I have an advanced copy of Stockman’s book, “The Great Deformation” but have not had time to review the book because of my conference. I hope to get to the book next week, but it is an amazingly long 712 pages.
Actually, I was disappointed in Stockman’s piece. I thought there would be some kind of real argument, some presentation, however tendentious, of evidence. Instead it’s just a series of gee-whiz, context- and model-free numbers embedded in a rant — and not even an interesting rant. It’s cranky old man stuff, the kind of thing you get from people who read Investors Business Daily, listen to Rush Limbaugh, and maybe, if they’re unusually teched up, get investment advice from Zero Hedge. Sad.
Stockman Fires Back
Today MarketWatch reports Stockman Fires Back at Krugman, Critics. Here is an excerpt of the interview….
MarketWatch: Since Nixon’s “abomination” as you call it, we have had some periods where government spending to GDP actually went down, like during the Clinton era. Doesn’t that show it’s just the choices made by Congress rather than the Fed to blame [for rising debt]?
Stockman: There is the issue that Congress ultimately is the fiscal authority. But my argument is, when the Fed becomes a massive buyer of bonds and debt and artificially suppresses interest rate below market-clearing levels, it’s a terrible signal to the Congress that debt is cheap, that running deficits is a viable strategy. So therefore they are induced to kick the can, to let it drift and avoid hard choices. Who wants to tell the public you are going to take your broccoli of higher taxes and lower benefits and spending if you can issue debt on a three-year basis for 40 basis points. That’s free. I was in Congress, they don’t do decimal math, OK? And they think the money is free, it’s a bad problem philosophically, we shouldn’t be doing this for the great long run, but it’s no harm today.
Then they have professors like Krugman who give them the disingenuous advice that the bond vigilantes don’t care. The market is saying, “fine with us, we don’t care, keep piling the debt on, we love it.” That is so much baloney. The reason the interest rate on the 10-year bond 10_YEAR -0.33% today is 1.8% or whatever it happened to settle today, is the market knows the Fed is buying half of the debt and is front running the Fed. And it is renting the bond on repo, 98 cents on the dollar, based on overnight money that’s free thanks to Bubbles Ben as well.
For a so-called Nobel laureate to claim the vigilantes are validating this crazy deficit expansion through the fact the interest rate is 1.8% is the height of disingenuous.
MarketWatch: But Bernanke did a recent speech on this, and he pointed out the bond yields of every industrialized nation, including Germany, have dropped.
Stockman: You know why? Because every central bank in the world is putting out the same heroin, the same monetary policy poison. Because the Fed is doing this, and this is part of my theme in the book, that once we started going into the massive balance sheet expansion, other central banks had to reciprocate or otherwise their currencies would be disadvantaged.
The whole world of central banks is now administering the same bad medicine. To say it works because everyone is doing the same thing, again, I think is utterly disingenuous.
Nixon’s Abomination Explained
Wikipedia refers to “abomination” as “Nixon Shock“.
“The Nixon Shock was a series of economic measures taken by United States President Richard Nixon in 1971 including unilaterally canceling the direct convertibility of the United States dollar to gold. It helped end the existing Bretton Woods system of international financial exchange, ushering in the era of freely floating currencies that remains to the present day.”
I side with Stockman. Krugman is disingenuous, and closing the gold window was an abomination.
Deposit Insurance a Moral Hazard
Stockman claims FDIC deposit insurance is a “moral Hazard”. Here is the pertinent snip from the interview.
MarketWatch: With what we’ve seen in Cyprus, doesn’t that argue for more and a more credible deposit insurance system rather than pulling back?
Stockman: No, I say deposit insurance is the great moral hazard. It’s what allowed the banks after we repealed Glass-Steagall to grow to this enormous magnitude and engage in all this speculation. And remember, Glass was opposed to deposit insurance, Steagall wanted it, Glass said, “OK, the quid pro is we’re not going to let the banks get outside the narrow walls of commercial banking.” Now when you repeal Glass-Steagall, you got the worst of both worlds. You got moral hazard of deposit insurance without the regulatory protections and separation of basically trading and gambling as Carter Glass would have seen it from deposit banking.
My argument is that if blue-haired ladies and timid people want to have safe places to save, create postal savings banks. Just a few government banks, they don’t earn any interest, and they get charged a penalty on their interest rate because the government’s credit is being used, but it’s safe, they sleep at night, and they can honestly save, because under a free-market interest rate the deposit rate would be helluva lot higher than today, half a percent under Bernanke imperialism.
Safe Way to Bank
I said nearly the same thing in Fraudulent Guarantees; Fictional Reserve Lending; Comparison of US to Cyprus; What About New Zealand?.
And the solution is so easy too. Open a bank that charges nominal fees for checking and makes no loans. Such a bank would not need loan officers or other high-priced personnel. It would offer safekeeping of money and simple checking accounts for a fee.
Those who want interest on their money should have to take a risk, the risk of a possible loss.
Finally, and as I have pointed out before, lending of checking accounts is outright fraud. Checking accounts are supposed to be money available on demand, but since Greenspan authorized Sweeps in 1994, almost none of it is.
Mike “Mish” Shedlock