Stockman On Bernanke's Actions: "The Ultimate Consequence Will Be A Train-Wreck"

Tyler Durden's picture

There is "not a chance," that the Fed will be able to unwind its balance sheet in an orderly manner, "because everybody is front-running [them]," as the Fed is creating "serial bubbles," that are increasingly hard to manage since "we're getting in deeper and deeper every time." David Stockman has been vociferously honest in the last few days and his Bloomberg Radio interview with Tom Keene was extremely so. While Keene tries his best to remain upbeat and his permabullish self, Stockman just keeps coming with body blow after body blow to the thesis that this 'recovery' is sustainable. "They are using a rosy scenario forecast for the next ten years that would make the rosy scenario of the 1981 Reagan administration look like an ugly duckling,," he exclaims, adding that the Keynesian Krugmanites' confidence is "disingenuous" - "the elephant in the room - the Fed," that are for now enabling rates to stay where they are. The full transcript below provides much food for thought but he warns, if the Fed ever pulled back, even modestly, "there would be a tremendous panic sell off in the bond market because it is entirely propped up... It's to late to go cold turkey."

 

 

Via Bloomberg Radio,

On why he's so gloomy on the U.S. since every time we've gotten into this mess we get out of it with technological progress:

We didn’t get out of this mess entirely with technological progress. I believe in it. I believe in the free enterprise economy, and I think it does generate productivity, growth, and wealth over time. What I am arguing in the book is that the machinery of the state has failed badly because we piled on way too much. We are out of control fiscally. It is almost a doomsday machine, I can explain. And second, the central bank is off the deep end with this money printing, which is dramatically distorting and deforming the financial markets. You can’t have capitalism without prices in the bond market, in the debt markets, in the money markets. And the fed has essentially destroyed prices. It administers everything.

On Bill Dudley of the New York Federal Reserve Bank saying that he has confidence we can unwind all the damage we've done with a huge balance sheet:

I don’t buy that because that huge balance sheet has gone nowhere. It has stayed right within the canyons of Wall Street. They have taken their balance sheet from $800 billion, which took 94 years to assemble, and in seven weeks they doubled it. They were printing money like $600 million an hour. It is now tripled, quadruple, up to $3.2 trillion.

 

And what happened? During that period, from September 2, ’08, excess reserves in the banking system went from nothing - $40 billion – to $1.7 trillion today. So the money is staying in the canyons of Wall Street. It funds the carry trade where you can buy anything that might have a return, a yield, a risk asset.

On whether the Fed is going to be able to pull money out of Wall Street in an organized manner:

Not a chance because everybody in Wall Street is basically front running the Fed. What the Fed is buying, the belly of the curve, I am buying. What the Fed is buying, short term, I’m using to fund my position. So no one really owns the treasury bonds today, it is all rented on huge repo spreads. And the minute the yields start heading up a little bit and the bond prices go down, you are going to destroy the arbitrage, the fast money is going to sell, then the slower money is going to have to sell because the fast money is selling. And where is the bid? At the bottom of the market…The Fed never gets up.

On what the alternative is given the deflationary trap that the U.S. is caught in:

I don’t think we are caught in a deflationary trap…Well, because you are suffering, my friend, from the recency bias. Yes, prices in Phoenix are way down, but they are still a heck of a lot higher in real terms than they were in 1995. The only thing that happened is a bubble collapsed which had to because it was an artificial bubble fueled by the Greenspan one percent interest rate policy and now the Fed is basically saying that bubbles can’t collapse, we’ll just do it again...

On whether the Fed is trying to manage the bubble collapse:

Well, we’re getting in deeper and deeper every time. And the ultimate consequence will be more of a train wreck. Today, at 1560 plus or minute, we are at the same point the S&P was in March 2000, 4,750 days ago. We have had two massive collapses in the interim – the dot.com $5 trillion evaporated, the Lehman meltdown $7 trillion evaporated. So it is serial bubble. They are bicycling the thing up and down. It happens in Wall Street.

On whether he has patience that the U.S. will grind its way out and get to a better place five or ten years from now:

No, because the ten year ago forecast said that we would have a surplus in 2012, that revenue would be $3.5 trillion, and it was $2.5 trillion. What they are using today is a rosy scenario forecast for ten years that would make the rosy scenario I did in 1981 in the Reagan administration look like an ugly duckling by comparison. They are saying that we are going to create 17 million jobs in ten years compared to two million in the last ten years, that we are going to go 14 years without a recession. It has never happened in history. Most cycles last 48 months. So when you actually do a forecast based on the last ten years, just say the performance in the last ten years, the growth rate, the business investment, job creation, you have $15 trillion to $20 trillion in deficits in front of us, not $7 trillion. We are not on a glide path going downward.

On what Paul Krugman, Brad DeLong and others are getting wrong right now:

They don’t see the elephant in the room called the Fed, and the other central banks buying hand over fist almost all the treasuries that are being issued. The interest rate is not two percent, that is administered, pegged, set by the fed. Ask yourself, if the Fed said we’re going fishing for six months and we are not going to be in the market, we’re gone, do you think the treasury at ten years would stay two percent? Not a chance…It would go way up. There would be a tremendous panic sell off in the bond market because it is entirely propped up. So therefore, they are disingenuous.

On deposit insurance:

Deposit insurance creates a huge moral hazard in the banking system. Abolish it and if there are blue haired old ladies or other timid people who want to save in a bank, set up a postal banking system that will be backstopped by the government and guaranteed. But commercial banks out in the real world need to have their liabilities monitored by the market just like everybody else or you are going to have moral hazard. So I would say take the big banks out of deposit insurance, that is what I meant…I don’t know that it was necessarily caused by the postal banking system.

 

I didn’t say the deposit insurance caused the whole bubble. I’m saying deposit insurance and the Fed window, and the Wall Street coddling policies of the Fed, and the low interest rates created these giant banks - $2 trillion balance sheets at JPMorgan, $2 trillion at Citi – that couldn’t be managed and they were able to raise massive amounts of money from depositors who didn’t care because they believed their deposits were guaranteed…It’s a bad system. Banking is a great danger in the United States and in the modern world, and it needs to be fundamentally reformed.

On the Republican party:

That is the problem. We have no conservative party left. The Republicans have simply adopted Keynesianism for the prosperous classes by using the Tax Code for this stimulus, that stimulus, to help this part of the economy or that part of the economy.

On Paul Ryan's budget plan:

It’s a disgrace because, on the one hand, to give you three examples, one, he repeals Obamacare, says he saves $1.8 billion. I would do that, too. What he doesn’t tell you is he is keeping all the Obama taxes. He has got $1 trillion of Obama taxes hidden in his budget and he is not telling anybody. Second, he gives Medicare and Social Security the huge social insurance programs, some of which goes to the affluent middle class, a pass to ten years, not a cut, $19 trillion. He takes it all out of the safety net, which is only $7 trillion over ten years, a 30 percent cut, actually hitting hard the vulnerable people that have been left behind that we need to do something for. He doesn’t do anything about the defense. He rolls back the sequester and raises defense. We should massively cut defense.

On how much fiscal drag is appropriate:

I don’t think we should have any fiscal drag because the Keynesian formula is simply a program to tax the future generations so that we can live a little better today. It doesn’t matter whether we have one percent growth or negative one percent or positive two percent. We can’t belay massive burdens on future generations because someone finds it inconvenient that our economy can only grow one percent.

On whether he agrees with Glenn Hubbard who suggested that we need to go after entitlements on a long glide path and against the wealthy first:

No, because we have been kicking the can for decades and decades, according to the advice of Keynesians like Hubbard. Hubbard is a complete Keynesian. He is a brilliant guy who told Bush cut taxes in 2001, cut taxes in 2003, oh, while you are at it, go have two unfinanced wars and don’t worry about the deficit because it doesn’t matter. This is the kind of advice Republicans are getting from the likes of Professor Hubbard, and it is no wonder that we are heading towards national bankruptcy. It has got to stop.

On what would happen if we went cold turkey:

It’s too late to go cold turkey. Nobody is going to do it, that is why we are drifting towards the wall. The deficit is much bigger than they are saying. As I indicated, with an honest economic forecast, just like we’ve had for ten years, you are looking at $15 trillion, $20 trillion. You are looking at a national debt $30 trillion.

On whether he believes in American optimism and that we will grow and find a path through this:

No, the optimism was in the people of Main Street, the entrepreneurs, the businessmen, the hard workers, the bus drivers, the farmers. I am attacking the elite. I am attacking the people that run Wall Street, the people inside the Beltway in Washington. I am attacking all of the Keynesian professors from both parties who have gotten us into this idea, just print enough money and we are going to get wealthier, just borrow enough money and we’re going to stimulate the economy.

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howenlink's picture

All it takes is one big dildo to stimulate the economy.

SheepDog-One's picture

And that dildo would be The Bernank I assume?

Unprepared's picture

You two, back to the slaughterhouse. I mean stock market.

Pinto Currency's picture

 

Await Federal Reserve newsflash.

"Shock Finding From Harare: Printing money does not create wealth. May dilute buying power and create bubbles enriching Fed Reserve shareholders."

TerminalDebt's picture

Printing money only causes inflation when other people do it.

If I print a $100 note and it causes 1% inflation I'm still $99 better off, you suckers are $1 worse off.

Pinto Currency's picture

 

A remake of the movie Being There is coming out this summer.

Starring Ben Bernanke as Chauncy Gardner.

ParkAveFlasher's picture

"I like to print."

Shirley MacLaine comes.

 

Jack Burton's picture

Complete Police State Bullshit!  The DEA are just working hard to justify their big pay and easy work life, plus those fat pensions. Odd how we tax payers work hard, pay taxes and the government uses our own tax money to wage war on us! America is becoming a vast gulag.

Once again, love your avatar! Scarlett has been my favorite since she was in "Horse Whisperer" and "Ghost World". You could see the star quality even at a young age!

Alexandre Stavisky's picture

No understanding of time.  No understanding of substitution.  No understanding of proxy.

 

Power and the Purse. Money.  Life and Death. The small time between.  How spent?

 

Or Stolen. Stolen pears, Stolen Waters.  Maybe men can create a matrix which can and will defy all the old arcane knowledge.

 

Maybe the Magi really were just common men.  Maybe the common is more precious than rare and refined.

 

Perception.

 

 

hannah's picture

you have $99 in your hand while i have a .38 colt detective special pointing at your belly..............wanna give me your $99..?

css1971's picture

Sure, why not. You take the 99, he prints off 10 more 100s after you go away and the 1% win again.

Yes this really works in real life.

BobPaulson's picture

then he takes the newly printed money and gives it to some guys with bigger guns called "the army" who come over with a swarm of drones, confiscate the .38 and get you a room in the big house or Gitmo if you worship a different imaginary being.

Pladizow's picture

Stockman's been on a roll this weeK!

NoDebt's picture

"Well, we’re getting in deeper and deeper every time. And the ultimate consequence will be more of a train wreck. "

He had me at hello.

I must admit I was more than a little suspicious of his article, and said so.  Maybe I judged him too harshly.  I just want to know his angle.  He's got an angle.  Everyone's got an angle.

McMolotov's picture

The fucktards who posted comments on Stockman's article on the NY Times site were truly amazing.

Admitedly, they're mostly the same people who worship Krugman, so the stupidity can be partly excused. But Stockman was basically repudiating the entire trickle-down, Wall Street-centric, "Reagan proved deficits don't matter" bullshit of the past 30 years — and the morons leaving comments couldn't get past the fact that he had once been associated with Reagan.

They had no factual rebuttal for Stockman's arguments (neither did Krugman, for that matter); they simply reverted to blind partisanship and dismissed everything he had to say, and some of them were so dumb they literally said they would wait to form an opinion until Krugman had written a response.

So allow me to repeat for what seems like the millionth time: The people who follow Krugman are quite possibly the stupidest, most condescending cunts in existence, and their idiocy is a danger to society.

Charles Nelson Reilly's picture

that gives me a business idea. T-shirts w/ Krugman's stupid fat face on the front and below it "Krugman's Kunt's" written.  I'll hook you up w/ a 10% finders/idea fee.

McMolotov's picture

It's a deal. Make sure you use a picture of him holding his cat, the official mascot of Krugman's Kunts.

DaveyJones's picture

Thomas the Tanked Economic Engine

I wish we still had George Carlin to narrate

RockyRacoon's picture

My take-away from all this:  Finally, somebody said it,

"It’s too late to go cold turkey."

The party is over.

This just needs to soak in and we can get on with a reset.

Law97's picture

Yes, but the reset can and should be properly managed by enlightened individuals such as Stockman.   No good options, but for starters we must slash the military budget, close foreign bases & bring the troops home, close the borders to illegal immigration, restore sound money & lock up the Wall Street bankers, and keep a robust social safety net to do the decent thing and not let any American citizens (which does NOT include illegals or aliens) starve or live in the streets. 

 

It's going to be a rough road, and it will hurt in the short-run.  But if we want any semblance of a prosperous America 20 years from now and any hope for a future for our children, we MUST man up and make these hard choices now.  And yes, the party's over.  It's time to take the whiskey away from the drunks and tell them to go home or get their ass kicked. 

SWRichmond's picture

We have a shitload of Thomas VCR tapes here narrated by Ringo Starr.  I have seen them enough times (though quite a few years ago) that I can probably narrate them myself.

Great stuff.

bulldung's picture

I thought Ringo Starr narrated that?

StychoKiller's picture

George Carlin took over the role of Mr. Conductor from Ringo Starr.  Alec Baldwin was Mr. Conductor in the movie.

GhostfaceCracka's picture

You know, a lot them have become mentally ill off their politics. As you said, how could they miss his criticisms of the GOP inclusive Reagan? I read quite a few comments that said roughly KRUGMAN IS A SHILL BECAUSE HE BLAMES ONLY THE DEMOCRATS AND NOT THE REPUBLICANS THIS ARTICLE IS STUPID. Meanwhile, front and center in the article is Stockman lambasting GOP profligacy including mentioning that he left the Reagan Administration in 1985 over precisely that issue. Right there, prominent in the article. Progressive politics will make you a crazy person if you believe in them long enough.

IamtheREALmario's picture

Krugman only has his position and fiat because he is a loud-mouthed shill. If he was not a shill for the banking powers he would just be small-time idiot professor, a lot of education and no sense.

I think Krugman fears being nothing more than he fears the loss of his soul.

MayIMommaDogFace2theBananaPatch's picture

their idiocy is a danger to society...

I agree that they are danger but when Stockman said

"They are disingenuous..."

I think its just because he cant get away with saying

"They are bald-faced fucking liars..."

ISEEIT's picture

Head up the ass on a diet of what you find there is the 'new normal'.

Dontcha know?

FORWARD!!

Binko's picture

I agree with you about the people who follow Krugman. But the people who follow the likes of Paul Ryan with their fantasy Bushonomics budgets of more war, more wealth for the wealthy and more goodies for everybody except the poorest of the poor are equally as deluded.

The reason we are so thoroughly fucked is that it's not just one side of our two party system that is trapped in delusion, it's both sides equally. If you try to speak truth then you are fighting against both ends of the power-base. It's like getting into the open ground between the bank robbers and the swat team and making rude and threatening gestures; you'll get blown away by both of them.

IamtheREALmario's picture

I think that there are a couple of legitimate explanations for their behavior.

1. Normalcy bias. They are brainwashable ... and so like many things washed, they will be hung out to dry.

2. Fear. They think that if they repeat known lies loud enough and long enough that they will become true, because someone with enough power will make it so.

I do not believe that they are intentionally lying to try to fool people and as a result get a competitive advantage with the truth.

As for the question as to what is Stockman's angle? I am not really sure but I have guesses, based on some comments from my wife who worked for Stockman for a brief period of time when he was a Congressman. Dave is brilliant, but he never really fit in with either Washington or Wall Street. He was smart enough to use both and allowed himself to be used by both. In the end, I think he feels some guilt for taking the easy road and wants to do what he can to square it up. That takes principle, if only latent. Alas he is a leader in that regard and the pack is very far behind.

... and I wish that Dave Stockman, like Ron Paul would not use the term "elite", because it is a counterproductive branding statement.

Lucius Cornelius Sulla's picture

Socialism (aka Liberal Democrats) is an ideology that has been proven harmful and unsustainable by numerous historical examples.  But the world has more useful idiots, tarantulas (as defined by Nietzsche) and ignoramus than not so it prevails.  Krugman is their man.

IamtheREALmario's picture

I had a conversation with my sister-in-law in the prelude to Easter dinner. She is a flaming liberal/progressive. I have no consistent political thought. In the end her entire basis for believing as she does is that she feels that as a people, country, species, whatever; we are "all in this together" and that to progress, we must do it together and not as elitists and slaves. I could not disagree with her, but feel that her trust in Obama and the liberal agenda is misplaced ... and after some discussion, she could not disagree.

StychoKiller's picture

Sit down in front of the painted-rock radio, put on your coconut-shell earphones and get those cargo planez back to the Island, or we all starve!  (At least that's what most Progressive-Socialists believe...)

MiltonFriedmansNightmare's picture

I would say his angle is his book, no more no less. He does the nation a service (although too little and too late to change the outcome) by garnering attention in the MSM. Perhaps he will save a few hides along the way.

grid-b-gone's picture

Stockman does have a book The Great Deformation coming out, but he's been saying essentially the same things since the crisis of 2008.

I lump David Stockman in with Paul Volcker, Sheila Bair, Ron Paul, and other higher-profile patriots who each made a good chunk of money in this system, but each is not so possessed to chase every possible dollar at the expense of the country itself.

 

 

tickhound's picture

There IS good in him.

 

Stockman on the FED... "The Dark Side of the Force is a pathway to many abilities some consider to be unnatural." 

"You can't win, Darth."

 

While Mona Lisas and Mad Hatters, Sons of Bankers, Sons of Lawyers, turn around and say good morning to the night...

For unless they see the sky, But they can't and that is why, They know not if it's dark outside or light.

This Broadway's got, It's got a lot of songs to sing, If I knew the tunes I might join in...

I'll go my way alone, Grow my own, my own seeds shall be sown in New York City.

Ying-Yang's picture

David Stockman's past to remember - The SEC sued Stockman and eight other former Collins & Aikman officers and directors in March 2007. The suit alleged that Stockman fraudulently inflated the company's income by accounting improperly for supplier payments

http://www.reuters.com/article/2010/04/19/sec-stockman-idUSN192119512010...

David payed a bunch of money to SEC -

Stockman agreed to pay $4.42 million plus prejudgment interest of $2.37 million and a civil penalty of $400,000, according to the final judgment filed in U.S. District Court in New York in a lawsuit brought by the U.S. Securities and Exchange Commission (SEC) in 2007.

So he has turned over a new leaf?

MayIMommaDogFace2theBananaPatch's picture

Man those are the kinda fines they give to TBTF banks...  ;)

aka Gil's picture

The SEC doesn't seriously go after the TBTFs, they go after guys like Stockman and Armstrong. The SEC is nothing more than a thug for the TBTFs, aka the White Shoe Boyz Club.

11b40's picture

Stockman has been unpopular in Washington since he, as an insider, blew the whistle on the Reagan administration and called out supply side econ for what it was. Not that I think anyone is above reproach, but I would want a lot of details before siding with the SEC against a small fish - especially one that knows he is being watched by something that would enjoy crushing him.

 

IamtheREALmario's picture

The government does not go after the criminal parasitic clubbies who play the game. They all protect each others' asses and loot the country at will. The fact that Stockman was prosecuted indicates that he was NOT a corrupt insider.

Miss Expectations's picture

I don't get this at all:

George Lucas has created legendary film heroes like Luke Skywalker and Indiana Jones, but the US director says that in real life, his hero is Barack Obama.

http://www.huffingtonpost.com/2008/06/04/george-lucas-on-obama-a-h_n_105...

IamtheREALmario's picture

Not so csurprising onsidering that the original article was from 2008 before O'bummer was shown to be a lazy, parasitic liar and fraud. Many people had hope for O'bummer, me included. Now we know better. He has signed more executive orders transferring power from the people, congresss, supreme count and constitution to himself than all past presidents combined. He has given himself the power to kill you without a trial, detain you indefintely without charge and to confiscate all of your possessions, including you land, and business. I am not sure what he is but he is not what he is advertised to be.

... and what is with the huge scar(s) on his head that look as if he had temporal lobe brain syrgery.

Tsunami Wave's picture

This is one of the best Zero Hedge articles I've read in a few days.. besides the Ron Paul one from earlier today.  Fucking excellent work.. and David Stockman is 100pc correct.

DoChenRollingBearing's picture

+ 1

Totally agree.  ZH has had some very good stuff lately.