On David Stockman's Out-Rage
A few years ago I walked around David Stockman’s backyard. I was admiring his stone walls. We fell into a conversation about rocks and masons. David has a good eye for stone, and he knows the proper way to lay it up (A balance of symmetry and chaos, with the least amount of mortar possible). I was pleased to learn that he holds stone masons (all artists) in much higher regard than lawyers, bankers and politicians. My kinda guy.
We talked about the macro/micro issues at length - Stockman knows the numbers and the history. He has an interesting perspective on the global economic scene. I thought about the meeting later. I concluded that Stockman was not just passionate about the state of affairs – he was out-raged. I wondered why.
Stockman is still out-raged. His new book, The Great Deformation, is his opportunity to vent some of that emotion. He does a pretty good job of it. There are a dozen “names” who will cringe reading it.
This is a history book. It’s a detailed account of the key events since the Depression that have shaped modern finance. I love history, and I’m familiar with those events. Stockman’s spin on financial history makes for a very good read. There’s something for everyone. For example, were you troubled by the bailout of AIG, and TARP? If so, you’ll love this chapter:
Paulson's Folly - The needless Rescue of AIG and Wall Street
Do you worry that Bernanke has overplayed his hand with monetary policy? Stockman rips him apart:
The Bernanke Bubble: Last Gift to the 1 Percent
How the Fed Brought the Gambling Mania to America's Neighborhoods
Do TV talking heads influence Fed policy? Stockman says "yes".
The Rant That Shook the Eccles Building: How the Fed Got Cramer'd
Worried about US indebtedness to foreign central banks? That’s covered in:
Monetary Roach Motels
Stockman puts meat on the bones to some old stories. A few examples:
Nixon took the USA off of the gold standard in 1971. The motivation and timing was Nixon's burning desire to win the 1972 elections. He devalued the dollar for a short-term boost to the economy. Tricky Dick rigged the global currency markets to achieve his ends. That makes Watergate look like small beer. Very high stakes poker was played. Nothing new today.
During WWII the Fed capped long-term interest rates at 2.5%. To hold that level, the Fed bought up all the supply (A slightly different version of today’s QE). The rate cap continued until 1951. How it ended (and the secret fight between Truman and the Fed) is history worth studying. This is a window into what will happen when the Fed is forced to end the current QE. Not surprisingly, it was 5% inflation that ended cheap money in 1951. How do you think Bernanke's QE will end?
A central element of the US economy is Roosevelt’s New Deal – Stockman shreds it:
The payroll tax has become an anti-jobs monster
In truth the trust funds are both meaningless and broke.
The fast approaching day of reckoning is thinly disguised by trust fund accounting fiction.
There's plenty of one-liners; a few of the many I found amusing:
On George Kaiser's "loss" in Solydra: (How not to make friends in Tulsa)
by essentially "shorting" Uncle Sam, George Kaiser stands to harvest a 4.6 times return on his sham investment to "rescue" Solyndra
On Elon Musk (How not to make friends in SoCal)
That a megalomanical promoter like Elon Musk could walk off with half a billion in taxpayer money, blown in less than four years, and make himself the toast of Hollywood in the process is powerful evidence that the putative conservative parted has vacated the ramparts of the US Treasury.
On Bernanke ("befuddled academic") and Janet Yellen ("career policy apparatchik"): (How not to make friends at the Fed):
these hired hands keep the carry trades well lubricated and generate continuous opportunities for speculators to extract vast economic rents from deformed financial markets
Bernanke is the godfather of of the debt zombies.
On former Treasury Secretary Hank Paulson, and the AIG bailout:
in one of the most egregious derelictions of duty every recorded, Paulson and his posse of Goldmanite hotshots hastily and blindly shielded these behemoths (the TBTF banks) from even a dollar of loss on their AIG insurance policies.
New Deal revivalists Like Paul Krugman are essentially telling fibs and peddling historical legends is not offensive merely because it distorts the distant past. These legends actually compound the deformations of the present by rationalizing policies that cannot succeed and will only bury the nation deeper in debt.
Glenn Hubbard was of the opinion that the Wall Street-coddling policies of the Greenspan-Bernanke era had been a roaring success.
The preposterous Fred Mishkin headed the posse of debt-bubble deniers who dominated the Fed's supporting cast. In a major study he concluded that the only bubbles in Iceland were those welling up from its famous hot geysers.
Keynes fancied himself a dandy, of course, and would never have been caught wearing the equivalent of Gandihi's loom. But when it came to nations and their unwashed masses, it is not at all surprising that he thought the nationalistic and autoartic Nazi Germany was the most likely candidate for early adoption of his program.
My only disappointment with The Great Deformation is that there is very little in the way of what could be done, versus what is being done. Stockman does offer up a few thoughts of what might be considered. These will get more than a few eyebrows raised on Wall Street and in D.C.:
- Abolish deposit insurance, strangle the Fed and shrink the banks.
- Adopt a Super Glass-Steagal. Abolish bailouts.
- Eliminate the Electoral College and establish strict term limits.
- A balanced budget, eliminate economic subsidies, shrink the federal government.
- Impose a 30% tax on wealth to reduce debt to 30% of GDP (assumes a $10T tax on the top 10% - think Cyprus on steroids)
- Eliminate income taxes and replace it with consumption taxes.
This is all blue sky stuff. It sounds alright, but it's not feasible for the USA to consider any of these measures. Stockman acknowledges that his list will never see the light of day, "They would never be adopted in today's regime of money politics, fast money speculators, and Keynesian economics".
Stockman sees nothing but trouble ahead for the USA. He realizes that the changes that are needed to avoid the big fall are simply not in the cards. Now I understand why he's so out-raged.
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