DAVID STOCKMAN: We've Been Lied To, Robbed, And Misled

http://www.businessinsider.com/david-stockman-weve-been-lied-to-2013-3

Then, when the Fed’s fire hoses started spraying an elephant soup of liquidity injections in every direction and its balance sheet grew by $1.3 trillion in just thirteen weeks compared to $850 billion during its first ninety-four years, I became convinced that the Fed was flying by the seat of its pants, making it up as it went along. It was evident that its aim was to stop the hissy fit on Wall Street and that the thread of a Great Depression 2.0 was just a cover story for a panicked spree of money printing that exceeded any other episode in recorded human history.


David Stockman, The Great Deformation


David Stockman, former director of the OMB under President Reagan, former US Representative, and veteran financier is an insider's insider. Few people understand the ways in which both Washington DC and Wall Street work and intersect better than he does.

In his upcoming book, The Great Deformation: The Corruption of Capitalism in America [37], Stockman lays out how we have devolved from a free market economy into a managed one that operates for the benefit of a privileged few. And when trouble arises, these few are bailed out at the expense of the public good.

By manipulating the price of money through sustained and historically low interest rates, Greenspan and Bernanke created an era of asset mis-pricing that inevitably would need to correct. And when market forces attempted to do so in 2008, Paulson et al hoodwinked the world into believing the repercussions would be so calamitous for all that the institutions responsible for the bad actions that instigated the problem needed to be rescued -- in full -- at all costs.

Of course, history shows that our markets and economy would have been better off had the system been allowed to correct. Most of the "too big to fail" institutions would have survived or been broken into smaller, more resilient, entities. For those that would have failed, smaller, more responsible banks would have stepped up to replace them - as happens as part of the natural course of a free market system:

Essentially there was a cleansing run on the wholesale funding market in the canyons of Wall Street going on. It would have worked its will, just like JP Morgan allowed it to happen in 1907 when we did not have the Fed getting in the way. Because they stopped it in its tracks after the AIG bailout and then all the alphabet soup of different lines that the Fed threw out, and then the enactment of TARP, the last two investment banks standing were rescued, Goldman and Morgan [Stanley], and they should not have been. As a result of being rescued and having the cleansing liquidation of rotten balance sheets stopped, within a few weeks and certainly months they were back to the same old games, such that Goldman Sachs got $10 billion dollars for the fiscal year that started three months later after that check went out, which was October 2008. For the fiscal 2009 year, Goldman Sachs generated what I call a $29 billion surplus – $13 billion of net income after tax, and on top of that $16 billion of salaries and bonuses, 95% of it which was bonuses.

Therefore, the idea that they were on death’s door does not stack up. Even if they had been, it would not make any difference to the health of the financial system. These firms are supposed to come and go, and if people make really bad bets, if they have a trillion dollar balance sheet with six, seven, eight hundred billion dollars worth of hot-money short-term funding, then they ought to take their just reward, because it would create lessons, it would create discipline. So all the new firms that would have been formed out of the remnants of Goldman Sachs where everybody lost their stock values – which for most of these partners is tens of millions, hundreds of millions – when they formed a new firm, I doubt whether they would have gone back to the old game. What happened was the Fed stopped everything in its tracks, kept Goldman Sachs intact, the reckless Goldman Sachs and the reckless Morgan Stanley, everyone quickly recovered their stock value and the game continues. This is one of the evils that comes from this kind of deep intervention in the capital and money markets.

Stockman's anger at the unnecessary and unfair capital transfer from taxpayer to TBTF bank is matched only by his concern that, even with those bailouts, the banking system is still unacceptably vulnerable to a repeat of the same crime:

The banks quickly worked out their solvency issues because the Fed basically took it out of the hides of Main Street savers and depositors throughout America. When the Fed panicked, it basically destroyed the free-market interest rate – you cannot have capitalism, you cannot have healthy financial markets without an interest rate, which is the price of money, the price of capital that can freely measure and reflect risk and true economic prospects.

Well, once you basically unplug the pricing mechanism of a capital market and make it entirely an administered rate by the Fed, you are going to cause all kinds of deformations as I call them, or mal-investments as some of the Austrians used to call them, that basically pollutes and corrupts the system. Look at the deposit rate right now, it is 50 basis points, maybe 40, for six months. As a result of that, probably $400-500 billion a year is being transferred as a fiscal maneuver by the Fed from savers to the banks. They are collecting the spread, they've then booked the profits, they've rebuilt their book net worth, and they paid back the TARP basically out of what was thieved from the savers of America.

Now they go down and pound the table and whine and pout like JP Morgan and the rest of them, you have to let us do stock buy backs, you have to let us pay out dividends so we can ramp our stock and collect our stock option winnings. It is outrageous that the authorities, after the so-called “near death experience" of 2008 and this massive fiscal safety net and monetary safety net was put out there, is allowing them to pay dividends and to go into the market and buy back their stock. They should be under house arrest in a sense that every dime they are making from this artificial yield group being delivered by the Fed out of the hides of savers should be put on their balance sheet to build up retained earnings, to build up a cushion. I do not care whether it is fifteen or twenty or twenty-five percent common equity and retained earnings-to-assets or not, that is what we should be doing if we are going to protect the system from another raid by these people the next time we get a meltdown, which can happen at any time.

You can see why I talk about corruption, why crony capitalism is so bad. I mean, the Basel capital standards, they are a joke. We are just allowing the banks to go back into the same old game they were playing before. Everybody said the banks in late 2007 were the greatest thing since sliced bread. The market cap of the ten largest banks in America, including from Bear Stearns all the way to Citibank and JP Morgan and Goldman and so forth, was $1.25 trillion. That was up thirty times from where the predecessors of those institutions had been. Only in 1987, when Greenspan took over and began the era of bubble finance – slowly at first then rapidly, eventually, to have the market cap grow thirty times – and then on the eve of the great meltdown see the $1.25 trillion to market cap disappear, vanish, vaporize in panic in September 2008. Only a few months later, $1 trillion of that market cap disappeared in to the abyss and panic, and Bear Stearns is going down, and all the rest.

This tells you the system is dramatically unstable. In a healthy financial system and a free capital market, if I can put it that way, you are not going to have stuff going from nowhere to @1.2 trillion and then back to a trillion practically at the drop of a hat. That is instability; that is a case of a medicated market that is essentially very dangerous and is one of the many adverse consequences and deformations that result from the central-bank dominated, corrupt monetary system that has slowly built up ever since Nixon closed the gold window, but really as I say in my book, going back to 1933 in April when Roosevelt took all the private gold. So we are in a big dead-end trap, and they are digging deeper every time you get a new maneuver.

 

Lefties like to trot out Stockman quotes when it suits them.

Lefties are anti-capitalist and basically misrepresent the truth that we're not practicing capitalism.

Stockman and this article nail it. We'd have been better off letting the banks sort out their own finances and that our elected and unelected officials have bastardized free markets into managed markets whose functions are to keep those in power in power and favor their friends and donors.

 

It would take a number of nations to try to buy up all the USA's gold. The USA's GDP (in gold) would be 25% to 33% of the entire world's.

If they did try to buy all the gold, they wouldn't be selling us goods, which would kill their economies.

If they sell us goods, then we take in yen for our cars (or whatever) and trade those yen back to the Japanese for dollars. There never really was much of an exchange of paper for gold. Just trading of our paper for theirs.

What the gold standard would do is limit the number of dollars we could have is all.

 

The price of gold would be $1800+ an ounce, not $35. Maybe more like $5000 an ounce.

We were on the gold standard for centuries without some "investors" buying up all the gold. I don't see how it could happen if we went back on the gold standard.

What I do see happening is a pretty massive deflation in prices of things, then the truly valuable things will increase in price over time.

There's not a fixed amount of gold. There are mining companies digging up more all the time...

 

We don't trade gold for yen. So the Japanese would have to sell us stuff to get dollars. Those dollars could be converted to gold, I suppose. But any yen we take in, we'd give them back in exchange for dollars before we gave them any gold.

Consider right now there are $1.28 euro to the dollar. That's a 28% discount on anything they buy here. We're going to be taking in a lot of euros for goods we make vs. us somehow sending them dollars to convert to gold.

See?

 

We buy a bunch of Japanese cars. They get dollars from us. They buy a bunch of Boeing planes from us. We get yen. We trade them yen for dollars, not gold for dollars.

 

It was illegal to own gold from 1933 to 1971.

 

He's arguing for capitalism in this article. That's not going to be popular with Obama sycophants.

 

He doesn't mention Reagan or GHW Bush policies.

More like he talks about how FDR fucked over the economy for perpetuity (see the last sentence in the article?) and how W didn't correct for the asset bubble creating fiscal policies instituted under Clinton.

 

I write frequently that Nixon taking us off the gold standard was the doom of the middle class. No president or congress, of either party, can overcome the gradual effect of inflation on anyone who doesn't get continuous pay raises to make up for it. I don't think the system is particularly corrupt because we're off the gold standard, though. It's just stupidly insane policy.