David Stockman, the onetime whiz-kid who was President Reagan’s first budget director, alternatively amused, appalled, and alarmed a Chicago Council audience Tuesday evening with a “tirade” – his word – about a “crazy” Federal Reserve Bank and its role in a coming financial collapse.
Stockman, now 67 and white-haired, decried a catalogue of sins against capitalism by past politicians and economists. But he focused his polemic on the Fed – “the monetary politburo” guilty of “the most massive usurpation of power in recorded history.” At its birth, he said, it financed an “unnecessary” First World War that led to the Great Depression. Today, he said, it is a “rogue central bank” accumulating unmanageable debt that is “wrecking the financial system of capitalism.”
“I don’t drink the Kool-Aid,” Stockman said. “I don’t think anything of what the Fed is doing makes sense. I think we’re on the verge of another huge bubble collapse.”
Basically, he said, the Fed should just stop what it’s doing – stop trying to stimulate the economy or lower unemployment and, especially, stop intervening in the bond markets.
“Tell him to go back to Princeton,” Stockman said, referring to Fed Chairman Ben Bernanke. “You’ve got your man here, Evans (Charles L. Evans, president of the Chicago Fed.) Tell him to go back to Nebraska on the John Deere tractor he came in on.”
Stockman spoke in a conversation with Council Senior Fellow Michael Moskow, who, as the former Chicago Fed president and Evans’ predecessor, made it clear that he disagreed with Stockman, on the Fed and on many other issues.
Stockman was a controversial director of the office of management and the budget in the first Reagan administration. He was best-known as a supply-side zealot who got in trouble with Reagan for telling a reporter that “none of us really understands what’s going on with all these numbers.” He resigned half-way through Reagan’s first term, wrote a book on “why the Reagan Revolution failed,” and has since been an investment banker, with mixed results.
Stockman was here to promote his new book, The Great Deformation: The Corruption of Capitalism in America, which Moskow called “718 pages of tirade” and “not a weekend read.”
Stockman is a free-market fundamentalist, scornful of both Milton Friedman and John Maynard Keynes. Armed with a Niagara of facts, figures, and assertions, he made these points:
- “We’re swamped in debt,” up to 3.6 times the gross domestic product. Former Fed Chairman Alan Greenspan created some of this debt “and Bernanke doubled down on the whole thing.”
- The government shouldn’t try to limit unemployment. In recessions, “the market will decide,” by pushing wages so far down that unemployed people can find jobs. “People would have a lower standard of living, no doubt.”
- The world’s bond markets “are a huge ticking time bomb” that are sure to explode.
- Federally-backed deposit insurance on bank deposits “is one of the great public policy disasters of the 20th century” and should end. Without such insurance, savers would force their banks to follow solid practices. “Banks are dangerous institutions,” he said: since their deposits are insured, they have no incentive to avoid gambling with depositors’ money. “If banks want to be high rollers, there should be no federal backing, no TARP bailouts,” he said. “If you blow up, you blow up – and that’s what capitalism is all about.”
- The United States should return to the gold standard. The then Fed chairman, “pipe-smoking Arthur Burns,” backed by Friedman, persuaded President Nixon to end the Bretton Woods agreement in 1971, dropping the dollar’s link to gold. This “opened a Pandora’s box that led to mission creep (by the Fed) and irrational exuberance.” Moskow objected that the Fed has evolved over the years, with Congressional approval, to take on new responsibilities in a complex economy. “It didn’t evolve,” Stockman replied. “It was mission creep.”
- The Fed’s current policy of low interest rates only inflates financial assets, especially in the stock market, which is a “huge boon to the one percent” – the richest Americans. The Fed’s creation of liquidity just floods Wall Street with money, “and it never gets out of Wall Street.”
- Close down Fannie Mae and Freddie Mac: “all they do is subsidize interest rates for the middle class but create an enormous moral hazard.”
- Government-sponsored health insurance, like deposit insurance, is a “moral hazard” that only encourages bad health habits. Without it, he said, “consumers would have the same prowess that has made Walmart what it is today.”
Moskow noted that only six of the 718 pages in Stockman’s book deal with solutions. He asked Stockman where he is investing his money now, since he sees a crash coming.
“Put it in a mattress,” Stockman said. With the Fed “condemning us to a life of speculation,” it’s best to “keep your money in cash.”