David Stockman: We've been lied to, robbed, and mislead

[TakeYouToTasker]

http://www.businessinsider.com/david-stockman-weve-been-lied-to-2013-3

 

Then, when the Fed’s fire hoses started spraying an elephant soup of liquidity injections in every direction and its balance sheet grew by $1.3 trillion in just thirteen weeks compared to $850 billion during its first ninety-four years, I became convinced that the Fed was flying by the seat of its pants, making it up as it went along. It was evident that its aim was to stop the hissy fit on Wall Street and that the thread of a Great Depression 2.0 was just a cover story for a panicked spree of money printing that exceeded any other episode in recorded human history.

 

David Stockman

,

The Great Deformation

David Stockman, former director of the OMB under President Reagan, former US Representative, and veteran financier is an insider's insider. Few people understand the ways in which both Washington DC and Wall Street work and intersect better than he does.

In his upcoming book, The Great Deformation: The Corruption of Capitalism in America [37], Stockman lays out how we have devolved from a free market economy into a managed one that operates for the benefit of a privileged few. And when trouble arises, these few are bailed out at the expense of the public good.

By manipulating the price of money through sustained and historically low interest rates, Greenspan and Bernanke created an era of asset mis-pricing that inevitably would need to correct. And when market forces attempted to do so in 2008, Paulson et al hoodwinked the world into believing the repercussions would be so calamitous for all that the institutions responsible for the bad actions that instigated the problem needed to be rescued -- in full -- at all costs.

Of course, history shows that our markets and economy would have been better off had the system been allowed to correct. Most of the "too big to fail" institutions would have survived or been broken into smaller, more resilient, entities. For those that would have failed, smaller, more responsible banks would have stepped up to replace them - as happens as part of the natural course of a free market system:

Essentially there was a cleansing run on the wholesale funding market in the canyons of Wall Street going on. It would have worked its will, just like

JP Morgan

allowed it to happen in 1907 when we did not have the Fed getting in the way. Because they stopped it in its tracks after the

AIG

bailout and then all the alphabet soup of different lines that the Fed threw out, and then the enactment of TARP, the last two investment banks standing were rescued, Goldman and Morgan [stanley], and they should not have been.

As a result of being rescued and having the cleansing liquidation of rotten balance sheets stopped, within a few weeks and certainly months they were back to the same old games

, such that

Goldman Sachs

got $10 billion dollars for the fiscal year that started three months later after that check went out, which was October 2008. For the fiscal 2009 year, Goldman Sachs generated what I call

a $29 billion surplus

– $13 billion of net income after tax, and on top of that

$16 billion of salaries and bonuses, 95% of it which was bonuses

.

Therefore, the idea that they were on death’s door does not stack up. Even if they had been, it would not make any difference to the health of the financial system.

These firms are supposed to come and go, and if people make really bad bets, if they have a trillion dollar balance sheet with six, seven, eight hundred billion dollars worth of hot-money short-term funding, then

they ought to take their just reward, because it would create lessons, it would create discipline.

So all the new firms that would have been formed out of the remnants of Goldman Sachs where everybody lost their stock values – which for most of these partners is tens of millions, hundreds of millions – when they formed a new firm, I doubt whether they would have gone back to the old game. What happened was the Fed stopped everything in its tracks, kept Goldman Sachs intact, the reckless Goldman Sachs and the reckless

Morgan Stanley

, everyone quickly recovered their stock value and the game continues.

This is one of the evils that comes from this kind of deep intervention in the capital and money markets.

Stockman's anger at the unnecessary and unfair capital transfer from taxpayer to TBTF bank is matched only by his concern that, even with those bailouts, the banking system is still unacceptably vulnerable to a repeat of the same crime:

The banks quickly worked out their solvency issues because the Fed basically took it out of the hides of Main Street savers and depositors throughout America. When the Fed panicked, it basically destroyed the free-market interest rate – you cannot have capitalism, you cannot have healthy financial markets without an interest rate, which is the price of money, the price of capital that can freely measure and reflect risk and true economic prospects.

Well,

once you basically unplug the pricing mechanism of a capital market and make it entirely an administered rate by the Fed, you are going to cause all kinds of

deformations

as I call them, or

mal-investments

as some of the Austrians used to call them, that basically pollutes and corrupts the system.

Look at the deposit rate right now, it is 50 basis points, maybe 40, for six months. As a result of that, probably $400-500 billion a year is being transferred as a fiscal maneuver by the Fed from savers to the banks. They are collecting the spread, they've then booked the profits, they've rebuilt their book net worth, and they paid back the TARP basically

out of what was thieved from the savers of America.

Now they go down and pound the table and whine and pout like JP Morgan and the rest of them,

you have to let us do stock buy backs, you have to let us pay out dividends so we can ramp our stock and collect our stock option winnings.

It is outrageous that the authorities, after the so-called “near death experience" of 2008 and this massive fiscal safety net and monetary safety net was put out there, is allowing them to pay dividends and to go into the market and buy back their stock.

They should be under house arrest

in a sense that every dime they are making from this artificial yield group being delivered by the Fed out of the hides of savers should be put on their balance sheet to build up retained earnings, to build up a cushion. I do not care whether it is fifteen or twenty or twenty-five percent common equity and retained earnings-to-assets or not, that is what we should be doing if we are going to protect the system from another raid by these people the next time we get a meltdown, which can happen at any time.

You can see why I talk about corruption, why crony capitalism is so bad. I mean, the Basel capital standards, they are a joke. We are just allowing the banks to go back into the same old game they were playing before. Everybody said the banks in late 2007 were the greatest thing since sliced bread. The market cap of the ten largest banks in America, including from

Bear Stearns

all the way to Citibank and JP Morgan and Goldman and so forth, was $1.25 trillion. That was up thirty times from where the predecessors of those institutions had been. Only in 1987, when Greenspan took over and began the era of bubble finance – slowly at first then rapidly, eventually, to have the market cap grow thirty times – and then on the eve of the great meltdown see the $1.25 trillion to market cap disappear, vanish, vaporize in panic in September 2008. Only a few months later, $1 trillion of that market cap disappeared in to the abyss and panic, and Bear Stearns is going down, and all the rest.

This tells you

the system is dramatically unstable.

In a healthy financial system and a free capital market, if I can put it that way, you are not going to have stuff going from nowhere to @1.2 trillion and then back to a trillion practically at the drop of a hat. That is instability;

that is a case of a medicated market that is essentially very dangerous and is one of the many adverse consequences and deformations that result from the central-bank dominated, corrupt monetary system that has slowly built up ever since Nixon closed the gold window,

but really as I say in my book, going back to 1933 in April when Roosevelt took all the private gold.

So we are in a big dead-end trap, and they are digging deeper every time you get a new maneuver.

[GG]

You do realize that Basel capital standards were put in place in the '90s to get European and Japanese banks to up their regulatory capital, and US banks fought Basel tooth & nail?

[Dean Cain]

Tasker, what's your take on the role of the expansion of private sector debt as it pertains to TBTF?

[TakeYouToTasker]

You do realize that Basel capital standards were put in place in the '90s to get European and Japanese banks to up their regulatory capital, and US banks fought Basel tooth & nail?

Yes.

 

Also, why wouldn't they?

 

Tasker, what's your take on the role of the expansion of private sector debt as it pertains to TBTF?

What happens to private sector debt when the debt holders collapse?

[truth on hold]

Stockman and sheila bair have been the most direct, credible and articulate about what went down. Unfortunately its all too little, too late. I just read the new CFO of Goldman has $75 million in stock options alone, on top of a hundred million in comp they paid him. This was the guy who ran the capital markets group that made all the horrific bets that required a bailout. But hey he was Lloyd blankfeins guy, and Goldman was then treasury sec paulsons old firm, so they got saved and even richer , instead of wiped out which is what in a legit capitalist system should have happened

Edited April 2, 2013 by Joe_the_6_pack

[meazza]

Stockman and sheila bair have been the most direct, credible and articulate about what went down. Unfortunately its all too little, too late. I just read the new CFO of Goldman has $75 million in stock options alone, on top of a hundred million in comp they paid him. This was the guy who ran the capital markets group that made all the horrific bets that required a bailout. But hey he was Lloyd blankfeins guy, and Goldman was then treasury sec paulsons old firm, so they got saved and even richer , instead of wiped out which is what in a legit capitalist system should have happened

 

Goldman didnt require a bailout. They were encouraged to take it by the fed according to sorkins book.

Edited April 2, 2013 by meazza

[truth on hold]

 

 

Goldman didnt require a bailout. They were encouraged to take it by the fed according to sorkins book.

They got a few billion from buffet but it was only a fraction of their exposure. The hedges Goldman put in place they kept running around bragging about were with AIG, another horrible credit that would have go down without a bailout, making the Goldman hedges worthless. That's another reason people think Paulsen rescued AIG

[DC Tom]

Stockman and sheila bair have been the most direct, credible and articulate about what went down.

 

Yes, Bair's published several books on the subject. I'm guessing you've read this one: http://www.amazon.com/Rock-Brock-Savings-Shock-Sheila/dp/080757094X/ref=sr_1_1?s=books&ie=UTF8&qid=1364878985&sr=1-1

[birdog1960]

stockman complains bitterly about the low 15% capital gains tax being counterproductive and unfair. doesn't have much good to say about milton friedman. what's yall's take on these opinions.

[GG]

Yes.

 

Also, why wouldn't they?

 

So if Basel is awful, and he blames the rules for destabilizing the banking system, and blames the banks for the destabilization, why would the banks oppose rules that allow them to have looser standards? You don't find one hint of inconsistency?

 

Or is Stockman the latest guys to call everyone who handles money a "bank" in hopes that most dupes don't understand the difference.

 

And no, Stockman hasn't given a good account of what happened. Bair is much better. Kindleberger's & Bookstaber's books also offer good glimpses.

[TPS]

I didn't think the wackas here would give this much credit since he didn't blame the Dems and poor people for the crisis...

[TakeYouToTasker]

I didn't think the wackas here would give this much credit since he didn't blame the Dems and poor people for the crisis...

There are no "Dems" and "Repubs" on this issue. There are simply powerful people with influence to sell to their wealthy friends, and the rest of us

[TPS]

 

There are no "Dems" and "Repubs" on this issue. There are simply powerful people with influence to sell to their wealthy friends, and the rest of us

I am in 100% agreement. Unfortunately too many people try to make it a partisan issue without seeing that truth.

[Jauronimo]

I am in 100% agreement. Unfortunately too many people try to make it a partisan issue without seeing that truth.

Spoken like a true pinko-commie liberal, comrade.

[birdog1960]

There are no "Dems" and "Repubs" on this issue. There are simply powerful people with influence to sell to their wealthy friends, and the rest of us

so were you for "citizen's united" before you were against it or vice versa.

[Wacka]

I didn't think the wackas here would give this much credit since he didn't blame the Dems and poor people for the crisis...

 

Keep my name out of this. I know enough to stay out of the economic threads. I only had a half year of economics in high school.

I do know enough that this present admin is F'ing everything up. That's just common sense.

[TPS]

 

Spoken like a true pinko-commie liberal, comrade.

Ahhh...living down to the reputation that "We come in Peace" noted...

[meazza]

Ahhh...living down to the reputation that "We come in Peace" noted...

 

He also believes what David Icke says so maybe he's not a good reference?

[Jauronimo]

Ahhh...living down to the reputation that "We come in Peace" noted...

It was about as subtle as being struck in the head with a brick, so I can understand if you missed it, but have you considered the possibility that the remark was just the slightest bit facetious?

[KD in CA]

It was about as subtle as being struck in the head with a brick, so I can understand if you missed it, but have you considered the possibility that the remark was just the slightest bit facetious?

 

You'd think an idiot who whines about partisans while being the only person to introduce party politics into the thread would have recognized it sooner, but I guess he was too excited by the prospect of his "gotcha" moment.