David Stockman, former White House budget director under President Ronald Reagan, who resigned from that administration over deficit spending tells Bernard Condon of The AP in USA Today tate the USA is headed for a financial disaster that will make the Lehman Bros. collapse in 2008 look like a walk in the park!
David Stockman economy Q&A: Economic disaster in the works
Q: How does it end?
A: At some point confidence is lost, and people don't want to own the (Treasury) paper. I mean why in the world, when the inflation rate has been 2.5% for the last 15 years, would you want to own a five-year note today at 80 basis points (0.8%)?
If the central banks ever stop buying, or actually begin to reduce their totally bloated, abnormal, freakishly large balance sheets, all of these speculators are going to sell their bonds in a heartbeat.
That's what happened in Greece.
Here's the heart of the matter. The Fed is a patsy. It is a pathetic dependent of the bigWall Street banks, traders and hedge funds. Everything (it does) is designed to keep this rickety structure from unwinding. If you had a (former Fed Chairman) 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%, of the speculative positions today.
Q: You sound as if we're facing a financial crisis like the one that followed the collapse of Lehman Bros. in 2008.
A: Oh, far worse than Lehman. When the real margin call in the great beyond arrives, the carnage will be unimaginable.
Q: How do investors protect themselves? What about the stock market?
A: I wouldn't touch the stock market with a 100-foot pole. It's a dangerous place. It's not safe for men, women or children.
Q: Do you own any shares?
A: No.
Q: But the stock market is trading cheap by some measures. It's valued at 12.5 times expected earnings this year. The typical multiple is 15 times.
A: The typical multiple is based on a historic period when the economy could grow at a standard rate. The idea that you can capitalize this market at a rate that was safe to capitalize it in 1990 or 1970 or 1955 is a large mistake. It's a Wall Street sales pitch.
Q: Are you in short-term Treasurys?
A: I'm just in short-term, yeah. Call it cash. I have some gold. I'm not going to take any risk.
Q: Municipal bonds?
A: No.
Q: No munis, no stocks. Wow. You're not making any money.
A: Capital preservation is what your first, second and third priority ought to be in a system that is so jerry-built, so fragile, so exposed to major breakdown that it's not worth what you think you might be able to earn over six months or two years or three years if they can keep the bailing wire and bubble gum holding the system together, OK? It's not worth it.
Q: Give me your prescription to fix the economy.
A: 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 that 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% or 4%. (It is zero to 0.25%.) I mean, that's normal in an economy with inflation at 2% or 3%.
Q: Social Security?
A: It has to be means-tested. And Medicare needs to be means-tested. If you're a more affluent retiree, you should have your benefits cut back, pay a higher premium for Medicare.
Q: Taxes?
A: Let the Bush tax cuts expire. Let the capital gains go back to the same rate as ordinary income. (Capital gains are taxed at 15%, while ordinary income is taxed at marginal rates up to 35%.)
Q: Why?
A: Why not? I mean, is return on capital any more virtuous than some guy who's driving a bus all day and working hard and trying to support his family? You know, with capital gains, they give you this mythology. You're going to encourage a bunch of more jobs to appear. No, most of capital gains goes to speculators in real estate and other assets who basically lever up companies, lever up buildings, use the current income to pay the interest and after a holding period then sell the residual, the equity, and get it taxed at 15%. What's so brilliant about that?
Q: You worked for Blackstone, a financial services firm that focuses on leveraged buyouts and whose gains are taxed at 15 percent, then started your own buyout fund. Now you're saying there's too much debt. You were part of that debt explosion, weren't you?
A: Well, yeah, and maybe you can learn something from what happens over time. I was against the debt explosion in the Reagan era. I tried to fight the deficit, but I couldn't. When I was in the private sector, I was in the leveraged buyout business. I finally learned a heck of a lot about the dangers of debt.
I'm a libertarian. If someone wants to do leveraged buyouts, more power to them. If they want to have a brothel, let them run a brothel. But it doesn't mean that public policy ought to be biased dramatically to encourage one kind of business arrangement over another. And right now public policy and taxes and free money from the Fed are encouraging way too much debt, way too much speculation and not enough productive real investment and growth.
You can read the whole interview here:
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