CONVERSATION AIR DATE: June 4, 2013
Former Reagan Budget Director Argues Against Bailouts, for Financial Discipline
SUMMARY
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.
IN-DEPTH COVERAGE
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 …
DAVID STOCKMAN: Right.
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.
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READ: Paul Krugman on Debt, but Are Soaring Interest Rates Running Against Him?
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