All Is Well

By Hannah Wallace May 31, 2007

He makes it sound like the most natural thing that, eventually, the market will prevail. Last spring in Bradenton, Steve Forbes, heir of the Forbes fortune, publisher of Forbes magazine, and two-time presidential candidate, delivered an upbeat and often funny message about the beauty of large corporations and their sometimes strange interactions with consumers, the stifling role of government, the continuing strength of the U.S. economy, and the resolve with which the United States must fight terrorism, insurgencies and anti-market forces worldwide. He received a standing ovation from the business crowd at the luncheon, a fund raiser for Boys & Girls Clubs of Manatee County.

After the speech—for which he charged a discounted fee—Forbes sat down with Biz941 to talk about markets, why New Orleans isn’t the city it used to be, how deregulation could solve the healthcare crisis, and how U.S. armed forces should learn from past colonial wars to fight the insurgency in Iraq.

You say that 2007 will be a year of bad economic and political news. But at the same time you say equities will be rising. Can you explain? Equity markets often reflect the bad expectations out there. Markets don’t wait for something to happen. They feel that it’s going to happen. So I think much of the bad news is already factored in.

What makes you think that? Because stocks are underpriced. Look at earnings, look at the still-low, 10-year interest rate of 4.5 percent. P/E ratios are trailing base 16, 17 or 18, which equates to an interest rate of about 5.5 percent. It’s usually the other way around. So the market is undervalued by 20 or 25 percent.

Are you suggesting all the bad news has already transpired? You never know what’s going to happen. The markets didn’t anticipate [Anna] Nicole Smith’s demise. But seriously, a lot of the uncertainties are reflected in [stock prices]. This doesn’t mean that the market can’t take a hit from time to time. But we’re in one of those periods in the next couple of years of what they call “climbing walls of worry.” It’s like the 1990s. It wasn’t until 1999, after this multi-year boom market, that people believed this is for real—that [the boom] is going to go on forever. If you look at surveys of money managers before 1999, they always underestimated what the market was going to do the following year. So then in the late 1990s, we had the Asian crisis, then the Russian collapse, and the market took a huge hit. So it’s not until it’s almost over that they see what the trend line is about.

China is now our biggest lender. Should we be alarmed? No, because China is very dependent on our economy. If they want to buy our bonds at 4.5 percent, bless them. We’ll take the money and run. The real challenge with China is not currency or buying bonds. It’s stealing our intellectual property—software, movies, videos. That’s far more of a challenge.

The dollar is down in comparison to almost all other major currencies. Is that a concern? The dollar has been relatively weak because the Federal Reserve has been printing too much money. If they hadn’t cheapened the dollar, we would be doing just fine. People are looking for alternatives because they’re holding something that isn’t retaining its value. They’ll want to get something else.

Many people feel that Steve Forbes and the other market guys have had a long enough run.  In Latin America, the state is staging a big-time comeback as an economic player, maybe even here under the next president. Your thoughts? If you look at the last 25 years, you’ve had eight years of Bill Clinton and you’ve had a lot of years of Democrats controlling Congress. Having challenges and road bumps is nothing unusual. We still haven’t simplified the tax code. We haven’t done right for Social Security and Medicare yet. But some progress is being made. In terms of Latin America, a handful of countries there are going against the global grain. When you see [China and India], the two most populous countries in the world, opening up and wanting to be part of the global economy, [Venezuelan President Hugo] Chávez shrinks to insignificancy. The only reason people pay attention to him is because of oil.

So you see the comeback of the state as a fluke… It’s an aberration. In the U.S., I don’t find many Democratic candidates for president advocating big tax increases. What they do is tell the middle class, “We’re going to do something for you.” They have to hedge it. The sentiment is not 1932.

The Society of American Engineers says the U.S. infrastructure is crumbling. We’re starting to see how part of the infrastructure is being built and part of it crumbles. The laying of the fiber is going full-board, finally. Verizon and others are pouring tens of billions of dollars into that. In terms of highway construction, the problem is the earmarks in highway bills, instead of letting the states have the money and build roads where they need it. The monies get diverted to these crazy projects these guys want—bridges to nowhere and stuff like that. But the infrastructure that really needs to be built is broadband. We’re behind much of the rest of the world, thanks to regulation.

Should the rising concentration of wealth and growing inequality be a concern to businesspeople? Rather than worrying about the Bill Gateses of the world, and about people with the knowledge base to do well in a knowledge-based economy, we should be examining why some people aren’t moving ahead. One of the big problems is the education system. We have the best universities in the United States, but K-12 is quite another matter. That’s why I thought that Governor [Jeb] Bush’s efforts, with the limited success he had, went absolutely in the right direction. Give parents a choice. The family should pick the school they think works for their kid. So school vouchers, charter schools, a combination thereof—do it!

Beyond education, any other response to poverty and inequality? With education, anything is possible.

New Orleans, two years after Katrina, still is an empty city. What went wrong? When people moved to places like Houston, they said, boy, life can be very nice. Life doesn’t have to be like the crime-ridden areas of New Orleans, especially the Ninth Ward. So a lot of people have no desire to move back.

What’s your evidence? Just talking to people. There are surveys, plus the fact that people didn’t move back. They are making a new life. But what they should do in New Orleans is make it a big, gigantic enterprise zone. That is, remove most of the taxation and regulations. I guarantee people will move in and make it a new city. It’d happen fairly quickly.

What do you think about global warming? Not trying to be flip about it, but weather patterns have been changing for a billion years. There is no scientific proof that carbon dioxide fundamentally affects weather patterns. A lot of climatologists—whom they try to shut up—will tell you the tilt of the earth has an impact, solar radiation has an impact, and that they still don’t know what caused the ice ages.

You’re among a minority. A United Nations conference in February concluded that humans and CO2 emissions are “highly likely” to be causing global warming. This conference report was written by politicians. One thing that’s going to happen on the back of this era is [people asking themselves] how in the world did this fear rise? But if you’re concerned about it—and we should do this anyway, for political reasons—we should try to rely a little less on the bad neighborhoods of the world, and reduce emissions [by using] nuclear power. A little factoid: If we had built all the nuclear power plants that were on the drawing boards before Three-Mile Island, we would be in compliance with the Kyoto Protocol. In terms of the other alternatives, we’ll see what comes along.

Corporate malfeasance—what’s worse from your standpoint, Enron or the judicial aftermath and regulations this scandal triggered? As to the fraud of Enron, what they did was illegal. That didn’t need [the] Sarbanes-Oxley [Act]. It was illegal before that [new set of accounting rules], and that’s why [Enron executives] got their sentences. The base inhibitor of wrongdoing is the perspective of spending 10 or 20 years in the slammer. Paper walls won’t do it. A large commodity firm, REFCO, went bust a year ago—Sarbanes-Oxley didn’t prevent that. A thing about the private sector is, if wrong is being done, eventually you get caught. In other areas, you can perpetuate bad programs forever and ever, if politicians like them.

So Enron wasn’t symptomatic of a bigger problem? With human nature what it is, you’ll always have someone trying to push the envelope. That’s a classic case of a descent into corruption. They started off with a very good idea and did very well with it, but others caught on to it and suddenly it lost its magic. So they decided to do things with the attitude, “Tomorrow we’ll undo our wrongdoing.” And off they go on the descent into corruption. [The case against] Arthur Andersen should have been focused on individuals. By indicting the firm, they destroyed it and threw tens of thousands of people out of work. That’s why there’s now a sort of hesitation of indicting a firm. Go after the perps. Don’t destroy it for everybody else.

I recently talked to a local Republican businessman who now sees universal healthcare as a palatable solution. What do you think about that? Just try to get elective surgery in Canada. They come here to do it because of the wait lines there. In Britain, they allow a safety valve because [universal healthcare] doesn’t work. You don’t get innovation.

Child mortality here is higher than in Canada. Depends on where you look in the country. I’ll find you rural areas in Canada where it’s pretty bad. You can pick a piece of Mississippi, or you can pick a piece of Minnesota where it’s the best in the world. And longevity is going up in this country. As for the uninsured, I don’t know what Florida’s particular situation is. But part of the problem is that in New York and New Jersey, we have a lot of mandates on insurance that makes it utterly unaffordable—whereas in Connecticut you can get a basic policy for catastrophic care for a few hundred dollars a year. But when you pile on all these mandates, guess what happens? Suddenly it costs $8,000, $10,000, $12,000 a year, and it becomes truly unaffordable. One answer is to allow people to buy insurance policies in any state of the Union. And as for Medicaid, a portion of the uninsured—I don’t know if it’s one-third or one-fourth—qualify for Medicaid but don’t know it. That’s an information problem. In Medicaid, as in Medicare, I’d allow people to have vouchers. If they don’t use them, they get to keep them. That way, they can make their choices.

In foreign policy, you’re a hawk. You’ve supported the occupation of Iraq, and you seem to be supporting some type of military intervention in Iran. How good or bad for business is the permanent war we’re in right now? It would be nice not to have it. But it was thrust on us in the 1990s, and very plainly after 9/11. We didn’t seek the thing out, it sought us out. We’d be very happy to just go along and not have to worry about the world. In Iraq, while we managed to remove Saddam Hussein, since then we’ve violated every rule of counter-insurgency, which they’re now beginning to correct. I don’t know whether [the new general] is going to get the resources to do it. But we’ve fought these wars before. Take the Philippine insurrection, where we lost far more men there in three years than we lost in Iraq.

A colonial war as a model? I’m comparing insurrections. There was an insurrection in British Himalaya—it took 12 years, but they did it. So there are right ways to do these things. We didn’t follow these precepts. If you don’t secure the population, if the population doesn’t feel safe, you’re not going to have much civil society. And in a lot of areas in Iraq there is a sense of safety. Especially in the south, there’s an economic boom. But we don’t know about it because we’re just focused on Baghdad. The Kurdish area in the north did very nicely, thank you very much.

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