And we’re still at risk of it happening all over againby Adam Taggart Saturday, March 30, 2013, 12:42 PM
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, 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.
By Jeffrey Lord on 12.21.12
Call it a Reykjavik Moment.
An Air Traffic Controllers Moment.
Both of which were Reagan Moments.
Moments in American history when, under extreme pressure, Ronald Reagan simply refused to buckle. Against all the chorus shouted from the media and congressional bleachers — that he had failed by walking out on a bad deal with Gorbachev or recklessly fired striking air traffic controllers who were striking against federal law — Ronald Reagan never blinked.
And the fact that he didn’t blink made America — and the world — an infinitely better place.
Thursday night 13 conservative House Republicans defeated the Rule for the vote on Speaker Boehner’s highly controversial “Plan B.”
Those conservatives, by name (an asterisk denoting those who will not be returning to Congress next year) are:
Justin Amash of MI
Paul Broun of GA
Trent Franks of AZ
Louie Gohmert of TX
Tim Huelskamp of KS
Walter Jones of NC
Jim Jordan of OH
Andy Harris of MD
Jeff Landry of LA*
Thomas Massie of KY
Ron Paul of TX*
Jean Schmidt of OH*
Joe Walsh of IL*
Let’s not forget here that in terms of pressure, a great deal of it was coming from the GOP House Leadership. Congressmen Amash, Huelskamp, and Jones were removed from their committee assignments for not cooperating with the Leadership.
And make no mistake….the talk radio stars jumped on this, each in their own way. Rush was there. Hannity was there. Levin was there.
Then there was the great Brent Bozell from For America (as reported at Breitbart) pounding away just Wednesday at a Capitol Hill presser saying:
I’m going to make a prediction, right here and now, and write it down – and call me on it. If the Republicans support this tax increase, they will lose control of the House in the 2014 elections,” Bozell said.
They will lose control of the House. Not only that, but a whole lot of members who thought they were safe and who thought they could get away with this will lose in their own districts. It doesn’t take a rocket scientist to figure this one out. This is precisely what happened to them six years ago and they’ve already forgotten that message. The Republicans were tossed out of the majority when they broke their word on spending. Now they’re breaking their word again but it’s not just spending. It’s taxes on top of that. Fiscal conservatives will not stand for this. This is a terrible bill. This is a terrible box Republicans have painted themselves into, in this corner. They’ve got to try to get themselves out of it. But going for higher taxes and trying to play “Democrat-lite” is the worst possible solution and the negotiations that are going on right now between the Speaker’s office and the Obama administration is the stuff of Keystone Cops. It is embarrassing how badly this has been negotiated. Real fiscal conservatives would simply walk away from this mess.
What is the take away here?
This was a botched GOP House Leadership issue. It is exactly what happens when the governing principle is deal making and not principle.
House GOP Members began to realize that, intended or not, they were perceived as trashing the legacy of Ronald Reagan.
It is worth remembering as Washington slows momentarily for Christmas, the words of Reagan’s old friend and House ally the late Jack Kemp. On November 3, 1991 — and I was there — Kemp stood up at a reunion of Reagan alumni at a pre-dedication ceremony for the Reagan Library. Reagan was there as Kemp said that Reagan’s tax cuts had ignited:
…the most expansive, noninflationary economic growth and entrepreneurial revolution this country has seen in the 20th Century:
- 21 million new jobs were created
- 4.5 million new businesses were started
- The federal deficit came down from 5.5 percent of GNP to 1.5 percent
- Federal spending fell from 25 percent of GNP to 21 percent
- GNP grew by one-third
- Revenues increased by 40 percent
- And the Wall Street Journal called the 1980’s a decade of minority capitalism — there was an 80 percent increase in Hispanic businesses; 60 percent for Asians; and nearly 50 percent for Black-owned businesses.
Congressman Louie Gohmert of Texas remarked to Sean Hannity Thursday afternoon that he had a colleague tell him he, the colleague, was “sick” of hearing about history. To which Gohmert astutely and correctly replied: History matters.
Indeed it does.
Mark Levin has noted repeatedly the problems with a Boehner Speakership, as have I in this space and many others have as well. (As Peter Ferrara did here.)
He’s a good soul, but he’s an affable deal maker when history at this moment calls for much more. In Levin’s words:
I just don’t think he’s up to the monumental task of saving the country from Obama’s designs. It’s time for the Republicans to seriously reassess what they’re doing.
Amen. As the Thursday night debacle illustrates.
America is being dragged backwards by the day by this President. House Republicans won an election. And they weren’t elected to sit idly by and let America go under.
Three cheers for those thirteen GOP House conservatives for standing up, Reagan-style, for principle.
They had a Reykjavik Moment.
An Air Traffic Controllers Moment.
They had a Reagan Moment.
And whatever happens next, the Reagan Thirteen are heroes.