Saturday, March 30, 2013

On David Stockman’s Out-Rage




A few years ago I walked around David Stockman’s backyard. I was admiring his stone walls. We fell into a conversation about rocks and masons. David has a good eye for stone, and he knows the proper way to lay it up (A balance of symmetry and chaos, with the least amount of mortar possible).  I was pleased to learn that he holds stone masons (all artists) in much higher regard than lawyers, bankers and politicians. My kinda guy.

We talked about the macro/micro issues at length – Stockman knows the numbers and the history. He has an interesting perspective on the global economic scene. I thought about the meeting later. I concluded that Stockman was not just passionate about the state of affairs – he was out-raged. I wondered why.


Stockman is still out-raged. His new book, The Great Deformation, is his opportunity to vent some of that emotion. He does a pretty good job of it. There are a dozen “names” who will cringe reading it.




This is a history book. It’s a detailed account of the key events since the Depression that have shaped modern finance. I love history, and I’m familiar with those events. Stockman’s spin on financial history makes for a very good read. There’s something for everyone. For example, were you troubled by the bailout of AIG, and TARP? If so, you’ll love this chapter:


Paulson’s Folly – The needless Rescue of AIG and Wall Street



Do you worry that Bernanke has overplayed his hand with monetary policy? Stockman rips him apart:


The Bernanke Bubble: Last Gift to the 1 Percent


How the Fed Brought the Gambling Mania to America’s Neighborhoods



Do TV talking heads influence Fed policy? Stockman says “yes”.

The Rant That Shook the Eccles Building: How the Fed Got Cramer’d



Worried about US indebtedness to foreign central banks? That’s covered in:

Monetary Roach Motels


Stockman puts meat on the bones to some old stories. A few examples:

Nixon took the USA off of the gold standard in 1971. The motivation and timing was Nixon’s burning desire to win the 1972 elections. He devalued the dollar for a short-term boost to the economy. Tricky Dick rigged the global currency markets to achieve his ends. That makes Watergate look like small beer. Very high stakes poker was played. Nothing new today.


During WWII the Fed capped long-term interest rates at 2.5%. To hold that level, the Fed bought up all the supply (A slightly different version of today’s QE). The rate cap continued until 1951. How it ended (and the secret fight between Truman and the Fed) is history worth studying. This is a window into what will happen when the Fed is forced to end the current QE. Not surprisingly, it was 5% inflation that ended cheap money in 1951. How do you think Bernanke’s QE will end?



A central element of the US economy is Roosevelt’s New Deal – Stockman shreds it:

The payroll tax has become an anti-jobs monster

In truth the trust funds are both meaningless and broke.

The fast approaching day of reckoning is thinly disguised by trust fund accounting fiction.



There’s plenty of one-liners; a few of the many I found amusing:


On George Kaiser‘s “loss” in Solydra: (How not to make friends in Tulsa)

by essentially “shorting” Uncle Sam, George Kaiser stands to harvest a 4.6 times return on his sham investment to “rescue” Solyndra


On Elon Musk (How not to make friends in SoCal)

That a megalomanical promoter like Elon Musk could walk off with half a billion in taxpayer money, blown in less than four years, and make himself the toast of Hollywood in the process is powerful evidence that the putative conservative parted has vacated the ramparts of the US Treasury.


On Bernanke (“befuddled academic) and Janet Yellen (career policy apparatchik): (How not to make friends at the Fed):

these hired hands keep the carry trades well lubricated and generate continuous  opportunities for speculators to extract vast economic rents from deformed financial markets

Bernanke is the godfather of of the debt zombies.


On former Treasury Secretary Hank Paulson, and the AIG bailout:

in one of the most egregious derelictions of duty every recorded, Paulson and his posse of Goldmanite hotshots hastily and blindly shielded these behemoths (the TBTF banks) from even a dollar of loss on their AIG insurance policies.


On economists:

New Deal revivalists Like Paul Krugman are essentially telling fibs and peddling historical legends is not offensive merely because it distorts the distant past. These legends actually compound the deformations of the present by rationalizing policies that cannot succeed and will only bury the nation deeper in debt.

Glenn Hubbard was of the opinion that the Wall Street-coddling policies of the Greenspan-Bernanke era had been a roaring success.

The preposterous Fred Mishkin headed the posse of debt-bubble deniers who dominated the Fed’s supporting cast. In a major study he concluded that the only bubbles in Iceland were those welling up from its famous hot geysers.

Keynes fancied himself a dandy, of course, and would never have been caught wearing the equivalent of Gandihi’s loom. But when it came to nations and their unwashed masses, it is not at all surprising  that he thought the nationalistic and autoartic Nazi Germany was the most likely candidate for early adoption of his program.


My only disappointment with The Great Deformation is that there is very little in the way of what could be done, versus what is being done. Stockman does offer up a few thoughts of what might be considered. These will get more than a few eyebrows raised on Wall Street and in D.C.:

- Abolish deposit insurance, strangle the Fed and shrink the banks.

- Adopt a Super Glass-Steagal. Abolish bailouts.

- Eliminate the Electoral College and establish strict term limits.

- A balanced budget, eliminate economic subsidies, shrink the federal government.

- Impose a 30% tax on wealth to reduce debt to 30% of GDP (assumes a $10T tax on the top 10% – think Cyprus on steroids)

- Eliminate income taxes and replace it with consumption taxes.

This is all blue sky stuff. It sounds alright, but it’s not feasible for the USA to consider any of these measures. Stockman acknowledges that his list will never see the light of day,  “They would never be adopted in today’s regime of money politics, fast money speculators, and Keynesian economics”.


Stockman sees nothing but trouble ahead for the USA. He realizes that the changes that are needed to avoid the big fall are simply not in the cards. Now I understand why he’s so out-raged.



Hat tip:KR


  1. David Stockman is ‘mad’ alright. The odds of any of his suggestions being implemented is close to zero. Super Glass Stegal is a distant possibility and a consumption tax a fine dream. Everything else is DOA.

    • David Stockman will get what he wants in the end, one way or another, as mathematics is on his side.

      I’m not sure Bruce intended the metaphor, but the debt is a stacking problem, like a stone wall.

      If you think of a loan as a stone, and the total debt as the wall, you can see in the begining the loans stack nicely, but as the debt curve turns parabolic, the debt load becomes increasing unstable.

      In 2008, Bernanke is did not magically stablize the debt. He moved teetering debt from smaller balance sheets (banks, AIG, GM…) to a larger balance sheet (US Government).

      By moving the debt, he was about to gain stability from a larger base.

      But, as the government debt grows it becomes increasingly precarious, just as it did for the banks.

      In my opinion, making people aware of this situation is the whole point of Bruce’s blog.

    • David Stockman will get what he wants in the end, one way or another, as mathematics is on his side.

      I’m not sure Bruce intended the metaphor, but the debt is a stacking problem, like a stone wall.

      If you think of a loan as a stone, and the total debt as the wall, you can see in the beginning the loans stack nicely, but as the debt curve turns parabolic, the debt load becomes increasing unstable.

      In 2008, Bernanke is did not magically stabilize the debt. He moved teetering debt from smaller balance sheets (banks, AIG, GM…) to a larger balance sheet (US Government).

      By moving the debt, he was about to gain stability from a larger base.

      But, as the government debt grows it becomes increasingly precarious, just as it did for the banks.

      In my opinion, making people aware of this situation is the whole point of Bruce’s blog.

  2. I’m glad Stockman has been standing on the rooftop shouting, in no uncertain terms, about what he sees and understands. It takes ALOT to wake up the citizens and it seems there are more notable people *inside* the USSA scam than willing to take it on in a big & vocal way.

    — Eliminate the Electoral College and establish strict term limits.

    Yes please, on the term limits for congress critters! But, would abolishing the Elec College really make any difference? Seems that electonic vote rigging is a much more pressing issue.

    No matter how remote the possibility of implementaion of any of his suggestions, the value of them is the illustation of how FAR WAY we are from healthy laws/systems/protocols.etc.

    Stone walls rock! (wink)

    • I can see this is a must read book. Forget the electronic voting machines. BAN’EM!
      Do like Iraq. When you vote you stick your index finger into a dye that you can’t wash off for 2 days. That stops multiple voting. Count the votes by hand and throw anyone who commits voter fraud in the slammer for 10 yrs. Voting is very serious and the cornerstone of a democracy.

      • @Homer – Sure, I like your voting plan. But, it would take some REAL citizen effort to get voting machines banned. They have likely created the easiest way in history for The Powers That Be to scam the vote.

        After the absurdity of the 2012 election (do an internet search…you’ll find plenty), I decided that I will only vote ON election day and by paper ballot. Period. If some jerk is going to hide/throw away my ballot, there’s nothing I can do about that. But, I’m certainly not providing early information about my vote OR giving them the opportunity to flip it.

        Oh and, just my personal preference, I’m not going to let them scan the completed ballot into some machine where it’s attibutable to my name/address/ethnicity, etc. Bastards…..none of that is any of their business.

        Hey, this is off-topic but, I’m in the mood to share about the over-reach of Big Brother. Over the week-end I completed HEALTH history paperwork prior to an annual physical. I was absolutely stunned to see these two questions:
        1 – Do you own any firearms that you keep in your home?
        2 – Do you keep the firearms in a locked place?

        The Emory Healthcare System doesn’t care about that! Those questions are, no doubt, included as part of Obamacare. By golly, they’re going to try to root out as many unregistered gun owners as they can. I left it blank. Yeessh!

  3. more propaganda for the sheep to eat. The good old boys where probably all in Greenwich CT last night toasting Stockman for a good job and laughing about where they got mentioned in the book.

  4. investment of the century says:

    go long rope

  5. State-Wrecked: The Corruption of Capitalism in America
    Published: March 30, 2013


  6. Obama bin Biden says:

    Some of us are still outraged at Stockman :


  7. Susan B Anthony's Lover says:

    1) term limits is an admission that voters are idiots, so how about go back to limits on who can vote instead? Mob-ocracy is exactly what Madison/Hamilton, et al didn’t want to happen. If anything only allowing land owning males the right to vote would sure help the housing market.

    2) doesn’t FDIC insurance help prevent bank runs and banking panics?

    • 1: It’s easier than that: just make the voting age 25, or maybe 30, rather than expanding the voter base. Maybe something about people who pay taxes should vote would help.
      2: FDIC or any deposit insurance scheme encourages people to place their money in banks that offer the highest interest on deposits while offering the lowest rates on loans – by definition, these are most often the worst banks. Perversely, the best, most responsible banks (I know, I know, but some actually are) typically pay high levees to support the Plan, which in effect subsidizes bad banks and helps them to flourish. Besides, how can 30 billion dollars in assets ‘insure’ 10 trillion dollars in deposits, a typical ratio in such systems around the world? And the issue of due diligence for savers is a non-starter: when someone offers you 4 or 5% or more in a 1 or 2 percent market, run the other way. Or be greedy and take your chances, a la Cyprus.
      As far as another Stockman recommendation is concerned, forget wealth taxes, just tax everyone at a flat 10% of gross income, with no deductions for anything and shrink the ‘budget’ (i.e. spending list) to match revenue. Bonus: the hundreds of thousands of tax personnel could shrink accordingly: no calculations by anyone are necessary to move a decimal point one place to the left.

      • Try limiting the voting age to 65 and younger too. Youngsters are taking care of the old fogeys – they shouldn’t be unnecessarily subjected to higher burdens just because the elderly say so, without providing anything.

        • Alex, you’re probably right. Actually you are right.
          Full Disclosure: I am an old fogey with little sympathy for those who can’t stop insisting for more handouts. We lived through the best times of the nation; some saved, and some didn’t bother.

    • A little facetious there, I think.

  8. Worth pointing out is the fact that deposit insurance is a valuable feature worth paying something for. It’s impractical to expect every saver no matter how small to be able to perform worthwhile due diligence on the banking institution of their choice (which typically means the closest branch office to their home or work). Charge for it outright to make the cost transparent to the saver. This would thrill Ben Bernanke as yet another motivation for people to quit being responsible and trying to save money when they should be out there buying more crap they probably don’t need at Target, Best Buy and WalMart.

  9. Deposit insurance is fraught with counter-party risk. FDIC works great until people need to draw on it. It is that little sticker on the door of your bank that is the protection. There’s
    nothing behind it. Oh, yes, I know a bankrupt federal government. Hahaha. Charge for it, up front. Hahaha. That’s a good way for government to get more of your money. Hahaha.

  10. Stockman is most likely correct, or will be eventually. However, as the Keynesianism goes, “The markets can stay irrational a lot longer than the investor can stay liquid (paraphrased somewhat).”

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