David Stockman, Reagan economist, on debt spree

[CarlV]

I found this interesting....

David Alan Stockman, director of the Office of Management and Budget in the Reagan administration, sat down to discuss the federal debt and the economy.

Q: What similarities do you see between the situation in Washington in the 1980s and the situation now?

A: I think it's dramatically different, a night-and-day difference. (In the 1980s) we had an economy that was encouraging and beckoning to entrepreneurs. I think we have an economy today that's on the edge of insolvency. We'll be dealing with an age of sacrifice, austerity and an age of pain. You have to stop pretending that we're in a normal business cycle.

Q: So what do we do about it?

A: The fall of 2008 and the financial market meltdown was simply a wake-up call that we were in an unsustainable debt spree. The first step is to recognize the new reality we're in, which is not something politicians ever want to do. They certainly do not like to tell people that we have to eat our broccoli and we have a political class in the Beltway that's totally out of shape, incapable of dispensing pain to the electorate. The stimulus spending got totally out of hand. We borrowed money from the Treasury and handed it out to people to spend. The Republicans are just focusing on tax cuts while Democrats are defending their spending and they aren't willing to compromise. You're going to need to allow the Bush tax cuts to expire and, on top of that, find some new revenue sources. Now, we seem to think that we can have 3 percent of GDP deficits forever. It's like a runway, and the airplane is near the end of it. The Republican Party is being reckless in historic proportions, reckless to the extreme.

Q: What about Obama?

A: He's got to stop talking about taxing only the top 2 percent. Tax increases are going to have to include the middle class. On this path we're heading toward class warfare.

Q: What will it take to break that cycle?

A: I think it'll take a thundering conflagration in the global bond market. The budget deficit isn't going to be addressed, and we have not had a two-way market of supply and demand. We now have what I call a "monetary roach motel," where the bonds come in and never come out. China has now got an economy that is so overheated - it means that they will be buying less dollars and far fewer bonds. Over half of the $9.5 trillion in U.S. Treasury debt is owned by central banks and has been purchased recently. I think we're at the last days of the artificial interlude and we're going to be entering the real days.

Q: Is the situation in Europe going to speed this process?

A: It should be a loud wake-up call. We're basically following the same path as the Greeks and the rest of Europe, and there's going to be a great day of reckoning, of reawakening. Once that starts, there could be a rapid, severe and even violent adjustment.

Q: What happens with that adjustment, and what does it do to the economy and corporations?

A: Everything is priced off the 10-year Treasury debt, so if that adjusts, it will ricochet in the fixed income market. That's why it's so dangerous. They're rolling the dice with an unstable market. This year, we're borrowing 43 cents on every dollar we spend. It's a violation of every canon of sound finance that has been believed in the Western world for the last 200 years. There's been no recovery; there's just been a massive medication. The (Rep. Paul) Ryan plan has been said to be brave and heroic as he faces the problems. He doesn't. The problem is here and now and the so-called modest recovery has come out of borrowed money. Since the peak of the last cycle in the fall of 2007, disposable personal income is up $1.1 trillion, but of that $1.1 trillion gained in the last 40 months, $700 billion is due to transfer payments and $300 billion is due to cutting taxes to the lowest point they've been at since 1948. A trillion is borrowed money. The point I'm making is that it's not sustainable.

Q: If some politicians could explain this to people, would they get votes?

A: The politicians have had their head in the sand for so long about this issue that I really don't think they can compute reality anymore. We had the tech bubble, the housing bubble and now the Feds are stimulating what I call the "risk-on" bubble. We've gotten the worst of both worlds: a false signal to Congress that sovereign debt is virtually free and a message to Wall Street that says, 'Go back to reckless speculation.' This is not causing the real economy to recover, and it's creating this massive IOU of unfunded public fiscal action that sooner or later is going to have to be paid.

We need a drastic downsizing of our war machine, especially after they got Osama bin Laden. As welcome as that event was, that kind of problem is a police problem at home, not something that needs a globe-spanning war machine. We should be rethinking whether we need an $800 billion defense budget. That's a vital part of the equation.

Q: What happens if suddenly there are no more defense contracts?

A: If you finance a military budget honestly out of savings, it has an immediate offsetting effect, but if you finance it dishonestly, as Bush did, by simply having the Fed print the money, then you're setting up the economy for a bad headache the morning after. (With the Arab Spring), it's pretty clear we've been fired as the world's policeman.

Q: So bottom line, what can we do?

A: In a pure world, I think you could cut a lot of spending. There would be a way of getting back to a government where we do a social safety net on a means-tested basis, but that is never going to happen in this world.

Revenue is absolutely necessary, both as a practical matter and a matter of numbers. We should put a variable levy on imported oil at $100 (a barrel); whatever the price is coming in, you pay a levy to bring it to $100. We increase the power of the economy, both supply-side and demand-side, if we give investors a certainty of the price.

If we have a Tobin tax - a small tax on every transaction in this casino we used to call the stock market - we can easily generate $100 billion in revenue. We have a massive high-frequency churning in these markets today, and they're not accomplishing anything that's productive for the rejuvenation of the private economy.

Q: Are you still a fan of entrepreneurial capitalism?

A: Yes, but we don't have entrepreneurial capitalism anymore, we have crony capitalism. We've had a tremendous reverse Robin Hood redistribution of income to the top. I don't think it's Armageddon. I think it's just one crisis after another.

Read more: http://www.sfgate.com/cgi-bin/articl...#ixzz1NrpWHToi

[BlueStreak]

Uh, Huh. That's right.

Dave

[finnbow]

It seems that the only Republicans who make any sense WRT to the economy are out of government.

[BlueStreak]

"Q: What about Obama?

A: He's got to stop talking about taxing only the top 2 percent. Tax increases are going to have to include the middle class. On this path we're heading toward class warfare."

My only real caveat to this entire article. I believe we have BEEN engaged in class warfare for a very long time. And since about, oh, I'm guessing, the 1980s or so the middle class has been losing.

Dave

[CarlV]

Agreed on the Q/A and he would have been part of the original Reaganomics fail as well. I find it so strange seeing good examples of how far right the GOP has gone. Almost as surprising GOPpers haven't taken their party back.
The gun article showing that Berkeley of all places had a multi term Republican state assemblyman back in the late 60's was a shocker too.



Carl

[flacaltenn]

While it has that objectiveness that comes from the outside man is refreshingly real, I find it strange that Stockman hits on Wall Street twice..

a false signal to Congress that sovereign debt is virtually free and a message to Wall Street that says, 'Go back to reckless speculation.

The market has gone nowhere in the past 12 months. It reflects a MUCH healthier evaluation of "real worth" in that the P/E ratios have shaken out to more realistic values. In fact, the entire economy including Wall Street has been held hostage by indecision on tax issues, energy issues, healthcare issues, war resolutions, and general lack of definition in the 1st 2 years of an all Democrat show.. No "reckless speculation" to be found.

And -- this is ill-considered..

If we have a Tobin tax - a small tax on every transaction in this casino we used to call the stock market - we can easily generate $100 billion in revenue. We have a massive high-frequency churning in these markets today, and they're not accomplishing anything that's productive for the rejuvenation of the private economy.

After all the class-warfare rhetoric about wall street/banker bonuses, salaries, that was implied as "stealing" from the 401Ks and investments of the "common investor" -- somehow having the FEDS suck off this same teat to the tune of $100B a year or so is just peachy. I might lose a couple bucks a year in fees to the Wall Street maggot crowd, but once the govt gets a hand in the till, I'm sure I'll feel that even more..
"Churning" in the market is NOT non-productive. Although there's a casino aspect to how the market behaves, the volume of trades aids in defining the correct price for every asset. A market that doesn't churn, isn't as predictive. It's in the process of over or under estimating the assets..

Other than that, when you look at the balance between outlays and revenues, there is a natural balance rate of about 18% of GDP all the way from the 50s thru the 90s.

http://nationalpriorities.org/resour...2015-perc-gdp/

That last bit of the graph shows the unmitigated irresponsibility that lost the Dems the House and created the Tea Party. I've kinda decided that I would actually support tax increases if they were done across the board. I do that KNOWING it's gonna kick the shit out of this drifting economy. Kinda like chemotherapy.. You poison the whole system to TRY and defeat the cancer. It will also leave the Dems and MSNBC with virtually NOTHING to offer -- so the whining will stop..

But I'm not ready for that sacrifice if the critters in Congress won't return the remaining stimulus to the Treasury, end our wars abroad, and sell off their "investments" that were made in cars, banks and insurance companies.

[JonL]

Flacaltenn, do you realize how much money is made on Wall Street simply through computer algorithms that can see trades coming down the tape and buy and sell in microseconds to take advantage of the spread? This is nothing more than a leech on top of what is mostly speculative gambling anyway. Taxing this would be a good thing if it increased revenue AND discouraged this parasitic drag on the market.

I'm amazed that Stockman, who I reviled in the Reagan years, is actually making some sense now.

I'm also amazed at the knee-jerk "NO" response that Flacaltenn gives to absolutely every thoughtful proposal that doesn't basically dismantle the government. I agree that government is broken. We need to fix it, not abandon it.

[BlueStreak]

Originally Posted by JonL

I'm also amazed at the knee-jerk "NO" response that Flacaltenn gives to absolutely every thoughtful proposal that doesn't basically dismantle the government. I agree that government is broken. We need to fix it, not abandon it.

I always say,

"I don't want a government that doesn't regulate. I want a government that regulates responsibly."

I believe that until BOTH parties* get that message, this country will go nowhere.

Dave

(*And the Tea Party)

[flacaltenn]

JonL:

Flacaltenn, do you realize how much money is made on Wall Street simply through computer algorithms that can see trades coming down the tape and buy and sell in microseconds to take advantage of the spread? This is nothing more than a leech on top of what is mostly speculative gambling anyway. Taxing this would be a good thing if it increased revenue AND discouraged this parasitic drag on the market.

Speculative Gambling heh? Yeah, I'd rather do it the Sandinista way, where the fearless leader gets up in the morning and DECLARES that shrimp ought to be $4.12/pound today.. Now THAT's efficiency in motion.. Later that afternoon all Nicaraguan shrimp boats unload in Honduras where they are paid $6.72/pound.. You're awfully dismissive about the trading and speculation market. Probably because there IS risk involved. And we all know that the goal of big government leftists is to BAN risk in all it's forms..

As for your tech adversions -- it was MUCH better when the appointed gate keepers could SIT on your market order and skim off on latent trades. Their floor yeller got trampled in the stampede and your order got lost. Today, companies get SUED for falling behind in orders by even a couple hours. I always say -- "just give me my Rolodex and file cabinets back and I'll compete with those computer nerds"..

Like I said before, churning is a good thing. If you impose a tax to lower the volume of the market trades, it's like trying to make polling more accurate by lowering your sample size. Try ANOTHER excuse to tax market trades. Maybe that one will stick..

And JonL: Before you try to label me as a NO man.. Did you miss the part where I was considering tax INCREASES?

[JonL]

There you go again, Flacaltenn... Sure, there were problems in the past with the way trades were executed. What does that have to do with identifying and fixing problems that exist today? Today there are algorithms that just sit there and skim profits off of everyone elses trades. They add nothing to pricing stability, production, or anything else of value. I have a close friend who's a NYSE trader. He explained it to me. He's against it BTW. I'll get more info.

Oh, also nice to extrapolate from my statements that I want gov't to ban anything with risk. WTF??? How do you make this crap up? You should really try to channel that creativity in a positive direction.