TOPICS > Economy

Former Reagan Budget Director Argues Against Bailouts, for Financial Discipline

June 4, 2013 at 12:00 AM EDT
In "The Great Deformation," David Stockman, former budget director under President Reagan, makes an argument against government economic intervention. Economics correspondent Paul Solman interviews Stockman on why he believes the U.S. bailout of banks after the 2008 financial meltdown perpetuates an unfair economic system.

JEFFREY BROWN: Next: another economic meltdown. That’s the dire prediction of a former White House budget director, who argues in a recent book that Wall Street and Washington are broken.

NewsHour economics correspondent Paul Solman has the first of two takes on the government’s role in the economic recovery, part of his regular reporting: Making Sen$e of financial news.

PAUL SOLMAN: Libertarian David Stockman has been a controversial figure since he quit the Reagan administration as budget chief in 1985, blaming it for failing to take deficits seriously. He became rich and legally embroiled as a leveraged buyout financier. He faced accounting fraud charges that were later dropped.

Now he’s become visible again as author of “The Great Deformation,” a hefty screed that attacks the left and right alike. But, mainly, it attacks government economic intervention. It begins with the crash of ’08.

Stockman thinks it was long overdue.

DAVID STOCKMAN, Former Reagan Administration Budget Director: That was Mr. Market bringing discipline, bringing resolution to very reckless financial behavior. We should have let it continue. Goldman would have gone down. Morgan Stanley would have gone down. It would have burned out there. It wouldn’t have spread to Main Street. The Main Street banks were in good shape. We basically made a mockery out of free markets and financial discipline, and we will never come back.

PAUL SOLMAN: But the theory of the time was that, because large financial institutions were so interconnected with one another, that if one went down, like Goldman, and owed lots of money to lots of others …


PAUL SOLMAN: … those others would go down, and dominoes.

DAVID STOCKMAN: Right. Well, that was the common theory, the contagion effect. There is no economic basis in history for the idea of contagion.

PAUL SOLMAN: Economic historians point to the onset of the worldwide Great Depression of the 1930s as evidence of contagion, but Stockman thinks they’re flat-out wrong about that, and wrong about the danger, five years ago, of contagion leading to a financial collapse.

Moreover, government, as the lender of last resort, he says, just makes matters worse; we shouldn’t have bailed out the banks or AIG.

And you think we shouldn’t have bailed out the auto industry either?

DAVID STOCKMAN: No, absolutely not. When we bailed out GM, the only thing we did was move 40,000 jobs from below the Mason-Dixon Line, where they would have been produced in Hyundai plants, or Honda plants, or Toyota plants, or BMW plants, to north of the Mason-Dixon Line. It was all about the Electoral College; it was not about jobs.

PAUL SOLMAN: But it would have been traumatic to Detroit and everybody who had an auto job.

DAVID STOCKMAN: Well, of course. But if we’re going to say that Washington will rescue anybody who is big and noisy and threatens a trauma, then we’re going to have total socialism, we’re going to have an ossified economy, and we’re going to have crony capitalism like you have never seen. Money will dominate everything, and we crossed that Rubicon when we bailed out Detroit in 2008.

PAUL SOLMAN: What do you mean exactly by “crony capitalism,” particularly if you’re including the United Auto Workers among the cronies?

DAVID STOCKMAN: Crony capitalism tries to get a different outcome than would occur on the market by using the tools and machinery of government.

As long as you want the government intervening at will any time there’s an emergency, a crisis, a threat of something going wrong, then money will win, because they will hire the lobbyists, they will hire the lawyers and the accountants, and all the rest of them, and you will get stupid things like Washington bailing out Goldman Sachs, and having Goldman come back within one year with $28 billion of surplus.

PAUL SOLMAN: So, you think our economy, perhaps our society as a whole, is on the one hand wussified — we can’t take any pain — and, on the other hand, controlled by a group of people in whose interests it is to preserve things as they are?

DAVID STOCKMAN: Sure. It’s two sides of the same coin.

The purpose of Washington is to prop up the powerful. If you’re running a small business in Indiana, they’re not going to bail you out. You have to have size. You have to have clout. Essentially, we have a very unfair system today where the bus drivers are paying taxes, so that we can give Social Security to old people that are rich, and we can bail out companies like G.E. Capital and Goldman Sachs and AIG and all the rest of them that never should have been near the taxpayers’ dollar.

So we would have had a serious recession, but no Great Depression, no black hole.

PAUL SOLMAN: But if you were in government then, you would have been willing to roll the dice on it?

DAVID STOCKMAN: Absolutely, because we’re in serial bubbles.

PAUL SOLMAN: Stockman blames the Federal Reserve under Alan Greenspan and Ben Bernanke for inflating bubbles for years by keeping interest rates low. Since the housing bubble burst, the Fed has been fueling the economy by creating money to buy U.S. bonds and mortgage-backed securities.

This is so-called quantitative easing. But, in doing so, says Stockman, the Fed is just inflating yet another bubble.

DAVID STOCKMAN: The problem is that you’re creating a system of bubble finance, where interest rates are so low that people can speculate. So what this is, is a gambler’s dream.

PAUL SOLMAN: So you think we’re cruising for a bruising here?

DAVID STOCKMAN: I think we’re doing what Einstein once said is the definition of insanity. He said, if you do the same thing over and over and expect a different result, that’s a sign of insanity. We’re doing the same thing over and over.

PAUL SOLMAN: As Stockman tells it, low interest rates have created financial markets full of speculators addicted to cheap debt. As a leveraged buyout deal-maker, he was one of them, and became rich in the process.

So, when you were in the midst of all of this, doing leveraged buyouts, you were part of the bubble. Did you think you might be doing something wrong?

DAVID STOCKMAN: I’m not saying there’s evil people running around Wall Street. I’m not particularly saying myself was evil, OK?

I’m saying if all of the system is geared towards massive borrowing and speculation on leverage, everyone is going to do it. Now, I had a company that went bankrupt, and as a result of that bankruptcy, I had huge problems for years.

PAUL SOLMAN: You were prosecuted. I mean …

DAVID STOCKMAN: Yes, but then they dropped the case, OK.

PAUL SOLMAN: They accused you of accounting fraud.

DAVID STOCKMAN: Yes. But it turns out that there wasn’t any accounting fraud. It was a company that was way overleveraged in the auto business, an auto supplier.

I had five or six times debt to cash flow on the company. It was crazy, never should have been done. That was reckless. But it was a pretty good wakeup call to me that it was widespread throughout our economy. Why did I have so much debt on the company that I had that went bankrupt? Because I could come to Wall Street and raise it in a half-a-day.

PAUL SOLMAN: Last question. Paul Krugman called you a cranky old man.

And the essence was that you are putting all of your faith in a free market that surely has its own excesses, its own depredations, its own horror shows, no?

DAVID STOCKMAN: No. I think I struck a raw nerve because I said you guys are peddling nothing more than debt, and debt, and more debt, and more money-printing. And it’s not sound economics, and it’s going to fail. And they didn’t like that.

PAUL SOLMAN: David Stockman, thank you very much.


JEFFREY BROWN: And we will hear a very different take on this in the coming days from Nobel Prize-winning economist and New York Times columnist Paul Krugman. Online now, you can get a sneak peak at Krugman’s response.