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David Stockman's Thoughts on the Coming European Train Wreck
Courtesy of Lee Adler of the Wall Street Examiner
(image credit: Studio Lévy and Sons)
David Stockman, former Director of the White House Office of Management and Budget during the Reagan Administration, has in recent years become a prominent and outspoken critic of the Fed, central banking policies generally, government finance schemes, and other aspects of the world's screwed up financial regimes. Mr. Stockman's perspective on these issues is unique. He played an integral role in government in the early days of the long running credit and government finance bubble which led to the mushrooming multifaceted financial crisis now engulfing the world.
Mr. Stockman subsequently spent many years on Wall Street in the investment banking and private equity arenas, as well as the corporate world, where he gained a perspective on the impacts of government policies on the financial system, and the perverse behaviors that result from bad policy. He has been a proponent of fiscal sanity for decades, even during a time when many politicians and economists believed that deficits didn't matter. He issued stern warnings about runaway deficits 25 years ago which ring all too true today. We now face the dire consequences of the practices he warned against.
After leaving the Reagan Administration, Mr. Stockman wrote frankly and critically about his role and experiences in the Administration in his book, The Triumph of Politics. The book is still relevant today as an historical study of the origins of the economic philosophies and government processes that led to the ever worsening mess in government finance.
As an important sidelight, I also found in the book fascinating insights into the psychology and personalities of not only members of the Reagan Administration, including the President, but of politicians in general. In many ways, the book confirmed my view that politicians have personality "issues" (OK, I am being more polite than usual).
Recently I had the privilege and the pleasure of meeting David Stockman at his home in Greenwich, for lunch and an afternoon of conversation. We were joined by Bruce Krasting, another veteran of Wall Street and the hedge fund world, and an insightful observer and commentator on the current scene (who also has graciously permitted The Wall Street Examiner to repost his commentaries).
The three of us, joined by Mrs. Stockman and Mrs. Adler, had a lively and fascinating discussion over the course of nearly 4 hours. At my age, it's impossible for me to recall all the specifics, and I wouldn't want to run the risk of paraphrasing and misrepresenting the thoughts of others. However, I continue to correspond with Mr. Stockman and he has been kind enough to allow me to share some of his thoughts with you. He is currently writing a book on the financial crisis which I am looking forward to reading. Some of the thoughts he expresses in our exchanges he relates to the ideas he is developing in the book.
In his most recent email to me, Mr. Stockman expounds on some things that illustrate why the European banking system is on the verge of collapse:
The real story of the present is the shadow banking system, the unstable and massive repo market, and the apparent daisy chain of hyper-rehypothecated collateral. It looks like the sound bite version amounts to the fact that the European banking system is on the leading edge of collapse for the whole system. These institutions are by all evidence now badly deficient of the three hallmarks of real banks--deposits, capital and collateral.BNP-Paribas is the classic example: $2.5 trillion of asset footings vs. $80 billion of tangible common equity (TCE) or 31X leverage; it has only $730 billion of deposits or just 29% of its asset footings compared to about 50% at big U.S. banks like JPM; is teetering on $500 billion of mostly unsecured long-term debt that will have to be rolled at higher and higher rates; and all the rest of its funding is from the wholesale money market , which is fast drying up, and from repo where it is obviously running out of collateral.
Looked at another way, the three big French banks have combined footings of about $6 trillion compared to France's GDP of $2.2 trillion. So the Big Three french banks are 3X their dirigisme-ridden GDP. Good luck with that! No wonder Sarkozy is retreating on France's AAA and was trying so hard to get Euro bonds. He already knows he is going to be the French Nixon, and be forced to nationalize the French banks in order to save his re-election.
By contrast, the top three U.S. banks which are no paragon of financial virtue--JPM, BAC, and C--have combined footings of $6 trillion or 40% of GDP. The French equivalent of that number would be $45 trillion. Can you say train wreck!
It is only a matter of time before these French and other European banks, which are stuffed with sovereign debt backed by no capital due to the zero risk weighting of the Basel lunacy, topple into the abyss of the shadow banking system where they have funded their elephantine balance sheets. And that includes Germany, too. The German banks are as bad or worse than the French. Did you know that Deutsche Bank is levered 60:1 on a TCE/assets basis, and that its Basel "risk-weighted" assets are only $450 billion, but actual balance sheet assets are $3 trillion? In other words, due to the Basel standards, which count sovereign and other AAA assets as risk free, DB has $2.5 trillion of assets with zero capital backing!
This is all a product of the deformation of central banking and monetary policy over the last four decades and the destruction of honest capital markets by the monetary central planners who run the printing presses. Furthermore, this has fostered monumental fiscal profligacy among politicians who have been told for years now that the carry cost of public debt is negligible and that there would always be a central bank bid for government paper. Perhaps we are now hearing the sound of some chickens coming home to roost.
The facts speak for themselves. Thanks to David Stockman for sharing these insights.
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Check out FerFal's website and/or book about life in Argentian post-hyperinflation. That'd be a good start.
Be aware that in this case, gold is nice to have but NOT in the "asset form" of coins or "large relative values" but in the form of small wedding bands, etc.., things that are easy to trade and do not attract a lot of attention... Good read and an eye opener.
Can a MAAP-gas blowtorch put out enough heat to melt Au/Ag? Pretty sure Acetylene can...
thanks
And so are we evidently: Stockman on spending spree:
http://www.sfgate.com/cgi-bin/article.cgi?f=%2Fc%2Fa%2F2011%2F05%2F29%2F...
Ilene good article thank you.
That is f*ing dark....
There are $707 trillion dollars of derivatives now like Credit Default Swaps. If Europe goes down, the US is sure to go down with it. So it won't be just a European train wreck.
The other problem is that Stockman claims that US GDP is $15 trillion. That is an oft cited number by many. Dagong, the Chinese rating agency claims that US GDP is under $6 trillion once you take out the fake financial padding out of the US GDP. To quote them:
"In addition, due to the high economic financialization, more than half of the profits in the real economy come from the returns of financial activities. If we exclude the factor of virtual economy, the U.S. actual GDP is about 5 trillion U.S. dollars in 2009, per capita GDP about $ 15,000."
To assume that US GDP is $15 trillion is more of an assumption that most will admit. So maybe the US GDP is $15 trillion but it may shrink in half if the financial sector gets into trouble.
Many western economies have already hit their debt icebergs - the sinking will take a little longer. And the US with its national debt ($15.1 trillion) and massive unfunded liabiliies ($117 trillion) is also sinking.
http://www.dagongcredit.com/dagongweb/uf/USARatingReport.pdf
http://www.usdebtclock.org/
Nice to see that somebody is appropriately excluding the paper games that comprise what is so clearly the virtual economy. Kudos to the Chinese.
GDP remains the metric that the financial class and its fully owned mass media continue to trumpet as the fundamental measure of our economic health--with its siamese ventriloquist dummy Mr. Market always faithfully at its side--yet the financialization of both the economy per se and the effective redefinition of "GDP" is rarely remarked upon.
Even at ZH.
We need to get as serious about exposing this as we are about the Fed, imo. It ain't rocket science. It's just propagandistic noise that covers the continued sacking of our society.
french capitalism : corporate dirigisme without capital. ENA the school that lost the french financial Crusade like the Templars did the ideological one. History repeats. The best and the brightest of the french mandarin class.To think that they beheaded Danton for these shills....
So if they print, it will have to be at least $10 Trillion or so; that should do wonders for gold (the real stuff, not the paper).
If the European banking system tanks, they will pull the rest of the entire world banking system down the black hole with them.
And when that event horizon slips by, there will be nothing -- political, economic, and social -- that will remain stable for many years to come.
Can you say Financial Apocalypse?
No......but I can say "Eureka!!!!"
Given all the FED did to "save" the US banks, does anyone think the Bernank will sit on his hands while Europe crashes the world?
Your links are confused causing me achive problems. Right at the first link.
Very nice article.
Edit: In the "printable".
let it crash and ca$h in! :)
http://expose2.wordpress.com
Would have been great to be at that lunch described above with Bruce Krasting, David Stockman and Lee Adler, and the ladies.
David Stockman - who many people really thought was going to be allowed by President Reagan, to balance the US budget in the early 1980s.
But the Pentagon and the other people running Reagan had other ideas, and the naive idealist Stockman didn't get a chance to try.
Hope Bruce Krasting will post some comments about the lunch as well.
Agree about hearing Bruce Krastings comments and, in a perfect world , Reagan would have begun an overhaul of US spending but it wasn't a perfect world. Reagan had the USSR to deal with and it was at its apogee. Spending a couple of percent of GDP extra to meet that threat ( and exhorting today's EU nations to spend at least 3% of GDP for the same purpose) was not an untoward burden at the tine, especially given the nuclear balance in 1981.
If the Reagan defense buildup strained the US budget it, unlike entitlement programs, was destined to end. In fact it did end with the collapse of the USSR. Regrettably the real build up in US and European debt was not as a result of any defense expenditures but the predictable result ( and Stockman predicted it) of entitlements.
Reagan started the whole banking deregulation mess with his "we really hit the jackpot" deregulation of the S&Ls, a precursor of the Gramm-Leach lunacy repealing Glass Steagall.
Just another captive of the banks is how I see Ronnie and his politics. Supply-side, crumbs from the master's table, Laffer curve douchebag idiocy.
Hey now, if we're having an 80s party let's not forget the 401(k) enslavement device and the Gucci Gulch tax reform. Where do you think all those wide pinstripe suits came from???
While the USSR threat did diminish, defense spending did not decline in any meaningful way.
Instead, counter terrorism replaced the cold war as the new impetus for the military industrial complex. A recent Frontline PBS special also documented a massive off the books, blank check, Homeland Security apparatus that does not even appear in official budget estimates.
http://www.pbs.org/wgbh/pages/frontline/topsecretamerica/
Assertion is not fact. You are an idiot! Too many of them at ZH these days.
Assertion is fact when the current ponzi was mothered, sealed and delivered by that Reaganomics ideology and Alan Greenspan's monetary policy was part of it. We would not be where we are without the Reaganistic and hubristic, "give our WS whiz kids the ball" mind set.
Bohemian grove, bitchez!
Archie Bunker with a subscription to the National Review.
Are you asserting that this blogger is indeed a IDIOT or do you believe for a FACT that this blogger is an IDIOT?
While you are considering your reply please be sure to include and cite your sources to support your statements.
I must concur with your second statement, that there are indeed to many idiots on ZH these days. (of which I believe you are one)
More irony. You are full of it (irony, that is).
+ StarWars SDI and the weaponisation of space...
Even worse ... Mitt Romney destroyed the solid financing of the best schools in the world, ( 2003 -attack on University Of Massatchussets ), to force MIT, Harvard, BU etc. to invent such a toys - braindrain for the money drain.
Lincoln Institute waits for all of the talents who don't have a choice but to do some jobs for DoD.
In the end - he nuked US of A. I'm not exaggerating.
Did you know when David Stockman was in the Cub Scouts, chewing bubblegum and getting the training wheels off his bicycle, US Defense spending accounted for 50% of the Federal budget. To suggest that it is 'defense spending' that has caused the 'hole' in America's budget is as retarded as the people who assert such assinine arguments.
Compare college tuition as a proportion of Federal spending and you will quickly see it is the professors and not the sergeants and lieutenants that are gobbling up our national resources but the Birkenstock clad beardos who think Ben Bernanke and his Indonesian stooge have the solution if it gives them $100,000 pensions at age 55
So.. because the US was (unsustainably) spending vast amounts on finishing a war (that was a direct result of the US needlessly getting involved in WWI, but that's another story) when Stockman was a child, that somehow means the US can afford to spend vast amounts on 'defence' spending ad infinitum?
Please elaborate; I love to see a world-class brain in action.
Yes, of course. It is the college students and professors that are ruining America. Has it ever occurred to you, sangell, that you have been brainwashed into blaming the country's problems on "beardos" (presumably the same as evil Liberals in your version of reality) as a matter of tribal manipulation, while your corporate masters laugh their asses off at your unwavering support for the transfer of wealth from the middle class to the .01%? No, of course it has not. Nevermind.
At the time the Soviet military forces were a Potemkin Village, the public was scared out of their minds by the military industrial complex but our military and the Oval Office knew better. The only power they could project was nuclear and even they were not that dumb.
It was Reagan that gutted this nation by setting us on a path to the most unequal income distribution the nation ever saw, he gutted us by allowing deficit spending and tricksy debt schemes to take control of government, he gutted us by cutting loose the ropes of crony (republican) capitalism. He gutted us by instituting a global police state with the USA as the beat cop, we had just gone through Viet Nam and most of America had learned it's lesson on that score, but no, Raygun had to chalk up a few victories to make you all proud again. Take that Grenada. Commies like that are why we needed a 600 ship navy.
Too bad the addled old fool is not still alive, I would love to see what the fucker would do to Hugo Chavez, or Akmaasscrack.
Brezhnev was senile by 1981; the Soviets went through 3 more leaders between 1984-86 and when Gorby came along he knew it was over, that central plannning had failed. That's why he ordered Honecker to "do nothing" when East Germans stormed the wall in 1989.
Power is too seductive, too addictive, because our corrupt shadow leadership -- the owners of the banking system -- have forgotten that Leviathan-state socialism is doomed to failure.
@ boiltherich
-1
Junked you because you evidently were not there watching the Soviets. I WAS, front row seat. I looked at scary looking weapons, listened to hard-line anti-US rhetoric, put up with Euro-blather about Pershings, etc., etc. These guys WERE looking to END Western Liberal Civilization! And Reagan was the main man in burying Communism on the ash-heap of history. You can look it up.
---
I cannot fault your remarks on how the deficit mentality took over during the Reagan years.
But, you're putting out BUNK re the great value Reagan & Co. did by ending the menace of the world-destroying capability of the Soviet Union.
I think you need to read more history (and less HuffPo) and watch less CNN.
we were fooled by the military industrial complex and its servant media. as vietnam was a tipping point for the u.s. economically, morally and militarily, so too was afghanistan for the soviets. contrast for just a moment where each was relative to the giant that got stuck in each tar baby: opposite side of the earth with vietnam, bordering the ussr with afghanistan. both were very bad ideas.
we would have done better to trade and aid all the communist countries after ww2, the chinese revolution, the korean invasion (which probably wouldn't have happened), the cuban revolution and on and on. properly regulated market capitalism beats centrally planned "communism" that badly. if we had been buying all of castro's sugar (and why wouldn't we, they were efficient and oh so close), he would never have considered putting soviet missiles in his country.
He had nary a word Democrat LBJ's Vietnam War and War on Poverty. This created the inflation and gutted economy of the 1970s.
"It was Reagan that gutted this nation"
It was already too late in 1965, that was the year of no return. The Great Society was upon us, and Vietnam was in full swing. Five years later we went tits up when Nixon closed the gold window. The rest was foreseeable to some people, and the actors were largely interchangeable, all herding us to where we are now.
And I suppose you, Hercules, were prepared to sally forth and expose the Red Army as a "Potemkin Village" in your 1960's vintage M-60 tank or your A-4 skyhawk or B-52. Where does the world get such cretins? Know at least something about a topic before you opine upon it. The US military in 1980 was so drawn down it could barely function.
Care to recall Jimmy Carter tasking it with flying to Iran to rescue some hostages. Compare that to what Barack Obama had available to him to kill Osama bin Laden!
Another idiot.
Another good student of MSM fiction.
Idiot - Bin Laden had been dead for years. Buried at sea...
Check into the fate of the Navy Seal team that 'got him'.
How did all that high tech hardware for which we've mortgaged our grandchildrens' future do against a few cave trained fanatics armed with box cutters, currently held up as the evil empire that will kill us all? Another idiot.
and you know exactly what about this? Anything? My guess is you use your keyboard more than your brain. Put your Ipod on and get the hell out of the adult world.
Someone disagrees with your simplistic, Red Team version of history and Ronald Reagan (the father of deficit spending and the beginning of the end for the middle class that defined American success), and your response is to attack him personally and suggest he is a child who cannot think for himself. Ironic, isn't it.
Yeah, because those wars in Iraq, Afghanistan (twice), War on Terror, Somalia, Yugoslavia, and Panama all paid for themselves (with full transparency).
But lets blame the fragile 75 yr old man collecting Medicare and Social Security who works his entire life. Yeah, that's easier.
Yeah ...
what I liked about Reagan is he could walk on water and chew gum at the same time ...
Graduated from high school too.
And was a native born son...
Another idiot. Do you think the US can maintain an aircraft carrier at the straits of Hormuz at no cost? If it launches training sorties do not the jets burn fuel, the sailors draw pay, the equipment depreciate? Putting a squadron of F-18's in the air has a fixed cost. If they fire live ammo that is the additional cost over a training mission. It isn't cheap. A JDAM can cost $250,000 a Tomahawk cruise missile a million or more but the platform they launch from and the crew to operate it is vastly more expensive. 55% of the Pentagon's budget is personel.
if we stopped trying to keep the zionist colonization of palestine a going concern we wouldn't need an aircraft carrier in the strait of hormuz. and the ussr at its apogee in 1981? they didn't think so. the cia might have because they like their jobs and all.
The collapse was a lot like the financial mess of today. Nobody could see it coming...especially, it seems, the "intel" community.
Except there were plenty of voices in the wilderness during the huge military build up, just like there were as the housing problems grew, who were mocked and ridiculed for challenging popular thought. The Soviet Union in 80's was like a long ash on the end of a burning cigarette. Only a gentle breeze would do it, so just a little more patience, and regular old detente would win.
You just made ShizzMoney's point. We have an own-goal here, people! :>D