The Federal Reserve is flat-out destroying conservative economics, David Stockman, the former Michigan congressman, Reagan budget director and private equity guru has been saying for the past month or so.
So Wednesday's announcement by the Fed that it's going to maintain its stimulative program of buying $85 billion a month in government bonds is more grist for Stockman's mill.
"This is a Federal Reserve that has allocated to itself the role of central monetary planner," Stockman, 66, railed earlier this week at a monthly meeting of conservative leaders, businesspeople, media and others in midtown Manhattan.
Stockman's latest book, The Great Deformation: The Corruption of Capitalism in America, expounds on his anger over the Fed's flow of "mad" and "phony" money that he says is ruining the country. He's been traveling across the country – to both Main Street and Wall Street – sharing that message.
And on Monday night, he was just as riled up, perhaps in anticipation of the Fed's announcement about continued stimulus.
"My point is, none of this makes any sense and it's not simply a matter of recalibrating the dials," said Stockman. "We have lost our way with the central bank. It was never meant to rig the interest rates, to set 10-year bonds at 1.7 percent, which assuredly it is, because it's buying [so many] billions of bonds a month.
"If you're buying half the new debt issued by the Treasury – one big fat thumb on the scale, one huge bid out in the market – well, all the other smart guys, the hedge funds, the traders, they know that as long as the Fed is buying the bond, they can buy it, too. They can front-run the Fed. The price of the bond won't fall, and they put it up as collateral in what's called the repo market, which means that you borrow overnight, 98 cents on the dollar.
"You pay 10 basis points in the repo market to borrow; everything is borrowed; you earn 1.7 percent interest on the bond, and you laugh all the way to the bank. That's where the so-called bond vigilantes have gone."
Stockman was getting warmed up. He'd been on tour for his book and histrionics were all part of the "style" he has honed over the last few years. Barely pausing for breath, he went on: "They [the 'bond vigilantes'] haven't disappeared. They're not in hiding. They haven't endorsed this crazy fiscal policy that [Paul] Krugman keeps telling you is OK because the bond market likes it. No!" said Stockman, really working himself into a bit of a froth now. "Everything is distorted, deformed, and undermined by a central bank that has gone crazy printing money."
Capitalism simply can't work without "healthy financial markets," he said. "Healthy financial markets can’t work unless there’s real interest rates set by healthy supply and demand. And stock markets can’t work if everybody is gambling on the juice that the Fed is injecting into the market every day in these massive quantities."
He continued, "I want to tell you, it [the Fed] is giving bad signals to everybody. This could be the third bubble ready to bust, ready to break any day now. When we have these serial bubbles, like we had with dot.com, then housing, then the Lehman and credit bubble – it gives capitalism a bad name."
And why is that? It's because "people think it’s being caused by greedy people or bad behavior, when, in fact, all of that behavior was induced by the cheap money that Greenspan put in, that Bernanke put, and all the rest of it that’s in the market today."
Stockman argues that we are at a crisis point in America: "These people, Greenspan and Bernanke, were put in by a Republican White House. If we look at who made all the decisions in 2005, 6, 7, 8, 9, 10, at the Fed, half of these people were Republican appointees."
If Stockman had his way, he added with a laugh, "The guy I'd like to run the Fed is Carter Glass. Unfortunately he's dead and has been for the last 50 years." (Glass, who favored decentralized banks, drafted the legislation that created the Federal Reserve Act just before Woodrow Wilson took office. Glass became Wilson's Treasury Secretary and then a senator from Virginia. The Glass-Steagall Act of 1932 separated commercial and investment banking.)
The point is, said Stockman, "The Fed was never supposed to be in Wall Street, to be buying government bonds... They weren't supposed to be targeting anything. They simply were supposed to be liquifying the banking system. [What we have now] is a perverted stepchild of what Friedman told us about… We need to get someone in there who understands what Carter Glass and the original founders of the Fed had in mind."
Stockman tucked this in: "It's so bad I have a whole list of names I could call it… You could call it corporate welfare if you want… bailout welfare, subsidies to the economy... But basically, we need to get back to free markets and to the rules of the free market. We have to start explaining to people once again what the free markets are. We've lost them to the Republicans and the Democrats over the last 20 years, unfortunately."
In answer to a question about how to explain this clearly to Americans across the country, Stockman said, "I've gone all over Main Street America. And most people who are average Americans trying to make ends meet – they agree this kind of crony capitalism for the powerful, the moneyed interests, the special interests, the K Street lobbies, is harming the country. It’s not helping them. But somehow that message gets lost in the debate once we get into the election process. Why? Because the elections are run by money and by the special interests – and they can explain away anything."