Steve Forbes on "liquidity"

Steve Forbes has routinely made provocative comments and bold prognostications over the years, not the least of which was a call for a return to $35 crude oil shortly after Hurricane Katrina struck in 2005.

His recommendation that the Federal Reserve target the gold price instead of consumer prices from the Bureau of Labor Statistics has yet to be taken up by Ben Bernanke and crew, though he seems to hold out hope that it someday will.

A short time ago on CNBC, the one-time presidential candidate, best known for his "flat tax" proposal, made these comments on the Fed and their current "liquidity" problem (a word that, by year-end, may rival "subprime" as the most important part of the 2007 financial lexicon):

One of the things that the Fed's going to have to do in a few weeks is, finally - I hope Ben Bernanke undoes the legacy he inherited from Alan Greenspan which is excess liquidity creation in 2004 and 2005 and winds that down. The longer you see these commodities - like gold at $680 or $700 an ounce - that means there's too much liquidity out there.

If that liquidity is out there, then what we saw this week, in a few months I guarantee it's going to happen again. He's got to announce that they're soaking up the liquidity - forget about interest rates, soak up that excess liquidity, let people unwind their speculative positions so we avoid this kind of crisis.

If that money remains out there, the fire's going to start again.

While this may sound appealing in a theoretical sense, the actual implementation of this "liquidity extraction" might be a problem.

Since the U.S. economy is now largely based on unbridled speculation and an ever-expanding pile of credit and debt to push up one asset class or another (hopefully good ones like stocks and real estate rather than bad ones like commodities), it's hard to imagine that putting an end to the easy money - easy money that hundreds of millions of people have grown accustomed to after 18 years with Alan Greenspan at the controls - is going to be a practical solution.

While most level-headed thinkers would agree that this is indeed the course that should be taken, it is akin to solving the nation's obesity problem by making food more expensive, limiting the amount of food that people can buy, and demanding that the citizenry exercise.

The pain involved in implementing such a thing will simply be too much to bear.