'The Single Most Drastic Error in Policy in Modern History'

PBS Newshour has posted a brief but fascinating interview with David Stockman, Director of the Office of Management & Budget during the Reagan era. Despite -- or, perhaps, because of -- his political and financial industry background, he pulls few punches in his remarks about the financial crisis and its aftermath. Here are a few excerpts:

On the relationship between Wall Street and Washington --

DAVID STOCKMAN: ...we have gotten into this syndrome, I think, over the last 20 years, where policy of the Treasury and of the Fed has been dictated by Wall Street, that, if Wall Street threatens to have a hissy fit, or the stock market is going to go down, the Fed has basically capitulated and is creating a very unstable and dangerous financial system in our economy.

On the AIG bailout --

DAVID STOCKMAN: The fact is, the heart of the bailout was AIG. That was $80 billion worth of CDS that was going to go sour.

[PBS Newshour business and economics correspondent] PAUL SOLMAN: CDS meaning?

DAVID STOCKMAN: Credit default swaps, OK? And we weren't bailing out AIG. We were bailing out the banks, because the banks had bought a lot of low-caliber or subprime loans, wrapped some insurance around it from AIG, and said, presto, we have a AAA, a security on our balance sheet.

They didn't. They had garbage on their balance sheet. And the bailout was to make sure that they didn't suffer multi $10 billion write-downs on that AIG-supported loan.

PAUL SOLMAN: So, if you had been in the administration after Lehman Brothers, you wouldn't have supported bailing out AIG?

DAVID STOCKMAN: No, absolutely not. It was the single most, you know, drastic error in policy in modern history, going back to the 1930s. This was exactly the wrong thing to do.

It's destroyed any basis for fiscal discipline in the United States. I was a member of Congress, and I know how they think. And they think by analogy. If you did it for John, you have got to do it for Bob. There is no way that any congressman is ever going to vote against farm subsidies or ethanol subsidies or housing subsidies or anything else, refrigerator subsidies, once we have made this tremendous bailout for Wall Street, and we stepped into AIG.

On the outlook for tax rates --

DAVID STOCKMAN: I think the lesson of the last 25 years is that it doesn't work. You can keep cutting taxes until you reach the point where this year -- or the year just ended, we spent $3.6 trillion, and we only collected $2.2 trillion.

So, we are now so far out of kilter that it's irrelevant. Taxes are going to have to be raised. And the beast needs to be trimmed back. But it can't be starved enough to even begin to cope with our fiscal problem. And this is where I think all the politicians are faking in both parties, but the Republicans especially.

The Republicans think their mission in life is to cut taxes. Sorry, game -- game over. We're now in the tax-raising business. And we're going to be in the tax-raising business for the next decade.

To read the full transcript, click here.

Otherwise, here is the video:

Comments

[Lewis]

Stockman has nothing to lose by telling it straight. We need a Congress that has the backbone to do the right things instead of focusing on reelection by posturing to make the other side look bad. We need leadership willing to sell us on the sacrifices necessary to get us out of our economic problems.

[Otto Maddox]

We must raise taxes?? Has Stockman become a Democrat?

[Robert Hurst]

Even a democrat wouldn't say that, if they wanted to get reelected or elected.

Stockman can say it because he's not in govt. any more.

Our system has failed rather spectacularly.

Robert
industrializedcyclist.com

[sparkylab]

That was refreshing. Spoken like someone who was on the inside of the machine, seen how it works/thinks, and is now free to speak (and wealthy enough not to be conflicted). I think the scale of the deficit and its implications are barely being spoken about in DC and on MSM. Pols are still sticking to their traditional left/right talking points. Massive tax increases and massive cuts in government are basically unavoidable at this point IMO unless the current 'hail-mary pass' strategy of bailouts/housing subsidies/stimulus doesn't kick-start the consumption economy again.

And well, its not looking good, is it?

[Blissex]

«Even a democrat wouldn't say that, if they wanted to get reelected or elected. Stockman can say it because he's not in govt. any more.
Our system has failed rather spectacularly.»

That's quite wrong indeed -- the system is working very well.

The voters want high spending and low taxes, and redistribution of income and wealth from the parasitical workers to the hero property owners, and they are getting exactly what they want, as Congress indeed "wanted to get reelected or elected"; democracy is working as it should.

The problem with the USA is not at all the "system", which is mostly working, it is the voters, who are mean and stupid, and they are going to get what they deserve.

[Marion Shaw]

One facet of our national financial crisis is that
our leadership and banks and brokerage firms have
become addicted to war; weapons development; weapons
exports; sub=prime military contracting, where the
salaries are high, the benefits low and the deals are
sweet. Has anyone even attempted to determine the number of foreign sub-contractors working for the US
military in the Middle East? Just look at Obama's
budget; our ongoing adventurism will leave us stranded in
the mud and snow, just like Napoleon's army in retreat
from Russia. Our military international global corporation is the beast sucking up all the capital;
what's left of it. What do we get in return?

[dearieme]

In 1988 I read Stockman's book about his years in the Reagan administration. It was fascinating, and he was a good enough historian to put the arguments of his opponents in the administartion with clarity and force. Anyone who wants to balance the budget really ought to read it.

[weinerdog43]

OMG! An honest Repub! Rare as hen's teeth.

[RoyBeans]

California has tried the Stockman solution, raise taxes but it did not work. California and another couple of states will soon be crushed. Even at the second highest percentage per capita of taxes : 10%+ income tax, 10% sales tax, and high property taxes since most California property has been resold in the last 5 years when property costs were sky high so the 1% maximum tax was still a high monthly payment usually $4-5 hundred a month PLUS the local add ons. Still on top of all this the Democrats think the answer to our states problem is the crushing need for more taxes. We have so many fundamental problems that simply electing better people won’t solve anything. Too much has been built into the system. Like addicts we must hit bottom first.

Unfortunately for David Stockman, government is more than a balance sheet. There is emotion, greed, expectations, and raw ambition for power.

Raise taxes and they raise spending, it is circular.
There are union contracts with some of the wages inappropriately spent and these members certainly don't want to reduce their pay. There are programs that do some "good" and the recipients of those programs and the administrators don't want their moneys cut. All of these will fight tooth and nail for their funds and slaughter legislators that suggest cutting "their" monies. There is some wasted and some fraud but touching these programs is like taking a chick from a hen. But we voted for these things or at least for politicians that promised this stuff. Clinton, Bush, Obama, and state politicians all had laundry lists of "stuff" they promised us and like Nancy Pelosi we bounced up from our chairs with plastic smiles and cheered with every item promised.

No movement goes forever, times they are a changing. The huge drop in Consumer credit was seen as a bad thing for the economy but it is part of tectonic shift in economic culture. The Tea Party movement is more about too much spending than anything else and it is symptomatic of the change that is just beginning to take place.
My great aunt used to talk of how everybody in 1929 got in on the Real Estate boom, even her and her brother. If you knew her, you would be amazed, she saved even used paper napkins for reuse. They bought some property thinking to develop it (I think she was in College) but with the crash of the market they lost more than everything and so started a new way of life (frugality) for a lifetime. I believe the same thing is happening to the country now, one more time. In time even politicians will come to be frugal. 123 Trillion dollars in debt and unfunded liabilities. They really have no other choice.

[Steve Roth]

Stockman gets that one almost right. The most drastically disastrous policy mistake in modern history was...the adoption of Reaganomics under Stockman.

He admits as much in the interview. Transcribed (with a bit of commentary of my own) here:

http://www.asymptosis.com/david-stockman-on-starving-the-beast-game-over.html

[Paul from Texas]

Where I think that Stockman is wrong is his failure to address the spending side. How is it that he can recommend increasing taxes (which, necessarily, will reduce future economic output and jobs growth) without saying, "But we also need to drastically reduce spending" ???

If we simply reduce spending to levels that existed in 2006 or 2007 and freeze it there for a couple of years, the deficit would go down immediately and probably be balanced within 3 - 5 years; more to the point, a giant signal would be sent to both the businesses of this country and to the world's financial markets. Stability would ensue if someone (or 536 someones, particularly including the guy living at 1600 Pennsylvania Avenue) actually addressed the critical problem with our budget: spending. Revenue has always gone up year-to-year (the present year being a big exception), but spending has virtually always gone up faster than revenue - and over periods of 5 and 10 years there are no exceptions in post-WW2 history.

Control the spending, and you solve the budget problem. Increase taxes, and you'll guarantee higher unemployment for longer periods of time - because it increases the cost to hire workers. Industry will, to the extent it still has product to sell, will accelerate its shift of jobs out of this country to China, Mexico, etc.