State-Wrecked: The Corruption of Capitalism in America--Part II
By DAVID A. STOCKMANNew York Times
Published: March 30, 2013
The culprits (of the coming collapse of capitalism) are bipartisan, though you’d never guess that from the
blather that passes for political discourse these days. The state-wreck
originated in 1933, when Franklin D. Roosevelt opted for fiat money
(currency not fundamentally backed by gold), economic nationalism and
capitalist cartels in agriculture and industry.
Under the exigencies of World War II (which did far more to end the
Depression than the New Deal did), the state got hugely bloated, but
remarkably, the bloat was put into brief remission during a midcentury
golden era of sound money and fiscal rectitude with Dwight D. Eisenhower
in the White House and William McChesney Martin Jr. at the Fed.
Then came Lyndon B. Johnson’s “guns and butter” excesses, which were
intensified over one perfidious weekend at Camp David, Md., in 1971,
when Richard M. Nixon essentially defaulted on the nation’s debt
obligations by finally ending the convertibility of gold to the dollar.
That one act — arguably a sin graver than Watergate — meant the end of
national financial discipline and the start of a four-decade spree
during which we have lived high on the hog, running a cumulative $8
trillion current-account deficit. In effect, America underwent an
internal leveraged buyout, raising our ratio of total debt (public and
private) to economic output to about 3.6 from its historic level of
about 1.6. Hence the $30 trillion in excess debt (more than half the
total debt, $56 trillion) that hangs over the American economy today.
This explosion of borrowing was the stepchild of the floating-money
contraption deposited in the Nixon White House by Milton Friedman, the
supposed hero of free-market economics who in fact sowed the seed for a
never-ending expansion of the money supply. The Fed, which celebrates
its centenary this year, fueled a roaring inflation in goods and
commodities during the 1970s that was brought under control only by the
iron resolve of Paul A. Volcker, its chairman from 1979 to 1987.
Under his successor, the lapsed hero Alan Greenspan, the Fed dropped
Friedman’s penurious rules for monetary expansion, keeping interest
rates too low for too long and flooding Wall Street with freshly minted
cash. What became known as the “Greenspan put” — the implicit assumption
that the Fed would step in if asset prices dropped, as they did after
the 1987 stock-market crash — was reinforced by the Fed’s unforgivable
1998 bailout of the hedge fund Long-Term Capital Management.
That Mr. Greenspan’s loose monetary policies didn’t set off inflation
was only because domestic prices for goods and labor were crushed by the
huge flow of imports from the factories of Asia. By offshoring
America’s tradable-goods sector, the Fed kept the Consumer Price Index
contained, but also permitted the excess liquidity to foster a roaring
inflation in financial assets. Mr. Greenspan’s pandering incited the
greatest equity boom in history, with the stock market rising fivefold
between the 1987 crash and the 2000 dot-com bust.
Soon Americans stopped saving and consumed everything they earned and
all they could borrow. The Asians, burned by their own 1997 financial
crisis, were happy to oblige us. They — China and Japan above all —
accumulated huge dollar reserves, transforming their central banks into a
string of monetary roach motels where sovereign debt goes in but never
comes out. We’ve been living on borrowed time — and spending Asians’
borrowed dimes.
This dynamic reinforced the Reaganite shibboleth that “deficits don’t
matter” and the fact that nearly $5 trillion of the nation’s $12
trillion in “publicly held” debt is actually sequestered in the vaults
of central banks. The destruction of fiscal rectitude under Ronald
Reagan — one reason I resigned as his budget chief in 1985 — was the
greatest of his many dramatic acts. It created a template for the
Republicans’ utter abandonment of the balanced-budget policies of Calvin
Coolidge and allowed George W. Bush to dive into the deep end,
bankrupting the nation through two misbegotten and unfinanced wars, a
giant expansion of Medicare and a tax-cutting spree for the wealthy that
turned K Street lobbyists into the de facto office of national tax
policy. In effect, the G.O.P. embraced Keynesianism — for the wealthy.
The explosion of the housing market, abetted by phony credit ratings,
securitization shenanigans and willful malpractice by mortgage lenders,
originators and brokers, has been well documented. Less known is the
balance-sheet explosion among the top 10 Wall Street banks during the
eight years ending in 2008. Though their tiny sliver of equity capital
hardly grew, their dependence on unstable “hot money” soared as the
regulatory harness the Glass-Steagall Act had wisely imposed during the Depression was totally dismantled.
Within weeks of the Lehman Brothers bankruptcy in September 2008,
Washington, with Wall Street’s gun to its head, propped up the remnants
of this financial mess in a panic-stricken melee of bailouts and
money-printing that is the single most shameful chapter in American
financial history.
There was never a remote threat of a Great Depression 2.0 or of a
financial nuclear winter, contrary to the dire warnings of Ben S.
Bernanke, the Fed chairman since 2006. The Great Fear — manifested by
the stock market plunge when the House voted down the TARP bailout
before caving and passing it — was purely another Wall Street
concoction. Had President Bush and his Goldman Sachs adviser (a k a
Treasury Secretary) Henry M. Paulson Jr. stood firm, the crisis would
have burned out on its own and meted out to speculators the losses they
so richly deserved. The Main Street banking system was never in serious
jeopardy, ATMs were not going dark and the money market industry was not
imploding.
Instead, the White House, Congress and the Fed, under Mr. Bush and then
President Obama, made a series of desperate, reckless maneuvers that
were not only unnecessary but ruinous. The auto bailouts, for example,
simply shifted jobs around — particularly to the aging, electorally
vital Rust Belt — rather than saving them. The “green energy” component
of Mr. Obama’s stimulus was mainly a nearly $1 billion giveaway to crony
capitalists, like the venture capitalist John Doerr and the self-proclaimed outer-space visionary Elon Musk, to make new toys for the affluent.
Less than 5 percent of the $800 billion Obama stimulus went to the truly
needy for food stamps, earned-income tax credits and other forms of
poverty relief. The preponderant share ended up in money dumps to state
and local governments, pork-barrel infrastructure projects, business tax
loopholes and indiscriminate middle-class tax cuts. The Democratic
Keynesians, as intellectually bankrupt as their Republican counterparts
(though less hypocritical), had no solution beyond handing out borrowed
money to consumers, hoping they would buy a lawn mower, a flat-screen TV
or, at least, dinner at Red Lobster.
But even Mr. Obama’s hopelessly glib policies could not match the
audacity of the Fed, which dropped interest rates to zero and then
digitally printed new money at the astounding rate of $600 million per
hour. Fast-money speculators have been “purchasing” giant piles of
Treasury debt and mortgage-backed securities, almost entirely by using
short-term overnight money borrowed at essentially zero cost, thanks to
the Fed. Uncle Ben has lined their pockets.
If and when the Fed — which now promises to get unemployment below 6.5
percent as long as inflation doesn’t exceed 2.5 percent — even hints at
shrinking its balance sheet, it will elicit a tidal wave of sell orders,
because even a modest drop in bond prices would destroy the
arbitrageurs’ profits. Notwithstanding Mr. Bernanke’s assurances about
eventually, gradually making a smooth exit, the Fed is domiciled in a
monetary prison of its own making. . . .
(In Part III, Mr Stockman reviews the most recent developments and what we can expect over the next five to ten years.)
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