Forbes magazine editor Steve Forbes failed to win the Republican presidential nomination in 1996 and 2000. And his pet big ideas -- a flat tax that would let citizens fill out their income taxes on a post card, individual health savings accounts and market-based Social Security reform -- remain unconsummated dreams of many conservative reformers.

But Forbes, 60, hasn’t lost his optimism, his edge as a sharp economic prognosticator or his capitalist’s disdain for dubious government fiscal and monetary policies -- even when Republicans are practicing them. Forbes writes editorials for each issue of Forbes magazine (circulation: 900,000) and appears often as a guest analyst on CNBC financial shows. I talked to the CEO of Forbes Inc. on Monday, March 10, by phone from New York City.

Q: The stock market seems to fall a percent and half a day. Oil prices just set a new record. The dollar is falling. Inflation is going up. The subprime troubles don’t seem to end. What has suddenly happened to our economy?

A: What’s happened is twofold. One is the weak dollar policy of the Federal Reserve and particularly the Bush administration. I’m a Republican, but I think they have made a grievous mistake here. When you debase your currency -- you print too many dollars -- strange and unpleasant things happen, such as soaring commodity prices. Since 2004 oil, copper, lumber, steel -- they’ve all gone up. The housing market, which was booming, went on steroids. The same thing with a lot of the hedge and equity funds. We’re paying the price for that today.

Then with the credit crisis last summer, what has made that protracted is, first of all, the people don’t know where the bad stuff is. It’s similar to getting a health warning that bags of lettuce are tainted. It may be only a small number, but nobody buys lettuce until they know where the bad stuff is. That’s what’s happening with the subprimes.

But we also have a modern version of a bank panic. Lenders are reluctant to lend, even to solvent customers. The system is frozen up. That’s why even solvent companies in the mortgage business are having a very, very tough time these days. So we have a panic and we have the unknown.

Q: Does all this add up to a recession?

A: Whether the theologians call it a recession or a slowdown, the economy has slowed very precipitously from the boom in the third quarter. The fourth quarter was stalled and the first quarter is stalled. I think in the second and third quarters of this year the economy is going to start to move up again. We shouldn’t forget that there’s plenty of liquidity in the economy. Overall, incomes are rising, not declining. Small- and medium-size companies are starting to buy back their stock. So there’s liquidity out there, and I think that will eventually get the economy moving.

Q: What’s the number-one thing we should be worrying about?

A: Two things. One is the free-fall of the dollar; that’s got to be stopped; that cannot go on. Two is stopping the panic by telling banks and lenders and the accounting industry and the regulatory authorities don’t take write-downs on subprimes and some of these other exotic instruments until you actually know what the losses are. In other words, if somebody defaults on a mortgage, you write the mortgage down. But you don’t try to guess how much you are going to write off because you don’t know.

Q: In layman’s terms, why is the fall of the dollar so important?

A: Why it’s important? Every time you go to the gas pump, you'll see why. Every time you go to the grocery store -- why are those prices rising like that? You see it in the impact on the housing market. Why did lenders behave so bizarrely? Well, one of the reasons is that a lot of new players came in with the easy money and lending standards went out the window. When you have that situation with excess money -- it’s the equivalent to flooding the engine of a car with too much fuel -- what you also have is that businesses are investing more outside the U.S. than inside the U.S.

Q: In the current issue of Forbes magazine, you say we’re in for the biggest bout of inflation we’ve seen since Jimmy Carter’s administration. Inflation is caused by government. So what has the Bush administration been doing wrong?

A: Well, it did not do anything to shore up the value of the dollar and ask the Fed to cooperate in that. There are various time-tested methods to do that. It all boils down to when you spill something, you soak it up. The Fed could sell bonds that remove excess money from the economy. The Bush administration could work with the G-7 (European countries) to do exchange operations -- you know, buying dollars to shore that up. Our allies would be quite willing to do it. They find the fall of the dollar very disturbing, very disruptive. So you take positive steps.

Q: Is it simple enough to say that the dollar is falling in value because too many have been printed up and are in circulation?

A: Too many dollars out there. Especially when the Fed prints a dollar bill these days, with all the borrowing and exotic instruments, it can multiply pretty quickly -- just like rabbits. So you stop breeding the rabbits.

Q: There have been Republicans screwing up the economy. What are the chances that either President Obama or President Clinton will fix things right?

A: The Democrats will probably make the situation worse, because they believe in tax increases. They want to raise taxes, not cut them, which would make us less competitive, which would hurt job creation and innovation. So they would compound the problem.

Q: Of the two Democrats, which would you prefer to see president?

A: (Laughs)

Q: I think that’s known as a Hobson’s choice?

A: Yeah. That’s like picking poisons. I’d rather have the antidote -- so I’m working for McCain. Continued...