Friday, September 30, 2011

Great David Stockman Interview

A great interview of Reagan's former head of the OMB.  It's long but read or listen to the whole thing.  Here is a key excerpt:

Chris Martenson:  You know, I think that this most recent Fed announcement, which just came out on September 22nd, I guess, or 21st, and it was around Operation Twist. That was a real disappointment to Wall Street. I think we're seeing that on some of our screens today and yesterday, obviously, and maybe across the world. So maybe they did get a little bit of the message that, you know, you talked about some of the political and social risks that exist in this. I'd like to talk a bit about the economic and financial or monetary risks that occur. And I don't really ascribe to any particular school of economics, but there is one quote from Ludwig Von Mises of the Austrian school that does stick with me because it rings true. And that quote is that, "There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved." I can't find a lot of fault in that. I've analyzed that statement a lot, and it feels like we're fully down that path at this point in time. What are the financial and -- particularly the ones I'm most concerned with here -- the monetary risks that you see in our current trajectory?

David Stockman:  Well, there are big risks. But I think that quote is spot on. It was never more applicable than to our recent past. And it's important to dwell on it, to focus on it, because the reason we have this crazy thrashing about by the Fed today, and by Washington with the front door stimulus, the back door stimulus, the absurdity of one-year tax holidays on payroll taxes that we desperately need, and so forth, is there is not a proper understanding of what caused the crisis in the fall of 2008, what caused the meltdown. And the answer is, it grew out of the preceding unsustainable reckless boom, exactly as Mises said. And as a result of failing to understand that, we have an implicit theory, which I think is remarkable in the mainstream of Keynesian policy makers or just politicians who would like to help, and that is that they don't know where this crisis came from.

It was like a one-in-a-hundred-year flood; maybe it was a contagion that came in on a comet from deep space. But they have no explanation for it; it was bad luck. It hurt us so now let's dig our way out and use the balance sheet of the Fed, the balance sheet of the federal government to compensate until we get back to normal. Well, that's absolutely wrong, that we're in a depressed economy right now because in 2003, -4, -5, and -6 and -7, we had an overheated bubble economy that wasn't real, wasn't sustainable, that created millions of jobs based on the margin credit extensions that couldn't be sustained. And all of that was taken back by Mr. Market in 2007 and 2008 when the first debt liquidation started. And therefore, we're totally on the wrong track, if we're trying to restore demand that was never honest demand, or legitimate demand based on earned income and production in the first place.

And that fundamental issue is why policy has gone off the deep end and become so dangerous. Because now, they're just pouring gasoline on the fire, as I think we all believe. Why would they think at the Fed that with the economy as sick as it is, the housing market as damaged as it is, that if you could get thirty basis points more on the long-term mortgage rate that somehow this is going to make everything better? And Operation Twist is, I would say, further evidence of ritual incantation. The Fed is so locked into this erroneous Keynesian world view that it's indulging in a ritual incantation just doing the same thing over and over and over, when almost anyone who thinks about it can see why twenty or thirty basis points -- if they can get that from Operation Twist -- [would] solve anything that the last four or five hundred basis points of interest rate reduction haven't solved, and what are the negative consequences of going in and manipulating and distorting the fundamental capital market of the world for thirty basis points? It's not even a close question. It's an evidence that they're locked into almost insane policy making.

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