In an appearance on CNBC this morning, Forbes CEO Steve Forbes said that the Federal Reserve should stop buying government debt and focus on kick-starting areas of the credit markets focused on consumers.
Forbes told "Squawk Box Europe" that he thinks the Fed "should announce first they're not going to buy any more Treasury securities. Cash in the banking system is not the problem, the problem is that parts of the credit economy are still not working." Forbes believes that the Fed needs to "aggressively" buy mortgage-backed securities in order to get housing sales moving again.
Forbes contends that the Fed should also buy packages of credit card loans, car loans, and other types of credit -- as they promised to do. Forbes said, "It doesn't have to balloon its balance sheet, but it does have to pump, literally, hundreds of millions of dollars" into the credit system.
Imagine that -- the Fed doing what it said it would do, and doing what it should do in order to help the American economy fight the current economic downturn. According to Forbes, U.S. regulators' plan for reform, which includes making the Fed a "systemic regulator for financial institutions and regulating all derivatives contracts," will be hotly debated.
I agree with Forbes' assertion that, "in terms of regulation, it is a bit ironic they're still going to put new powers in the Federal Reserve, which is an agency that, one, didn't exercise proper oversight over the banking system that it had already under its purview and [two,] its lousy monetary policy in 2003 and 2004, when it printed all this excess money, made the bubble possible."
Why give the Fed more power? Many people believe that the Central Bank was derelict in its duty with the banking system -- which is what got us into this mess in the first place.
Forbes finished his interview by noting that the financial system is still not functioning properly, thanks to the fact that there is very little credit available for small companies and consumers. Again, I agree with Forbes here. It is the small businesses and the consumers that will pull this economy out of the recession -- not over-inflated, propped-up financial behemoths that will suck the lifeblood out of the American economy.
Where I disagree with Forbes is that he believes the worst of the recession is over. Yes, the financial markets may have recovered from their March lows, but there is still a chance that we could quickly slip into a second phase of the recession. Rising crude prices scare me, not because it will cost more to fill the tank -- but rising prices could signal rising inflation and rising inflation could lead to another economic meltdown.