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David Stockman Explains The Keynesian State-Wreck Ahead - Sundown In America

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David Stockman, author of The Great Deformation, summarizes the last quarter century thus: What has been growing is the wealth of the rich, the remit of the state, the girth of Wall Street, the debt burden of the people, the prosperity of the beltway and the sway of the three great branches of government - that is, the warfare state, the welfare state and the central bank... What is flailing is the vast expanse of the Main Street economy where the great majority have experienced stagnant living standards, rising job insecurity, failure to accumulate material savings, rapidly approach old age and the certainty of a Hobbesian future where, inexorably, taxes will rise and social benefits will be cut... He calls this condition "Sundown in America".

  SUNDOWN IN AMERICA: THE KEYNESIAN STATE-WRECK AHEAD

Remarks of David A. Stockman at the Edmond J. Safra Center for Ethics, Harvard University, September  26, 2013

The median U.S. household income in 2012 was $51,000, but that’s nothing to crow about. That same figure was first reached way back in 1989--- meaning that the living standard of Main Street America has gone nowhere for the last quarter century. Since there was no prior span in U.S. history when real household incomes remained dead-in-the-water for 25 years, it cannot be gainsaid that the great American prosperity machine has stalled out.

Even worse, the bottom of the socio-economic ladder has actually slipped lower and, by some measures, significantly so. The current poverty rate of 15 percent was only 12.8 percent back in 1989; there are now 48 million people on food stamps compared to 18 million then; and more than 16 million children lived poverty households last year or one-third more than a quarter century back.

Likewise, last year the bottom quintile of households struggled to make ends meet on $11,500 annually ----a level 20 percent lower than the $14,000 of constant dollar income the bottom 20 million households had available on average twenty-five years ago. 

Then, again, not all of the vectors have pointed south. Back in 1989 the Dow-Jones index was at 3,000, and by 2012 it was up five-fold to 15,000.  Likewise, the aggregate wealth of the Forbes 400 clocked in at $300 billion back then, and now stands at more than $2 trillion---a gain of 7X.

 And the big gains were not just limited to the 400 billionaires. We have had a share the wealth movement of sorts--- at least among the top rungs of the ladder. By contrast to the plight of the lower ranks, there has been nothing dead-in-the-water about the incomes of the 5 million U.S. households which comprise the top five percent. They enjoyed an average income of $320,000 last year, representing a sprightly 33 percent gain from the $240,000 inflation-adjusted level of 1989.

The same top tier of households had combined net worth of about $10 trillion back at the end of Ronald Reagan’s second term.  And by the beginning of Barrack Obama’s second term that had grown to $50 trillion, meaning that just the $40 trillion gain among the very top 5 percent rung is nearly double the entire current net worth of the remaining 95 percent of American households.

So, no, Sean Hannity need not have fretted about the alleged left-wing disciple of Saul Alinsky and Bill Ayers who ascended to the oval office in early 2009. During Obama’s initial four years, in fact, 95 percent of the entire gain in household income in America was captured by the top 1 percent. 

Some other things were rising smartly during the last quarter century, too. The Pentagon budget was $450 billion in today’s dollars during the year in which the Berlin Wall came tumbling down.

Now we have no industrial state enemies left on the planet: Russia has become a kleptocracy led by a thief who prefers stealing from his own people rather than his neighbors; and China, as the Sneakers and Apple factory of the world, would collapse into economic chaos almost instantly---if it were actually foolish enough to bomb its 4,000 Wal-Mart outlets in America.

Still, facing no serious military threat to the homeland, the defense budget has risen to $650 billion----that is, it has ballooned by more than 40 percent in constant dollars since the Cold War ended 25 year ago. Washington obviously didn’t get the memo, nor did the Harvard “peace” candidate elected in 2008, who promptly re-hired the Bush national security team and then beat his mandate for plough shares into an even mightier sword than the one bequeathed him by the statesman from Yale he replaced.

Banks have been heading skyward, as well.  The top six Wall Street banks in 1989 had combined balance sheet footings of $0.6 trillion, representing 30 percent of the industry total. Today their combined asset footings are 17 times larger, amounting to $10 trillion and account for 65 percent of the industry.

 The fact that the big banks led by JPMorgan and Bank America have been assessed the incredible sum of $100 billion in fines, settlements and penalties since the 2008 financial crisis suggests that in bulking up their girth they have hardly become any more safe, sound or stable.

Then there’s the Washington DC metropolitan area where a rising tide did indeed lift a lot of boats. Whereas the nationwide real median income, as we have seen, has been stagnant for two-and-one-half decades, the DC metro area’s median income actually surged from $48,000 to $66,000 during that same interval or by nearly 40 percent in constant dollars.

Finally, we have the leading growth category among all others----namely, debt and the cheap central bank money that enables it. Notwithstanding the eight years of giant Reagan deficits, the national debt was just $3 trillion or 35 percent of GDP in 1989. Today, of course, it is $17 trillion, where it weighs in at 105 percent of GDP and is gaining heft more rapidly than Jonah Hill prepping for a Hollywood casting call.

Likewise, total US credit market debt---including that of households, business, financial institutions and government--- was $13 trillion or 2.3X national income in 1989. Even back then the national leverage ratio had already reached a new historic record, exceeding the World War II peak of 2.0X national income.

Nevertheless, since 1989 total US credit market debt has simply gone parabolic. Today it is nearly $58 trillion or 3.6X GDP and represents a leverage ratio far above the historic trend line of 1.6X national income---a level that held for most of the century prior to 1980.  In fact, owing to the madness of our rolling national LBO over the last quarter century, the American economy is now lugging a financial albatross which amounts to two extra turns of debt or about $30 trillion.

In due course we will identify the major villainous forces behind these lamentable trends, but note this in passing: The Federal Reserve was created in 1913, and during its first 73 years it grew its balance sheet in turtle-like fashion at a few billion dollars a year, reaching $250 billion by 1987---at which time Alan Greenspan, the lapsed gold bug disciple of Ayn Rand, took over the Fed and chanced to discover the printing press in the basement of the Eccles Building.

Alas, the Fed’s balance sheet is now nearly $4 trillion, meaning that it exploded by sixteen hundred percent in the last 25 years, and is currently emitting $4 billion of make-believe money each and every business day.

So we can summarize the last quarter century thus: What has been growing is the wealth of the rich, the remit of the state, the girth of Wall Street, the debt burden of the people, the prosperity of the beltway and the sway of the three great branches of government which are domiciled there---that is, the warfare state, the welfare state and the central bank.

What is flailing, by contrast, is the vast expanse of the Main Street economy where the great majority has experienced stagnant living standards, rising job insecurity, failure to accumulate any material savings, rapidly approaching old age and the certainty of a Hobbesian future where, inexorably, taxes will rise and social benefits will be cut.

 And what is positively falling is the lower ranks of society whose prospects for jobs, income and a decent living standard have been steadily darkening.

I call this condition “Sundown in America”.  It marks the arrival of a dystopic “new normal” where historic notions of perpetual progress and robust economic growth no longer pertain. Even more crucially, these baleful realities are being dangerously obfuscated by the ideological nostrums of both Left and Right.

Contrary to their respective talking points, what needs fixing is not the remnants of our private capitalist economy ---which both parties propose to artificially goose, stimulate, incentivize and otherwise levitate by means of one or another beltway originated policy interventions.

Instead, what is failing is the American state itself----a floundering leviathan which has been given one assignment after another over the past eight decades to manage the business cycle, even out the regions, roll out a giant social insurance blanket, end poverty, save the cities, house the nation, flood higher education with hundreds of billions, massively subsidize medical care, prop-up old industries like wheat and the merchant marine, foster new ones like wind turbines and electric cars, and most especially, police the world and bring the blessings of Coca Cola, the ballot box and satellite TV to the backward peoples of the earth.

In the fullness of time, therefore, the Federal government has become corpulent and distended---a Savior State which can no longer save the economy and society because it has fallen victim to its own inherent short-comings and inefficacies.

 Taking on too many functions and missions, it has become paralyzed by political conflict and decision overload. Swamped with insatiable demand on the public purse and deepening taxpayer resistance, it has become unable to maintain even a semblance of balance between its income and outgo.

Exposed to constant raids by powerful organized lobby groups, it has lost all pretenses that the public interest is distinguishable from private looting. Indeed, the fact that Goldman Sachs got a $1.5 billion tax break to subsidize its new headquarters in the New Year’s eve fiscal cliff bill--- legislation allegedly to save the middle class from tax hikes--- is just the most recent striking albeit odorous case.

Now the American state----the agency which was supposed to save capitalism from its inherent flaws and imperfections----careens wildly into dysfunction and incoherence. One week Washington proposes to bomb a nation that can’t possibly harm us and the next week its floods Wall Street speculators, who can’t possibly help us, with continued flows of maniacal monetary stimulus.

Meanwhile, the White House pompously eschews the first responsibility of government---that is, to make an honest budget, which is the essence of what the Tea Party is demanding in return for yet another debilitating increase in the national debt.

To be sure, the mainstream press is pleased to dismiss this latest outburst of fiscal mayhem as evidence of partisan irresponsibility---that is, a dearth of “statesmanship” which presumably could be cured by stiffer backbones and greater enlightenment.  Well, to use a phrase I learned from Daniel Patrick Moynihan during my school days here, “would that it were”.

What is really happening is that Washington’s machinery of national governance is literally melting-down.  It is the victim of 80 years of Keynesian error---much of it nurtured in the environs of Harvard Yard---- about the nature of the business cycle and the capacity of the state---especially its central banking branch--- to ameliorate the alleged imperfections of free market capitalism.

As to the proof, we need look no further than last week’s unaccountable decision by the Fed to keep Wall Street on its monetary heroin addiction by continuing to purchase $85 billion per month of government and GSE debt.

Never mind that the first $2.5 trillion of QE has done virtually nothing for jobs and the Main Street economy or that we are now in month number 51 of the current economic recovery--- a milestone that approximates the average total duration of all ten business cycle expansions since 1950. So why does the Fed have the stimulus accelerator pressed to the floor board when the business cycle is already so long in the tooth----and when it is evident that the problem is structural, not cyclical?

The answer is capture by its clients, that is, it is doing the bidding of Wall Street and the vast machinery of hedge funds and speculation that have built-up during decades of cheap money and financial market coddling by the Greenspan and Bernanke regimes.  The truth is that the monetary politburo of 12 men and women holed up in the Eccles Building is terrified that Wall Street will have a hissy fit if it tapers its daily injections of dope.

So we now have the spectacle of the state’s central banking branch blindly adhering to a policy that has but one principal effect: namely, the massive and continuous transfer of income and wealth from the middle and lower ranks of American society to the 1 percent.

The great hedge fund industry founder and legendary trader who broke the Bank of England in 1992, Stanley Druckenmiller, summed-up the case succinctly after Bernanke’s abject capitulation last week. “I love this stuff”, he said, “…. (Its) fantastic for every rich person. It’s the biggest redistribution of wealth from the poor and middles classes to the rich ever”.

Indeed, a zero Federal funds rate and a rigged market for short-term repo finance is the mother’s milk of the carry trade: speculators can buy anything with a yield----such as treasuries notes, Fannie Mae MBS, Turkish debt, junk bonds and even busted commercial real estate securities--- and fund them 90 cents or better on the dollar with overnight repo loans costing hardly ten basis points.

 Not only do speculators laugh all the way to the bank collecting this huge spread, but they sleep like babies at night because the central banking branch of the state has incessantly promised that it will prop up bond prices and other assets values come hell or high water, while keeping the cost of repo funding at essentially zero for years to come.

If this sounds like the next best thing to legalized bank robbery, it is. And dubious economics is only the half of it.

 This reverse Robin Hood policy is also an open affront to the essence of political democracy.  After all, the other side of the virtually free money being manufactured by the Fed on behalf of speculators is massive thievery from savers. Tens of millions of the latter are earning infinitesimal returns on upwards of $8 trillion of bank deposits not because the free market in the supply and demand for saving produces bank account yields of 0.4 percent, but because price controllers at the Fed have decreed it.

For all intents and purposes, in fact, the Fed is conducting a massive fiscal transfer from the have nots to the haves without so much as a House vote or even a Senate filibuster. The scale of the transfer---upwards of $300 billion per year----causes most other Capitol Hill pursuits to pale into insignificance, and, in any event, would be shouted down in a hail of thunderous outrage were it ever to actually be put to the people’s representatives for a vote.

To be sure, all of this madness is justified by our out-of-control monetary politburo in terms of a specious claim that Humphrey-Hawkins makes them do it---that is, print money until unemployment virtually disappears or at least hits some target rate which is arbitrary, ever-changing and impossible to consistently measure over time.

 In fact, however, this ballyhooed statute is a wholly elastic and content-free expression of Congressional sentiment.  In their wisdom, our legislators essentially said that less inflation and more jobs would be a swell thing. So the act contains no quantitative targets for unemployment, inflation or anything else and was no less open-ended when Paul Volcker chose to crush the speculators of his day than it was last week when Bernanke elected (once again) to pander obsequiously to them.

In truth, the Fed’s entire macro-economic management enterprise is a stunning case of bureaucratic mission creep that has virtually no statutory mandate. Certainly the author of the Federal Reserve Act, the incomparable Carter Glass of Glass-Steagall fame, abhorred the notion that the central bank would become a tool of Wall Street.

To that end, the Fed originally had no authority to own government debt or to conduct open market operations buying and selling treasury securities on Wall Street. And Carter Glass would be rolling in his grave upon discovery that the Fed was rigging interest rates, manipulating the yield curve, providing succor to financial speculators by propping-up risk asset markets, placing a Put under the S&P 500 or bragging, as Bubbles Ben did recently, that he had levitated an ultra-speculative stock index called the Russell 2000.

Summing up a wholly opposite Congressional intent in the early 1920s, Senator Glass was almost lyrical:  “We cured this financial cancer by making the regional reserve banks, not Wall Street, the custodian of the nation’s reserve funds… (And) by making them minister to commerce and industry rather than the schemes of speculative adventure. The country banks were made free. Business was unshackled. Aspiration and enterprise were loosened. Never again would there be a money panic.”

Except…except….except that the Fed eventually strayed from its original modest mandate to be a “banker’s bank”----and in due course we got the crashes of 1929, 1974, 1987, 1998, 2000, and 2008,  to name those so far. In the original formulation, however, these cycles of bubble and bust would not have happened: the Federal Reserve’s only job was the humble matter of passively supplying cash to member banks at a penalty spread above the free market interest rate.

In this modality, the Fed was to function as a redoubt of green-eyeshades, not the committee to save the world. Central bankers would dispense cash at the Fed’s discount window only upon the presentation of good collateral. Moreover, eligible collateral was to originate in trade receivables and other short-term paper arising out of the ebb and flow of free enterprise commerce throughout the hinterlands, not the push and pull of confusion and double-talk among monetary central planners domiciled in the nation’s political capital.

Accordingly, the Federal Reserve that Carter Glass built could not have become a serial bubble machine like the rogue central banks of today. The primary reason is that under the Glassian scheme the free market set the interest rate, not price controllers in Washington.

This meant, in turn, that any sustained outbreak of speculative excess---- what Alan Greenspan once warned was “irrational exuberance” and then promptly hit the delete button when Wall Street objected---would be crushed in the bud by soaring money market interest rates. In effect, leveraged speculators would cure their own euphoria and greed by pushing carry trades---that is, buying long and borrowing short---to the point where they would turn upside down. When spreads went negative, the bubble would promptly stop inflating as overly exuberant speculators were carried off to meet their financial maker---or at least their banker.

And, yes, Carter Glass’ Fed did function under the ancient regime of the gold standard, but there was nothing especially “barbarous” about it----J. M. Keynes to the contrary notwithstanding.  It merely insured that if the central bank was ever tempted to violate its own rules and repress interest rates in order to accommodate speculators and debtors, more prudent members of the financial community could dump dollar deposits for gold, thereby bringing bank credit expansion up short and aborting incipient financial bubbles before they swelled-up.

Needless to say, a central bank which could not create credit-fueled financial bubbles could not have become today’s monetary central planning agency, either. Indeed, the remit of the Glassian banker’s bank did not include managing the business cycle, levitating the GDP, targeting the unemployment rate, goosing the housing market or fretting over the rate of monthly consumer spending.

 Certainly it did not involve worrying whether the inflation rate was coming in below 2 percent---the current inexplicable target of the Fed which Paul Volcker has rightly pointed out amounts to robbing the typical laboring man of half the value of his savings over a working lifetime of 30 years.

In short, in the Glassian world the state had no dog in the GDP hunt: whether it grew at an annual rate of 4 percent, 1 percent or went backwards was up to millions of producers, consumers, savers, investors, entrepreneurs and, yes, even speculators interacting on the free market. Indeed, the so-called macroeconomic aggregates----such as national income, total employment, credit outstanding and money supply----were passive outcomes on the market, not active targets of state policy.

Needless to say, no Glassian central banker would have ever dreamed of levitating the macro-economic aggregates through the Fed’s current radical, anti-democratic doctrine called “wealth effects”.

 Under the latter, the 10 percent of the population which owns 85 percent of the financial assets---and especially the 1 percent which owns most of the so-called “risk assets” managed by hedge funds and fast money speculators---are induced to feel richer by the deliberate and wholly artificial inflation of financial asset values.

In the case of the Russell 2000 which is Bernanke’s favorite wealth effects tool, for instance, the index gain from 350 in March 2009 to 1080 at present amounts to 200 percent and that is for un-leveraged holdings; the Fed engineered windfall actually amounts to a 400 or 500 percent gain under typical options, leverage and timing based strategies employed by the fast money.

 In any event, feeling wealthier, the rich are supposed to spend more on high end restaurants, gardeners and Pilate’s instructors, thereby causing a “trickle-down” jolt to aggregate demand and eliciting a virtuous circle of rising output, incomes and consumption----indeed,  always more consumption.

Having been involved in another radical experiment in “trickle down”----the giant Reagan tax cuts of 1981----I no longer believe in Voodoo economics. But at least the Gipper’s tax cuts were voted through by a democratic legislature. The Greenspan-Bernanke-Yellen version of “trickle-down”, by contrast, is a pure gift from a handful of central bank apparatchiks to the super-rich.

Nevertheless, the more virulent form of “trickle-down” being practiced in 2013 is rooted in the same erroneous predicate as the mistake of 1981----namely, the Keynesian gospel that the free enterprise economy is inherently prone to business cycle instability and perennially under-performs its so-called “potential” full employment growth rate.  Accordingly, enlightened intervention---if that is not an oxymoron--- by the fiscal and monetary branches of the state is claimed to be necessary to cure these existential disabilities.

The truth of the matter, however, is that Keynesian monetary and fiscal stimulus has never really been needed in the post-war world. Among the ten business cycle contractions since 1950, two of them were unavoidable, self-correcting dislocations resulting from the abrupt cooling down of hot wars in Korea and Vietnam.

The other eight downturns were actually caused by the Federal Reserve, not cured by it.  After the Fed first got carried away with too much stimulus and credit creation in 1971-1974, for example, it had to trigger a short-lived inventory correction to halt the resulting inflation and speculative excesses in financial, labor and commodity markets. But once these necessary inventory corrections ran their course, the economy rebounded on its own each and every time.

To be sure, the Reagan tax cut intervention of 1981 came in a quasi-libertarian guise. By getting the tax-man out of the way, GDP growth was supposed to be unleashed throughout the economic hinterlands, rising by something crazy like 5 percent annually--- forever and ever, world without end.

But in practice, “supply-side” was just Keynesian economics for the prosperous classes---that is, it ended-up being a scheme to goose the GDP aggregates by drawing down Uncle Sam’s credit card and then passing along the borrowings to so-called “job creators” thru tax cuts rather than to dim-witted bureaucrats thru spending schemes.

Indeed, the circumstances of my own ex-communication from the supply-side church underscore the Reaganite embrace of the Keynesian gospel. The true-believers---led by Art Laffer, an economist with a Magic Napkin, and Jude Wanniski, an ex-Wall Street Journal agit-prop man who chanced to stuff said napkin into his pocket--- were militantly opposed to spending cuts designed to offset the revenue loss from the Reagan tax reductions.

They called this “root canal” economics and insisted that the Republican Party could never compete with the Keynesian Democrats unless it abandoned its historic commitment to balanced budgets and fiscal rectitude, and instead, campaigned on tax cuts everywhere and always and a fiscal free lunch owing to a purported cornucopia of economic growth.

So supply-side became just another campaign slogan---a competitive entry in the Washington beltway enterprise of running-up the national debt in order to perfect and improve upon the otherwise inferior results of the free market economy. In the fullness of time, of course, supply-side economics degenerated into Dick Cheney’s fatuous claim that Reagan proved “deficits don’t matter”.

From there came two giant unfinanced tax cuts and two pointless unfinanced wars under George W. Bush. And then there arose, finally, the GOP’s descent into fiscal know-nothingism during the Obama era--- wherein it refused to cut defense, law enforcement, veterans, farm subsidies, the border patrol, middle class student loans, social security, Medicare, the SBA and export-import bank loans to Boeing and General Electric, among countless others--- while insisting that no tax-payer should suffer the inconvenience of higher taxes to pay Uncle Sam’s bloated bills.  

We thus ended up with the New Year’s Day Folly of 2013. Save for the top 2 percent of taxpayers who were being generously taken care of by the Fed already, all of America got a huge permanent tax cut----amounting to $2 trillion over the coming decade alone.

Never mind that the Democrats had spent the entire prior decade denouncing the Bush tax cuts as fiscal madness. Now, the tax bidding war which had started in the Reagan White House in May 1981 became institutionalized in the Oval Office.

The so-called Progressive Left was in charge of the veto pen, of course, but the latter was found wanting for ink and in that outcome the nation’s fiscal demise was sealed. There was no progressive case whatsoever for extending the Bush tax cuts because, as Willard M. Romney had so inartfully taught the nation during the Presidential campaign, the bottom 47 percent of households don’t pay any income tax in the first place!

In short, the most left-wing President ever elected in America was showering the upper middle-class with trillions in extra spending loot for no reason of policy----except to ensure that they would buy more Coach Bags and flat screen TVs.

The fiscal end game---policy paralysis and the eventual bankruptcy of the state---thus became visible.  All of the beltway players----Republican, Democrats and central bankers alike----are now so hooked on the Keynesian cool-aid that they cannot imagine the Main Street economy standing on its own two feet without continuous, massive injections of state largesse.

Indeed, the lunacy of the Fed’s trickle-down-to- the-rich was justified last week by Bernanke himself on the grounds that the minor fiscal pinprick owing to the budget sequester was keeping the GDP from growing at its appointed rate.

Based on the same logic the GOP’s most fearsome fiscal hawk, Congressman Paul Ryan, proposed a budget which actually increased the deficit by $200 billion over the next three years on the grounds that the economy was too weak to tolerate fiscal rectitude in the here and now.  In the manner of St. Augustine, the Ryan budget got to balance in the by-in-by---that is, in 2037 to be exact--- pleading “Lord, make me chaste--- but not just now”.

In other words, the entire fiscal and monetary apparatus of the state has become a jobs program. Progressives pleasure households earning a quarter million dollars annually with tax cuts so that they will hire another gardener; conservatives support modernization of our already lethal fleet of 10,000 M-1 tanks to keep the production line open in Lima, Ohio----notwithstanding that no nation in the world can invade the US homeland and that the American people are tired of invading the homelands of innocent peoples abroad.

In the same vein, by all accounts the US income tax code is a disgrace--- a milk-cow for the K-street lobbies, a briar patch of screaming inequities and the leakiest revenue raising system ever concocted.

But it also amounts to 70,000 pages of jobs programs. None of these can be spared, according to the beltway consensus, so long as GDP and job growth is not up to snuff---that is, as long as they fall short of the American economy’s so-called full employment potential. The latter is an ethereal number known only to the Keynesian priesthood, led by the great thinker’s current vicar on earth, professor Larry Summers, who during his tenure in the White House turned Art Laffer’s napkin upside down and wrote “$800 billion” on the back.

That was the magic number which, when multiplied by another magic number called the fiscal multiplier, would generate an amount of incremental GDP exactly equal to the gap between actual GDP in early 2009 and potential GDP, as calibrated by the vicar.

This might be called the bath-tub theory of macroeconomics because according to Summers and the White House, it didn’t matter much what  was in the $800 billion package----the urgent matter was to get Washington’s fiscal pumping machinery operating at full-tilt.

 Accordingly, once the magic number had been scribbled on the White House napkin, the nation’s check-writing pen was handed off to Speaker Nancy Pelosi and Harry Reid, who conducted the most gluttonous  feeding frenzy every witnessed along the corridors of K-Street.

In exactly twenty-two days from the inauguration, the new administration conceived, drafted, circulated, legislated and signed into law an $800 billion omnibus package of spending and tax cutting that amounted to nearly 6 percent of GDP.  I had been part of a new administration that moved way too fast on a grand plan and had seen the peril first hand. But the Reagan fiscal mishap did not even remotely compare to the reckless, unspeakable folly conducted by the Obama White House.

In fact, the stimulus bill was not a rational economic plan at all; it was a spasmodic eruption of beltway larceny that has now become our standard form of governance.

 Stated differently, the stimulus bill was a Noah’s ark which had welcomed aboard every single pet project of any organization domiciled in the nation’s capital with a K-street address. Most items were boarded without any policy review or adult supervision, reflecting a rank exercise in political log-rolling that proceeded straight down the gang planks to the bulging decks below.

Indeed, the true calamity of the Obama stimulus was not merely its massive girth, but the cynical, helter-skelter process by which the public purse was raided. At the end of the day, it was a startling demonstration that the power of a bad idea----the Keynesian predicate----when coupled with the massive money power of the PACs and K-Street lobbies, has rendered the nation fiscally incontinent.

This unhinged modus operandi undoubtedly accounts for the plethora of sordid deals that an allegedly “progressive” White House waived through. Thus, the homebuilders were given “refunds” of $15 billion for taxes they had paid during the bubble years; manufacturers got 100 percent first year tax write-offs for equipment that should have been written off over a decade or longer; and crony capitalist investors got $90 billion for uneconomic solar, wind and electric vehicle projects under the fig leaf of “green energy”.

Likewise, insulation suppliers got a $10 billion hand-out via tax credits to homeowners to improve the thermal efficiency of their own properties; congressman on the public works committees got $10 billion earmarked for pork barrel water and reclamation projects in the home districts; and the already corpulent budget of the Pentagon was handed another $10 billion for base construction it most definitely didn’t need---to say nothing of a new headquarters for the insanely bloated  and incompetent Homeland Security Department

Moreover, the big ticket stuff was far worse. Nearly $50 billion was allocated to highway construction---much of it for repaving highways that didn’t need it or building interchanges where the traffic didn’t warrant it; and, in any event, it should have been paid for with user gasoline taxes, not permanent debt on the general public.

Still, the real pyramid building gambit was the $30 billion or so for transit and high speed rail. Forty-five years of mucking around with the abomination know as Amtrak proves unequivocally that cross-country rail can never be viable in the US because it cannot compete with air travel among the overwhelming majority of city-pairs.

Presently, every single ticket sold on the Sunset Limited from New Orleans to Los Angeles, for example, requires a subsidy that is nearly double the cost of an airline ticket, and is indicative of why we pour $1 billion down the drain each year subsidizing the public transit myth ---a boondoggle that will become all the greater owing to the distribution of billions of high speed rail “stimulus” funds which were not subject to even a single hour of hearings.

Then there was $80 billion for education but the only rhyme or reason to it was the list of K-Street lobbies that had lined-up outside Speaker Pelosi’s door: to wit, the National Education Association, the school superintendents lobby, the textbook publishers, the school construction industry, the special education complex, the pre-school providers association, and dozens more.

 In a similar manner, the nursing home lobby, home health providers, the hospital association, the knee and hip replacement manufactures, the scooter chair hawkers and the Medicaid mills were all delighted to pocket an extra $80 billion of Federal funding, thereby relieving pressures for reimbursement reductions from the regular state Medicaid programs.

Finally, there was the Obama “money drop” whereby $250 billion was dispersed in helicopter fashion to 140 million tax filers and 65 million citizens who receive social security, veterans and other benefit checks. But there was virtually no relationship to need: tax filers with incomes up to $200,000 were eligible, or about 95 percent of the population.

And among the beneficiary population receiving a $250 stimulus check, less than 10 percent were actually means-tested--- while millions of these checks went to affluent social security retirees happy to have Uncle Sam pay for an extra round or two of golf.

Indeed, there was no public policy purpose at all to Obama’s quarter trillion dollar money drop except filling the Keynesian bath-tub with make believe income, hoping that citizens would use it to buy a new lawnmower , a goose-down comforter, dinner at the Red Lobster or a new pair of shoes.

 Yet ensnared in the Keynesian delusion that society can create wealth by mortgaging its future, the stimulus-besotted denizens of the beltway blew it entirely on the one true domestic function of the state---even under the regime of crony capitalism that now prevails. That imperative is to maintain and adequately fund a sturdy safety net to support citizens who cannot work due to age or health, and to supplement the incomes of families whose marketplace earnings fall below a minimum standard of living.

Yet notwithstanding the feeding frenzy on K-Street to fill-in the Keynesian vicar’s $800 billion blank  check in a record twenty-two days, only 3.8 percent of the total----a mere $30 billion---was allocated to means-tested cash benefits which actually fund the safety net for the needy. Yet with $17 trillion of national debt on the books already, and the certainty that will double or triple in the decades immediately ahead, indiscriminately filling the Keynesian bathtub with borrowed money is not only reckless, but also a cruel insult to any reasonable standard of equitable justice.

The fiscal madness of the Obama era cannot be excused on the grounds that the nation was faced with Great Depression 2.0. We weren’t and the widespread belief that we were so threatened is almost entirely attributable to Ben Bernanke’s faulty scholarship about the Fed’s alleged mistake of not undertaking a massive government debt buying spree to counter-act the Great Depression.

The latter, in turn, was borrowed almost entirely from Milton Friedman’s primitive quantity theory of money which was wrong in 1930 and ridiculously irrelevant to the circumstances of 2008. Nevertheless, it was the basis for Bernanke’s panicked flooding of Wall Street with indiscriminate bailouts and endless free liquidity after the Lehman event.

But what was actually happening was that the giant credit and housing bubble, which had been created by the Greenspan-Bernanke Fed in the wake of the bursting dotcom bubble, which it had also created, was being liquidated. Most of the carnage was happening within the gambling halls of Wall Street because it was the wholesale money market and the shadow banking system that was experiencing a run, not the retail banks of main street America.

The so-called financial crisis, therefore, consisted first and foremost of a violent mark-down of hugely leveraged, multi-trillion Wall Street balance sheets that were loaded with toxic securities--- that is, the residue of speculative trading books and undistributed underwritings of sub-prime CDOs, junk bonds, commercial real estate securitizations, hung LBO bridge loans, CDOs squared---- and which had been recklessly funded with massive dollops of overnight repo and other short-term wholesale money.

 This was just one more iteration of the speculator’s age old folly of investing long and illiquid and funding short and hot.

By the time of the frenzied bailout of AIG on September 16th, led by Bernanke and Hank Paulson, the most dangerous unguided missile every to rain down on the free market from the third floor of the Treasury building, it was nearly all over except for the shouting.  Bear Stearns, Lehman and Merrill Lynch were already gone because they were insolvent and should have been liquidated----including the bondholders who have foolishly invested in their junior capital for a few basis points of extra yield. 

Likewise, Morgan Stanley was bankrupt, too----propped up ultimately by $100 billion of Fed loans and guarantees that accomplished no public purpose whatsoever, except to keep a gambling house alive that the nation doesn’t need, and to rescue the value of stock held by insiders and bonds owned by money manager who had feasted for years on its reckless bets and rickety balance sheet.

 Indeed, at the end of the day the only real purpose of the September 2008 bailouts was to rescue Goldman Sachs from short-sellers who would have taken it down, had not Paulson and Bernanke bailed out Morgan Stanley first, and then outlawed the right of free citizens to sell short the stock of any financial company s until the crisis had passed.

The case for bailing out AIG was even more sketchy.  It had around $800 billion of mostly solid assets in the form of blue chip stocks, bonds, governments, GSE securities and long-term, secured aircraft leases, among others.

 So the great global empire of dozens of insurance and leasing companies that Hank Greenburg had built over the decades wasn’t really insolvent: the problem was that its holding company, which had written hundreds of billions of credit default swaps, was illiquid.

 It couldn’t met margin calls against the CDS it had written because state insurance commissioners in their wisdom had imposed capital requirements and dividend stoppers on AIG’s far flung insurance subsidiaries----precisely so that policy-holders couldn’t be fleeced by holding company executives and Boards needing to fund their gambling debts.

In short, virtually none of the AIG subsidiaries would have failed; millions of life insurance policies and retirement annuities would have been money good, and the fire insurance on factories in Peoria would have remained in force.

 The only thing that really happened was that something like twelve gunslingers based in London, who sold massive amounts of loss insurance on sub-prime mortgage bonds to about a dozen multi-trillion global banks, would have had to hire protection on their lives in the absence of the bailout. These CDS policies issued by the AIG holding company, in fact, were almost completely bogus and would have generated about $60 billion in losses among Goldman, JPMorgan, Barclays, Deutsche Bank, SocGen, BNP-Paribas, Citi bank and a handful other giants with combined balance sheet footings of $20 trillion.

So the loss would have been less than one-half of one percent of the aggregate balance sheet of the global banks impacted---that is, a London Whale or two, and nothing more

 But by dishing out around $15 billion of bailout money to each of the above named institutions, the American taxpayer kindly protected the P&L of these banks from a modest one-time hit, and kept executive bonuses in the money, too.   It also left AIG under the care of unreconstructed princes of Wall Street whose claims to entitlement know no bounds, as exemplified by Mr. Benmosche’s recent stupefying inability to distinguish between a lynching and the loss of undeserved bonuses.

But as they say on late night TV, there’s more. We were told that ATMs would go dark, big companies would miss payrolls for want of cash and the $3.8 trillion money market fund industry would go down the tubes.

 All of these legends are refuted in the section of my book called the Blackberry Panic of 2008----the title being a metaphor for the fact that the Treasury Department of the US government was in the hands of Wall Street plenipotentiaries who could not keep their eyes off the swooning price charts for the S&P 500 and Goldman Sachs flickering red on their blackberry screens.

But just consider this. Fully $1.8 trillion or 50 percent of total money market industry was in the form of so-called “government only” funds or Treasury paper. Not a single net dime left these funds during the panic and for the good reason that treasury interest payments were never in doubt.

 Likewise, the other half of the industry consisted of so-called “prime” funds which included modest amounts of commercial paper along with governments and bank obligations. About $400 billion or 20 percent of these holdings did leave these “prime” funds.

 Yet, the overwhelming share of these withdrawals---upwards of 85 percent---simply migrated within money fund companies from slightly risky “prime” funds to virtually riskless “government only” funds.  In effect, the much ballyhooed flight from the money market funds consisted of professional investors hitting the “transfer” button on their account pages.

Worse still, the only significant investor loss in this $4 trillion sector, which was supposedly ground zero of the meltdown, was on about $800 million of Lehman commercial paper held by the industry’s largest operation called the Reserve Prime Fund.  The loss amounted to 0.002 percent of the money market industry’s holdings on the eve of the crisis.

In a similar vein, the $2 trillion commercial paper market was said to be melting down, but this too is an urban legend fostered by the nation’s leading crony capitalist, Jeff Imelt of GE. Unaccountably, the latter did manage to secure $30 billion of Fed guarantees for General Electric’s AAA balance sheet, thereby obviating any need to do the right free market thing---that is, to make a dilutive issue of stock or long-term debt to pay down some cheap commercial paper that could not be rolled during the crisis.

Accordingly, GE Capital’s practice of funding long-term, sticky assets with short-term hot money should have caused shareholders to take a hit, and the company’s executives to be brought up short on the bonus front.

Instead, the bailout of GE’s commercial paper gave rise to the urban legend that companies could not fund their payrolls, when the truth is that every single industrial company that had a commercial paper facility also had back-up lines at their commercial bank, and not a single bank refused to fund, meaning no payroll disbursement was every in jeopardy.

 What actually shrank, and deservedly so, was the $1 trillion asset-backed commercial paper market---a place where banks go to refinance credit card and auto loan receivables so that they can book the lifetime profits on these loans upfront---literally the instant your card is swiped--- under the “gain-on-sale” accounting scam.

 Consequently, the subsequent sharp decline of the ABCP market has been entirely a matter of bank profit timing. It never prevented a single consumer from swiping a credit card or obtaining an auto loan.

In short, by the time of TARP and the massive liquidity injections into Wall Street by the Fed------when it doubled its 94 year-old balance sheet in seven weeks thru October 25, 2008---the meltdown in the canyons of Wall Street had pretty much burned itself out.

 Had Mr. Market been allowed to have his way with the street, a healthy purge of decades’ worth of speculative excesses would have occurred. Indeed, the main effect would be that perhaps a half-dozen “sons of Goldman” would be operating today, not the vampire squid which remains----and they would be run by chastened people who would have lost their stake during the free market’s cleansing interlude.

In a similar manner, the one-time hit to GDP and jobs which resulted from economically warranted collapse of the housing, commercial real estate and the consumer credit bubbles was actually over within nine months.

The ensuring rebound that incepted in June 2009 reflected the regenerative powers of the free market, and not the Fed’s mad-cap money printing or the Obama fiscal stimulus.  The Fed did lower interest rates to zero, and thereby it revived the speculative juices on Wall Street. But the plain fact is that household and business credit continued to contract on Main Street long after the June 2009 bottom, and for good reason:  both sectors were massively over-leveraged after three decades of continuous, pell mell credit expansion. 

The household sector, for example, had $13 trillion of debt which represented 205 percent of wage and salary income---compared to the historic ratio of under 90 percent which had prevailed during healthier times prior to 1980. So the Fed’s massive balance sheet expansion did nothing to cause higher borrowing, spending, output or employment on Main Street, even as it put the hedge funds back into the carry-trade business---now with essentially zero cost of funds.

By the time the rebound began in June 2009 not even $75 billion of the stimulus bill—that is, one-half of one percent of GDP---- had hit the spending stream, meaning, again, that the recovery already  underway was self-generating.

 As it happened, the initial wave of business inventory liquidation and labor-shedding triggered by the Wall Street meltdown had burned itself out quickly during the first nine months after the Lehman crisis. Thus, business inventories totaled $1.54 trillion in August 2008, and dropped by a total of $215 billion or 14 percent during the course of the recession. Yet fully $185 billion of that liquidation occurred before June 2009, and inventories started to actually rebuild a few months later.

The story was similar for non-farm payrolls. Nearly 7.6 million jobs were shed during the Great Recession but fully 6.6 million or 90 percent of the adjustment was completed by June 2009. Indeed, the idea that this short but sharp recession had anything to do with the Great Depression is essentially ludicrous, and fails completely to note the vast structural differences between the two eras.

 During the early 1930, the US was the great creditor and exporter to the world, with 70 percent of GDP accounted for by primary production industries----agriculture, mining and manufacturing--- which have long pipelines of crude, intermediate and finished inventory.

 By the time of the 2008 Wall Street meltdown, however, the primary production sector had become a mere shadow of its former self, accounting for only 17 percent of GDP. Accordingly, when recession hit the American economy this time, the downward spiral of inventory liquidation was muted----with the total inventory liquidation amounting to 2 percent of GDP in 2008-09 compared to 20 percent in the early 1930s.

Indeed, the inherent recession dynamics of the contemporary US service economy--- with its massive built-in stabilizers in the form of transfer payment and huge government payrolls--- militated against the entire scare story of a Great Depression 2.0.

 During the nine months thru June 2009, for example, government transfer payments for foods stamps, unemployment insurance, Medicaid, cash assistance and social security disability soared at a $300 billion annual rate, thereby more than off-setting the $275 billion drop in total wage and salary income.

 Likewise, government wages and salaries actually rose during the period, and the vast US service sector payrolls were tapered back modestly, rather than going dark in the form of traditional factory shutdowns. Aerobics class instructors, for example, experienced modestly reduced paid hours, but unlike factories and mines, fitness centers did not go dark in order to burn off excess inventories; they stuck to burning off calories at a modestly reduced rate.

In fact, by 2008 China, Australia and Brazil had become the world’s new mining and manufacturing economy---that is, the US economy of the 1930s. When upwards of 50 million Chinese migrant workers were sent home from idle Chinese export factors, the villages of China’s vast interior became the “Hoovervilles “of the present era.

 In short, Bernanke’s depression call was reckless and uninformed. The real challenge facing the American economy was to get off the massive credit binge which had bloated and inflated output, jobs and incomes for more than two decades.

Instead, Washington poured gasoline on the fire, thereby re-igniting an even great bubble that will ultimately end in state-wreck—that is, in the thundering collapse of the financial markets. Indeed, the nation’s rogue central bank will eventually be engulfed in the Wall Street hissy fit it fears---undone by waves of relentless selling when the monetary politburo finally loses control of panicked day traders and raging robo trading machines.

Likewise, the Federal budget has become a doomsday machine because the processes of fiscal governance are paralyzed and broken. There will be recurrent debt ceiling and shutdown crises like the carnage scheduled for next week, as far as the eye can see.

Indeed, notwithstanding the assurances of debt deniers like professor Krugman, the honest structural deficit is $1-2 trillion annually for the next decade and then it will get far worse. In fact, when you set aside the Rosy Scenario used by CBO and its preposterous Keynesian assumption that we will reach full employment in 2017 and never fall short of potential GDP ever again for all eternity, the fiscal equation is irremediable.

Under these conditions what remains of our free enterprise economy will be buckle under the weight of taxes and crisis.  Sundown in America is well-nigh unavoidable.

 

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Sat, 10/05/2013 - 19:24 | 4026648 Duc888
Duc888's picture

Dave, that's a whole lotta words there.  Lemme sum it up for ya.  "We're Phucked".  Oh, and it's by design.

Sat, 10/05/2013 - 19:28 | 4026656 eddiebe
eddiebe's picture

Yea, we know, things are really fucked up. We the people have been bent over about as far as bending gets. We get it. Question is. So what? The perps are laughing all the way to the bank; definitely not getting reamed by Bubba where they belong.

Maybe set ourselves on fire? Or Ram a white house gate? Wow! 

Sat, 10/05/2013 - 19:31 | 4026657 Duc888
Duc888's picture

"Realize you all want to make some coin but just to let you know your ads are really pushing the threshold of my tolerence. I'm not gonna say I won't come to the site anymore, but damn sure I will only come once a day or less, I have a pretty high tolerence for ad bullshit so you are probably on the verge of shooting yourselves in the foot. 

Overkill, btichez."

_________________________________________________________________________

Learn to use the proper tools for the job.  As a previous poster mentioned, "addblockplus"

 

Then install "Noscript"...and then "Ghostery"...if ya want some kewl things to watch..."Collusion"

 

 

Sat, 10/05/2013 - 19:30 | 4026661 22winmag
22winmag's picture

Sundown? Absolutely not. When shit really breaks down, good people are forced to act.

 

The largest army on earth... armed Americans (in uniform and out of uniform), generally good people, will have to act and will weather the storm.

 

Sunny days are right around the corner.

Sat, 10/05/2013 - 21:41 | 4026872 shinobi-7
shinobi-7's picture

Sundown it is and there is nothing much "good" people can do about it. The current system was built over many decades, it is overly complex and impossible to reform. The worst part of it is that so many people depend on it that nothing much is possible enymore leading to the current paralysis. Congress and the government are powerless.

Sun, 10/06/2013 - 00:12 | 4027079 RafterManFMJ
RafterManFMJ's picture

SUNDOWN you'd better take care...

I can see her lying back in her satin dress
In a room where you do what you don't confess

Sundown, you better take care
If I find you been creeping 'round my back stairs
Sundown, you better take care
If I find you been creeping 'round my back stairs

She's been looking like a queen in a sailor's dream
And she don't always say what she really means

Sometimes I think it's a shame
When I get feeling better when I'm feeling no pain
Sometimes I think it's a shame
When I get feeling better when I'm feeling no pain

I can picture every move that a man could make
Getting lost in her loving is your first mistake

Sundown, you better take care
If I find you been creeping 'round my back stairs
Sometimes I think it's a sin
When I feel like I'm winning when I'm losing again

I can see her looking fast in her faded jeans
She's a hard loving woman, got me feeling mean

Sometimes I think it's a shame
When I get feeling better when I'm feeling no pain
Sundown, you better take care
If I find you been creeping 'round my back stairs
Sundown, you better take care
If I find you been creeping 'round my back stairs
Sometimes I think it's a sin
When I feel like I'm winning when I'm losing again

Sun, 10/06/2013 - 08:16 | 4027358 Keyser
Keyser's picture

Love me some Gordon Lightfoot... Up arrow for you... 

 

Sun, 10/06/2013 - 12:00 | 4027641 RaceToTheBottom
RaceToTheBottom's picture

"The largest army on earth... armed Americans "

I am sorry, I don't see it.  Most Americans are either indifferent, or more likely, not able to make life and death decisions on the fly. 

The decision of whether to shoot a person or not is a highly stressful decision.  I am not sure I have any confidence that anyone will make that decision correctly with any frequency approaching 50%. 

Look at how much difficulty police have with that decision.  When the SHTF, it will only get harder.

 

Sat, 10/05/2013 - 19:32 | 4026667 Uncle Remus
Uncle Remus's picture

Wir.

Sind.

So.

Geshtup.

 

Please crawl thru.

Sat, 10/05/2013 - 19:35 | 4026671 Winston Smith 2009
Winston Smith 2009's picture

David Stockman: We Have Bubbles Everywhere! Yellen Clueless

http://www.youtube.com/watch?v=EAuP_kYrIVc

Sat, 10/05/2013 - 19:34 | 4026674 BlueCheeseBandit
BlueCheeseBandit's picture

Twilight of America would be a much better title.

Imagery fail.

Sun, 10/06/2013 - 08:19 | 4027362 Keyser
Keyser's picture

Twilight is too effeminate. More like being on a hellbound train. 

 

Sat, 10/05/2013 - 19:35 | 4026675 steve2241
steve2241's picture

As much as I like Stockman, these government-created numbers that he cites are just so many lies, damn lies and statistics.

Sat, 10/05/2013 - 19:39 | 4026682 NoWayJose
NoWayJose's picture

25 years is an interesting number, as that was the end of Reagan and Stockman. You can really point to this as a change with Bush 1 coming in and reading his lips with tax increases, more social spending and the beginning of US global war interventions. Bush 1 set the pattern for CIA and NSA expansion and big oil.

Sat, 10/05/2013 - 19:40 | 4026684 0b1knob
0b1knob's picture

Too many words, didn't read it.

The Keynesian mistake (short form):  Money DOES NOT EQUAL wealth.

Sat, 10/05/2013 - 20:41 | 4026774 tao400
tao400's picture

you should. because once you are done, you see where things are headed. you might be able to make some money in the meantime

Sun, 10/06/2013 - 08:23 | 4027365 Keyser
Keyser's picture

A better synopsis would be 

Currency does not equal money

 

Sat, 10/05/2013 - 19:40 | 4026688 J Pancreas
J Pancreas's picture

Very nice article, ZH. Pretty well spot-on too. The problem with guys like the Bernank, the Krug, etc. is that neither would read this simply because "the the people holding this thing back from working" are defined by their disagreement with a commonly held viewpoint. Give us moar debt and things would get better... Give us just 100 billion and we would take off economically, etc.

Stockman should have mentioned oil in this piece. If the country started doing what Carter wanted to do when he wanted to do it things COULD have been going differently. Oil to me is what links a lot of the problems together and the need to feed the MIC. I say "could" because I have no confidence in any politician or government figure to do the right thing. One Ron Paul was too much truth for the estrablishment to handle and the voters, ahem, sheep in this mess we call a country wanted promises handed to them without regard to the economic reality of promises presented.

Sat, 10/05/2013 - 21:45 | 4026886 W74
W74's picture

Is it any wonder why the NeoCONs don't like sustainable energy? I love it personally. It takes away the need to have our oil drug.

Now don't get me wrong, I believe people should get solar panels on their rooves and do away with the public utility conglomerates, but people should do it because it's in their economic best interests...not because the government told them to or offered subsidies to do so.

Sat, 10/05/2013 - 19:46 | 4026696 blindman
blindman's picture

nail fungus adds tell all.
we all give up,
one at a time,
and it is gone.

Sat, 10/05/2013 - 19:46 | 4026697 Jimbodude
Jimbodude's picture

Anyone with a functional brain cell and a cheap pocket calculator knows how this will all turn out.

Sat, 10/05/2013 - 19:57 | 4026710 A Lunatic
A Lunatic's picture

Rainbows, lollipops and a unicorn in every yard..........?

Sat, 10/05/2013 - 20:16 | 4026731 DrData02
DrData02's picture

Stockman for  whatever the Head Honcho is going to be after the collapse!

Sat, 10/05/2013 - 20:41 | 4026770 tao400
tao400's picture

Wow, that might be the best macro article i have ever read. Know what it means, 3 things if you are someone who doesn't have the balls to put all their money in gold, like I don't. 1. put as much money as you can in the stock market 2. hope to god you can get it out right before it crashes 3 have some gold and real assets outside the system when it does crash just in case

Sun, 10/06/2013 - 01:21 | 4027143 harleyjohn45
harleyjohn45's picture

When the market crashes, you will not be able to get out.  The algo traders will lock up the system.  I only have metals, realestate and cash. 

Sun, 10/06/2013 - 01:23 | 4027144 harleyjohn45
harleyjohn45's picture

When the market crashes, you will not be able to get out.  The algo traders will lock up the system.  I only have metals, realestate and cash. 

Sat, 10/05/2013 - 20:44 | 4026780 Paracelsus
Paracelsus's picture

Judging by the popularity of the payday loans mob around here I think most Americans are a paycheck or two behind in life.I think most non-Mormon folks have a week's worth of food or less in the household.If credit breaks down and the food distribution mechanism is halted to the major cities,this could get ugly very quickly.The Wall Street mob are like a kid with a toy,that when it is broken are going to toss the problem to the military.

The point where a state secedes is when TSHTF.This financial crisis worldwide begs the question of whether the Banking system adds any value to society...

Stockman was in command during the huge defense buildup under Reagan.People felt insecure because of the Iranian hostage slow motion train wreck.Much of that money was wasted but we are still on the hook for it.SDI,NASA,and all the aerospace stuff.

But no armored jeeps because they ain't sexy....

Sun, 10/06/2013 - 08:32 | 4027382 Keyser
Keyser's picture

ding, ding, ding, hold all calls, we have a winner. 

Stockman was part of the Reagan gang that sold out the USG to Wall Street when they de-regulated the financial industry. Just check the deficit spending that took place in Reagan's era. Comparable to today's debacle. 

http://hnn.us/article/53527

 

 

Sat, 10/05/2013 - 20:50 | 4026792 Debt Slave
Debt Slave's picture

Long read and the author labors to illustrate the rotting core of our financial/political system with excruciating detail. I suppose it is good to compose a record of accurate account.

Okay we know it's rotten. It stinks so bad that we can't imagine anyone not noticing, yet millions remain oblivious to the stench.

Intelligent people out there need to give serious thought to fundamental changes necessary to salvage what is left when this thing blows up. We need government and we need finance and what we have now is neither.

Also, people need to be educated and I'm afraid the only education that ever seems to be effective is that of suffering. People just won't pay attention until they are.

When the interest overtakes the budget, and it will, it's going to get mighty hot in the kitchen. People like ZH readers will survive. Many will not.

Sun, 10/06/2013 - 04:49 | 4027255 blabam
blabam's picture

We don't need gov. 

Sat, 10/05/2013 - 20:54 | 4026800 autofixer
autofixer's picture

I initially sent the article to a friend of mine in Brazil.  Then I thought about reading the article in Portuguese and my eyes glazed over and I sent her the following:  Os EUA e Foda-se!  The USA is fucked!   

Sat, 10/05/2013 - 20:57 | 4026802 Herdee
Herdee's picture

SunDownInAmerica.DavidStockman.

Sat, 10/05/2013 - 21:01 | 4026813 Ned Zeppelin
Ned Zeppelin's picture

This is a good way to get a summary of Stockman's book, which is a brilliant work and should be required reading for all ZHers.

Sat, 10/05/2013 - 21:02 | 4026815 RMolineaux
RMolineaux's picture

Of course, Stockman benefits from 20-20 hindsight.  And he gives little importance to the threat of CDS overhang or continuing de-leveraging.  It is a pity that the actor-president was not able to comprehend the value of Stockman's knowledge and insights, but preferred to listen to the likes of Ollie North, etc.  Stockman's criticisms of Greenspan and Bernanke are fair, but he failed to mention the Fed's failure to exercise its regulatory functions, which was one of the prime causes of the 2008 crisis. 

Sat, 10/05/2013 - 21:18 | 4026832 Debt Slave
Debt Slave's picture

Regulatory functions that are outlined in it's 1913 mandate.

Sun, 10/06/2013 - 06:05 | 4027277 Bazza McKenzie
Bazza McKenzie's picture

By "actor-president" I presume you mean the man who had served two successful terms as governor of America's then economically largest state before running for president.

Those who ignore this salient fact demonstrate either gross ignorance or dishonesty by omission.  Somehow, if at some point in your life you have been an actor, you are deemed to be less qualified to be president than a lawyer, community organiser, baseball club owner or the corrupt governor of a small state like Arkansas, even though you have successfully run the largest American political entity after the USA itself.

While Stockman's current analysis is pretty good, there is an element of self-justification relative to his time with Reagan.  As president, Reagan brought to a successful end the only twentieth century war that ever threatened the continental US, ie the Cold War during which most Americans and people throughout the West and USSR lived in perpetual fear of being destroyed in a nuclear holocaust courtesy of MAD.

No one seems to complain about the debt run up by US governments in fighting in WWI and WWII, despite the fact those two wars were wholly discretionary on the part of the US (Japan bombed the US Pacific fleet in an attempt to give itself a free hand in Asia, which the US opposed, not as a precursor to attempting any invasion of Hawaii, let alone the continental US).  Yet when Reagan fought and bloodlessly defeated the only military threat ever to the whole US population, the deficit incurred while doing so is presented as some sort of economic failure.

Sun, 10/06/2013 - 07:48 | 4027335 overmedicatedun...
overmedicatedundersexed's picture

bazza, me boy, lets play, I guess the bush family is living hand to mouth these days, the policy of CFR and Davos or what ever you understand as the power elite, has deteriorated over the the course of the last 60 years...or better yet when the FED was formed. do you think policy of off shore our jobs and wide open borders is what voters wanted or what international elite wanted? that answer will tell us all we need to know about where your bread is buttered.

Sun, 10/06/2013 - 08:34 | 4027384 Keyser
Keyser's picture

Barry has Valerie and her band of merry idiots. Why does he need Stockman or anyone with experience for that matter? /sarc

 

Sat, 10/05/2013 - 21:09 | 4026823 Hedgetard55
Hedgetard55's picture

A+ for Stockman on this summary.

 

Ben and the rest will burn in Hell for eternity.

Sat, 10/05/2013 - 21:17 | 4026833 shinobi-7
shinobi-7's picture

Great but deeply depressing. The deeper you look the more rotten it is. How do you reform a disfunctional machine? Is it even worth the effort?. As seen from outside the US, we won't have the requiem of the American Imperium sung soon enough!

Sat, 10/05/2013 - 21:40 | 4026853 Dadburnitpa
Dadburnitpa's picture

Well done, Stockman.  A nice, coherent oration.  Really do appreciate it when someone tells the truth.

Sat, 10/05/2013 - 21:35 | 4026857 Wahooo
Wahooo's picture

Cool story bro.

Sat, 10/05/2013 - 22:22 | 4026929 monad
monad's picture

The economics profession is totally bankrupt today, with every Nobel Prize winner in economics with the sole exception of Maurice Allais qualifying for commitment to a psychiatric institution. One of the reasons for the depravity of the economists is that their assigned task has always been one of mystification, especially the job of covering up the simple and brutal fact that American depressions have generally been caused by Bank of England and City of London bankers. All the mystical mumbo-jumbo of curves, cycles, and epicycles a la Schumpeter has always had the purpose of camouflaging the fact that the Bank of England bank rate was the nineteenth century’s closest equivalent to the hydrogen bomb. - Webster Tarpley

Sat, 10/05/2013 - 22:34 | 4026958 NidStyles
NidStyles's picture

So easy to just blanket everyone as the same collective, which is why collectivists get so much shit wrong. Tarpley has never been the exception.

Sun, 10/06/2013 - 12:51 | 4027706 monad
monad's picture

This blanket assertion could lead one to think you're a collectivist. Tarpley is right. 

There is voluntary collectivism and coerced collectivism, trade or exploit. T Jefferson said voluntary consent with full disclosure are paramount to our republic. Adams said this system could only work with a moral population. Unfettered capitalism allows you to invest in the improvements you approve, whereas Soetoro's tax mafia demands at gunpoint all your wealth and your life for the secret programs of his owners, who we can't even name. By action or inaction the entire federal "government" participates in this illegal war on Americans. Even LaRouche at 91 would do better.

Sun, 10/06/2013 - 18:23 | 4028525 falak pema
falak pema's picture

how would you qualify a nation state other than a "collective" wlll to live or die together.

the grasp of language is as weak as the grasp of reality for some here on ZH.

Voluntary collectivism in republic to uphold law and ethics requires people to be responsible citizens; something that died in USA; otherwise we wouldn't be where we are!

Sat, 10/05/2013 - 22:35 | 4026960 chindit13
chindit13's picture

Yes, the article was long, but the reason it was long is because he pre-empted the "but, but, but Mr. Stockman, what about...."

Government, Wall Street and K Street critics would have brought up any number of MADs had Stockman not addressed them (e.g., AIG, Lehman, Morgan Stanley, etc.).  Now I fully expect there would have been some collateral damage---for example in insurance companies and pension funds---had lots of junior and mid-level bonds been allowed to go sour in 2008/9, but that was/is inevitable, as well as being the bedrock of capitalism.  The solution to that unavoidable event, as Stockman argues, made the eventual day of reckoning far worse, and tossed in as a bonus the concept of moral hazard.

Yes, habitues of Zerohedge know all of this on the macro level, but Stockman went micro with a point and purpose, which was to obviate criticism and let critics know he's already thought of their bogus arguments, and that he anticipated their knee-jerk scaremongering.

He spared no elected officials, which pretty much guarantees all of them will ignore this, treat Stockman with even greater disdain in the future, and "fight back" by calling their K Street friends and asking if these contributors need anything else from their "employees" on Capitol Hill.

Sat, 10/05/2013 - 22:38 | 4026965 Charles Nelson ...
Charles Nelson Reilly's picture

"Instead, what is failing is the American state itself----a floundering leviathan which has been given one assignment after another over the past eight decades to manage the business cycle, even out the regions, roll out a giant social insurance blanket, end poverty, save the cities, house the nation, flood higher education with hundreds of billions, massively subsidize medical care, prop-up old industries like wheat and the merchant marine, foster new ones like wind turbines and electric cars, and most especially, police the world and bring the blessings of Coca Cola, the ballot box and satellite TV to the backward peoples of the earth."

Fucking brilliant!

Sun, 10/06/2013 - 08:38 | 4027390 Keyser
Keyser's picture

Yes, even in this lengthy piece, there are a few salient comments that strike right at the heart of the situation. At the end of the day, it appears that American's sense of exceptionalism will be their undoing.

 

Sat, 10/05/2013 - 22:40 | 4026970 tony bonn
tony bonn's picture

i hate to quibble with an otherwise sterling article; yet i must.

"...Certainly the author of the Federal Reserve Act, the incomparable Carter Glass of Glass-Steagall fame, abhorred the notion that the central bank would become a tool of Wall Street...."

this is the most fucktarded statement in the n-th degree....by very definition, the federal reserve was and is a creature of wall street and glass well knew it....he was a total tool of wall street...the federal reserve is a private banking cartel which has raped the nation endlessly over the past 100 years....its authors and practitioners should burn in hell.

Sat, 10/05/2013 - 22:46 | 4026987 bobert
bobert's picture

Tony:

Get the book.

In it Stockman points out that Carter Glass's view of the central bank was to provide liquidity only among banks. No "dual mandate."The federal reserve has morphed into something grotesque in comparison to it's original design.

Respectfully yours.

Sat, 10/05/2013 - 22:41 | 4026971 bobert
bobert's picture

The Great Deformation is Economics 101-501.

I read it with incredible amazement and thankfullness.

Stockman is a wizard.

Do yourself a favor and get the book for your library or as a legacy piece for your heirs. Serious!

Sat, 10/05/2013 - 22:43 | 4026976 SubjectivObject
SubjectivObject's picture

Ventura's fantasy Cabinet:

Ron Paul for VP

Stockman for Sec of Treasury

Black for Attorney General

 

mmmmmmmmm  I love the smell of burnt bankster in the morning .... smells like .... Victory

Sat, 10/05/2013 - 22:44 | 4026981 Purple headed w...
Purple headed warrior's picture

For fucks sake, stop using household data, its meaningless.

I will once again post a sophomore video to explain it to you

http://www.youtube.com/watch?v=wcsvAT4JT-g

Then Thomas Sowell, where his data comes from

http://www.amazon.com/Economic-Facts-Fallacies-Thomas-Sowell/dp/0465022030/

Sat, 10/05/2013 - 22:52 | 4026992 Calmyourself
Calmyourself's picture

Read every word, he confirmed much of what I knew and provided more "twelve gunslingers in london"  Wall street, crony capitalists and the other suckers of the taxpayer tit must go while maintaining a safety net for those truly in need.

The time is at hand gentleman back away from ill gotten gains and K street largesse otherwise we will need to take action.  This government should not re-open without LARGE cuts to Warfare, Welfare (mostly corp) and FIRE subsidies of all types.   Lets make it pay to manufacture in America!

Sat, 10/05/2013 - 23:04 | 4026998 Hongcha
Hongcha's picture

Well, if it is this bad and going to turn out worse, I have no better option than to focus on being part of the 20% serving the 1%.  I am certainly not going to wind up in some airless, metastisizing, diseased waiting room filling out form after form and looking for a place on the floor for my sleeping bag.

My most sanguine expectations, sprouted in 2001 after I started wising up and reading Doug Noland, Jim Sinclair, International Forecaster, Kunstler and the Chaostan guy, and others, are being borne out.  I have taken ten years to ponder this shitstorm.  I am out of debt and doing fine because those guys told me to get unleveraged and I trusted them and they were trustworthy.  That proves there are trustworthy and helpful people out there.

I know what exactly .gov is going to do, in fact mathematically has to do; methodically pluck all the leaves from whatever productive trees it still has in the meadow; until there are none left - then the thing will move on.  It cannot stop nor be stopped nor will it ever do anything but lie, so that you stand still while getting skinned.

This is exactly what is happening now and will happen until there is nothing left.  Whatever you have will be taken unless you hide it.  You have to break all the rules you can, adopt measures of hostile and total distrust of anything governrnmental past the level of your bowling league treasurer, and fuck them wherever you can.

Sun, 10/06/2013 - 04:47 | 4027253 NuYawkFrankie
NuYawkFrankie's picture

Re I have no better option than to focus on being part of the 20% serving the 1%.

 

Pssst...the 1% is goin' down - big time. 

In the aftermath, it might be best not to be regarded as having been a "collaborator" ;)

Sun, 10/06/2013 - 09:02 | 4027401 Keyser
Keyser's picture

Quite true. I am conjuring images of an angry crowd with pitch forks and torches breaking down the doors of some banker's home, with intent to drag him into the courtyard for an old-fashioned lynching. 

 

Sun, 10/06/2013 - 17:48 | 4027008 ToNYC
ToNYC's picture

Sundown for Financial syndickation. Masks will be required.

Sun, 10/06/2013 - 00:19 | 4027084 Dork
Dork's picture

1

Sun, 10/06/2013 - 00:15 | 4027086 Dork
Dork's picture

Very detailed article from all angles, BUT no mention of U.S. CORPORATE manufacturing abandonment/ divorce from the U.S. into the 3rd world and the permanent long-term economic effects thereof upon the U.S.

Sun, 10/06/2013 - 05:59 | 4027269 Pay Day Today
Pay Day Today's picture

I don't see how "supply side economics" has anything to do with Keynes, while in this write up Milton Friedman, the Chicago School, and the monetarists, get away scot free from this mess.

Keynes would say that a lack of income in the mass portion of the population is ineveitably going to crash aggregate consumer demand and lead to economic stagnation.

Which is exactly what we see happening.

Sun, 10/06/2013 - 08:08 | 4027351 Notarocketscientist
Sun, 10/06/2013 - 08:44 | 4027394 Mareka
Mareka's picture

Stockman for Fed chairman!

Sun, 10/06/2013 - 08:46 | 4027395 Notarocketscientist
Notarocketscientist's picture

Guns Ammo Gold Xanax - I am ready

Sun, 10/06/2013 - 09:08 | 4027409 MarcusLCrassus
MarcusLCrassus's picture

But if we keep cutting taxes for the super rich, then it will trickle down and we'll all be rich. 

Sun, 10/06/2013 - 09:40 | 4027438 buckethead
buckethead's picture

"Banks have been heading skyward, as well.  The top six Wall Street banks in 1989 had combined balance sheet footings of $0.6 trillion, representing 30 percent of the industry total. Today their combined asset footings are 17 times larger, amounting to $10 trillion and account for 65 percent of the industry."

Small paragraph, largest cotnent.

Sun, 10/06/2013 - 10:35 | 4027496 RaceToTheBottom
RaceToTheBottom's picture

Looking back at how this could have happpened differently, you would have had Stockman in some conference room of the WH with all the ex GS Banksters, the Bernank, the Greenspam for window dressing, etc on the other making their case to the President.  I would have loved for that to happen.  It would have taken a strong man to go against all that but Stockman would have loved to make the argument.

We need to take away the role of WS Bankster as advisor and the only way to do that is to remove fractional lending fromt he equation so trust of WS Banksters becomes less of a need.  Notice I said trust of us by the WS, banksters, We don't need and will never have trust of the WS Banksters by us.

Sun, 10/06/2013 - 10:42 | 4027507 RaceToTheBottom
RaceToTheBottom's picture

BTW, Tyler, great choice of photograph to accompany this article

Sun, 10/06/2013 - 15:03 | 4027578 withglee
withglee's picture

 Certainly it did not involve worrying whether the inflation rate was coming in below 2 percent---the current inexplicable target of the Fed which Paul Volcker has rightly pointed out amounts to robbing the typical laboring man of half the value of his savings over a working lifetime of 30 years.

INFLATION should be zero at all times and in all places with a properly managed Medium of Exchange (MOE).

Recognizing that "money" is "a promise to complete a trade", you quickly realize that none of the issues brought forward in this article can exist with a properly managed Medium of Exchange (MOE).

First, about money being a promise to complete a trade: Examining trade we see there are three steps: (1) Negotiation, (2) Promise to trade, (3) Delivery. In simple barter, (2) and (3) happen simultaneously on the spot. Money allows (2) and (3) to take place over time and space. This is typically called "financing".

So it is traders who create money by making trading promises. All the MOE manager does is "certify" those trading promises. These certificates (in the form of coin, currency, or accounting entries) freely trade in the marketplace. The traders have confidence in being able to use them in multi-stage trades without their changing value. At this stage, the trade of these certificates is actually simple barter. The certificates have become something of actual value in and of themselves even though you can't eat them or make anything out of them.

Why do traders have this confidence? Because proper management of the MOE guarantees zero INFLATION at all times everywhere.

How is this possible? Well, the MOE manager keeps track of the trading promises he has certified. The trader needs to return the certificates as agreed when he completes his trade. The MOE manager then extinguishes these certificates. If the trader does not deliver (i.e. DEFAULTS), the MOE manager must reclaim those certificates through INTEREST collections. These INTEREST collections exactly equal the DEFAULTs he measures. The governing relation is:

INFLATION = DEFAULT - INTEREST

So, even though the MOE manager can never know what inflation is if it is not zero, he can easily guarantee it to be zero. And that's what the traders and the marketplace want to see.

Knowing this, read the article again and observe how silly all this manipulation is. It's like reading about the universe before Copernicus.

Todd Marshall
Plantersville, TX

Sun, 10/06/2013 - 11:27 | 4027580 falak pema
falak pema's picture

Correction : Oligarchy crony capitalist "state wreck" to protect the 1% at the expense of the 99%.

The men who pull the strings behind the curtain are the private Oligarchs who run the state via front men; both blue and red. 

Neo-Keynesianism today does NOT serve the same power structure, the Oligarchy muscle, as then under FDR : then,  the state was a bureacracy that DEFIED the Oligarchy in the face of general economic demise of great depression; product of Oligarchy greed gone mad under Harding-Coolidge-Hoover under spell of super Oligarchy member and mouthpiece, Andrew Mellon.

Today, Ben's form of neo Keyniasism is state subservience to the interests of the 1% Oligarchs, all the while keeping an eye on the constituency of old populist democratic power base; the Obamacare entitlements substrata; the new phony concoction of Clintonian/Blair social democracy, of trying to reconcile two extremes of society; all the while  truly sucking the teat of deregulated shadow banker Oligarchy in Thatcher-Reagan NWO framework, to get rich on the side (Clinton and Blair have never made so much money as once OUT of office having played their surrogate role for the Oligarchs). 

THe state wreck is not socialism led, its private monopoly oligarchy led.

Cause and effect do not mean the same thing as if it were Stalin or Mussolini led; aka pure state fascism plays. 

HERE WE ARE IN A RABID RETURN TO CAPITALIST ARISTOCRACY AS NEVER BEFORE. Back to the feudal age! 

Do not get your premise wrong as the whole argument then becomes a phony song

History always bites back the negationists and deviationists with a historically false agenda! 

Sun, 10/06/2013 - 11:39 | 4027594 SpectateSwamp
SpectateSwamp's picture

The common man / woman know what happened. We were sold out and offshored by the rich. The politicians are all corrupt. Everyone of them.

I have ran in 2 elections this year. And will run in every one that comes up. I came in last each time. It gives me a chance to out the Chamber of Commerce and their election rigging ways.

 

http://www.youtube.com/watch?v=TwFvH4Za_B4

Sun, 10/06/2013 - 22:20 | 4027636 KrisArmani
KrisArmani's picture

An absolutely brilliant account of the shenanigans of the government, fed and financial fraudsters. Although a lot of it is has been recounted by others, I thoroughly enjoyed the lucidity and comprehensiveness of this analysis. Congratulations.

Sun, 10/06/2013 - 12:27 | 4027677 colion
Sun, 10/06/2013 - 14:55 | 4028014 moneybots
moneybots's picture

"In short, Bernanke’s depression call was reckless and uninformed."

 

No, we are in a depression, with 47 million on food stamps and still 10% real unemployment, four years after the end of a recession.

Sun, 10/06/2013 - 19:22 | 4028687 nonplused
nonplused's picture

word bro.

Sun, 01/12/2014 - 15:35 | 4325071 Akrunner907
Akrunner907's picture

One of the more rational comments from Stockman, but given his past and poor performance running Heartland Industries......check the numbers.

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