipitated by the
popping of the high-tech bubble, the economy weakened in
2000 and went into a formal recession the following year. In
response, the Federal Reserve started to cut interest rates.
hen it and the Treasury Department (which by law is in
charge of the dollar) began to undermine the value of the
greenback.
hat was a catastrophic mistake. he theory behind this
move was that a gradual devaluation of the dollar would
boost exports, which would help stimulate the economy.
hat theory is nonsense: Countries with unstable currencies
always, over time, roundly underperform those with sound
currencies. Compare Switzerland, which has had the best-
managed currency over the past 100 years, with Argentina,
which has had one of the worst. Switzerland has expanded
impressively, while Argentina has stagnated, even though it
was once a global economic powerhouse.
he reason for such a dramatic divergence is simple.
Progress depends on investing, and productive investing
is aided immeasurably when money’s value is stable, just
as markets operate far more eiciently and fruitfully when
there are ixed weights and measures for commodities.
For example, the amount of liquid that constitutes a gallon
doesn’t luctuate. Money measures value the way a yardstick
measures length.
Funny money distorts prices, which are the absolutely
crucial conveyors of information—supply and demand—that
enables free markets to function. Like a virus in a com-
puter, a distorted currency corrupts the information. As the
greenback was gradually gutted, commodity prices soared.
Oil gushed from $20 to $25 a barrel to over $100. Gold bal-THE DISASTER OF 2008
WHY IT CAN HAPPEN AGAIN
BY STEVE FORBES, EDITOR-IN-CHIEF