It is the scariest thing I have read in a long time. Unfortunately, it is hard to argue with much of the message it contains. The “it” is a recent Associated Press interview with David Stockman, Ronald Reagan’s “whiz kid” budget director. Stockman, now 65, made headlines back then by pushing first for what was at the time the largest tax cut in history and then later resigning to protest excessive levels of deficit spending.
So how does one of the sharpest fiscal minds that ever served in government see the current state of fiscal policy? In a word: depressing.
In the interview, Stockman points to a problem that everyone in government talks about but few stand up to, that being our unsustainable levels of debt. In saner times, Stockman points out that both the public and private sectors would borrow between $1 to $2 to create a dollar of real GDP growth. It is no coincidence, according to Stockman that, on the eve of the 2008 financial market meltdown, the public and private sectors were borrowing six dollars to generate a single dollar of GDP growth. High credit card debt and multiple home mortgages were fueling the “recreational” economy geared more toward dining out and leisure activities than business start ups and strategic investments with surplus money. When the economy burped, the debt-fueled spending headed for the sidelines. In Stockman’s words: “It wasn’t sustainable. It wasn’t real consumption or real income. It was bubble economics.”
Some of Stockman’s most biting criticisms in the interview were directed at the policies of the current Federal Reserve Board under the leadership of Ben Bernanke:
“The Fed is a patsy. It is a pathetic dependent of big Wall Street banks, traders, and hedge funds. Everything it does is designed to keep this rickety structure from unwinding. If you had a Paul Volcker running the Fed today—utterly fearless and independent and willing to scare the hell out of the market any day of the week—you wouldn’t have half, you wouldn’t have 95 percent, of the (speculation) going on.”
It is hard for ordinary folks who would like for their investments to be safe to argue with that assessment. Bernanke and his accomplices have pounded the dollar with their “liquidity” moves in order to drive investments away from savings accounts and CDs (currently with near negligible rates of returns) and into the equity markets. To some extent, the Fed has accomplished its objective (though many smaller investors have gone the gold route in lieu of the market). If Stockman is correct, those seeking the higher rates of returns in the stock market may soon have a big quarrel coming with Bernanke and the “wise elders” at the Fed.
Stockman’s recipe for correcting the current fiscal problems will not be popular with either the Left or the Right:
“We have to eat our broccoli for a good period of time. And that means our taxes are going to go up on everybody, not just the rich. It means we have to stop subsidizing debt by getting a sane set of people back in charge of the Fed, getting interest rates back to some kind of level that reflects the risk of holding debt over time. I think the federal funds rate ought to be 3 percent or 4 percent. I mean, that is normal in an economy with inflation at 2 percent or 3 percent.” Stockman also believes strongly that entitlement spending must be brought under control if entitlements are to survive.
Reagan’s former budget director has a new book coming out entitled “The Triumph of Crony Capitalism.” It is his answer to the bailout mentality in the federal government today and the perverse practice of having the government pick winners and losers in the economy. In Stockman’s world view, if federal fiscal policy doesn’t change soon, there will be few winners for the federal government to pick.