‘The Single Most Drastic Error in Policy in Modern History’
Courtesy of Michael Panzner at Financial Armageddon
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:
