Trashing Obama's Economic Team
Federal Reserve Chairman Ben Bernanke “is a math teacher, he’s not a central banker,” former White House Budget Director David Stockman scoffs. “He is so caught up in his equations that I think he’s extremely dangerous—the worst Fed chairman we’ve ever had.”
In the flat, dry accents of the Michigan farm boy he once was, Stockman tells me: “How can he believe that stimulating more credit creation and more borrowing can possibly solve the problem of a housing sector that’s drowning in debt and a federal government that’s on the edge of insolvency?…
“The Bush tax cuts never should’ve been passed because, one, we couldn’t afford them, and second, we didn’t earn them,” Stockman says.
“He is the greatest enabler of Wall Street speculation and of the disasters that brewed both before the financial crisis of 2008 and are brewing again, and I would blame the Bush White House. I would lay this right at the doorstep of Karl Rove. How did they vet the appointment of a new Fed chairman and not even read the black-and-white writings of this Bernanke fellow who said, ‘If push comes to shove, I’ll print money until the cows come home. I’ll drop it out of helicopters!’ This is Republican doctrine? This is sound money?” Stockman concludes: “The Wall Street casino is simply a consequence of what Bernanke is doing, and for that alone, he should be removed from office.”
As Stockman explains why Bernanke should be fired immediately—along with Treasury Secretary Timothy Geithner and President Obama’s chief economic adviser, Larry Summers—he sips a cappuccino at The Little Nell bar in Aspen, Colorado, site of the Aspen Institute’s weeklong Ideas Festival, which ended on Sunday.
“Summers,” Stockman continues, dispatching his next victim, “has had in his whole life only one idea—and it’s wrong. The idea is: No matter what state we are in the cycle—you’re entering a recession, coming out of the recession or facing one down the road—stimulate the economy, add to the federal debt, basically borrow from the future in order to create false gains today.”
• Peter Lauria: America’s Moguls Revolt Against ObamaAs for Geithner, “he has basically been a bag carrier for Wall Street—in fact, his shoulders are a little stooped,” Stockman says. “I don’t think he’s really fit to occupy the office he’s in. He has no real philosophy. I don’t see any evidence that he’s understood financial history or public policy going back decades and decades. It’s all seat-of-the-pants, make judgments on the fly: Try something, and if it doesn’t work, try something else…He might make a third-rate investment banker, but he certainly shouldn’t be Secretary of the Treasury.”
The other patrons pay no attention to the silver-haired gadfly at the corner table who’s making smart remarks about the powers that be. At 63—casually dressed in a dark patterned shirt that is draped over his belt to conceal his spreading belly—Stockman looks like any of the other wealthy senior citizens who populate this posh resort town.
But he was, in his day, President Reagan’s “boy wonder” and fiscal hatchet man, the most famous (or infamous, depending on your outlook) budget director in American history. In the notorious episode that prompted an angry Reagan to “take him to the woodshed,” as the encounter was spun at the time, Stockman confided his misgivings about an intellectually dishonest, politically corrupt federal budget process to William Greider in The Atlantic Monthly. "None of us really understands what's going on with all these numbers," Stockman told Greider in 1981—an utterance so refreshing and unprecedented, coming as it did from a top government official, that a Washington, D.C., dance company presented an avant-garde ballet inspired by Stockman’s truth-telling.
Since leaving government and politics in the mid-1980s, he has made millions as an investment banker—he was a founding partner, with Steve Schwartzman and Pete Peterson, of the Blackstone Group—and later became the target of Justice Department and Securities and Exchange Commission investigations into what the government alleged was his fraudulent stewardship of a failed auto parts company. Criminal charges were dropped last year for lack of evidence, and a few months ago Stockman settled the SEC’s civil suit by paying $7.19 million in penalties and fines.
“It wasn’t a pleasant experience, but I also knew what the facts were,” Stockman tells me.
Does he believe he was targeted because of his celebrity?
“It’s very hard to figure out how they pick and choose their cases,” he answers. “I’m just glad to have all this over—to have the Justice Department drop the case because they realized they couldn’t defend it, and to have the SEC drop most of the charges they made. I’m not going to second-guess why they got involved, but after tens of millions of pages of documents and two or three years of investigation and millions of dollars of legal expenses, both the SEC and the Justice Department ended up dropping the case. That says something.”
“The Wall Street casino is simply a consequence of what Bernanke is doing,” Stockman says, “and for that alone, he should be removed from office.”
Leaping from the relative obscurity of representing a rural Michigan congressional district to the bright hot lights of the Reagan White House, Stockman was an economic superstar on a par with former Fed Chairman Alan Greenspan. The previous day at the Aspen Ideas Festival, he had used a luncheon to grill his former mentor, who had employed him as a student policy trainee in the Ford White House. “Alan, a long time ago, when I didn’t know anything, you taught me four things,” Stockman informed his ex-boss, who had a wry smile plastered on his otherwise poker face. “One, lower tax rates are better than higher; solvency is better than insolvency; in the long run the budget has to be balanced; and the way you do it is cut spending structurally over time. Thirty years later we didn’t follow those principles. We now have massive debt and, in that 30 years, the Republican Party had an opportunity to stand up and be counted on spending cuts and never did.” Stockman demanded: “Would you be willing to tell them, ‘Game over! You had 30 years. Now sit down and let taxes be raised so we can avoid insolvency?’”
To which Greenspan quipped, “Is that a question for me?”—and then, amid audience laughter, elegantly dodged it.
According to Stockman, Greenspan, who was Fed chairman for two decades, deserves a share of the blame for the current state of affairs, but certainly not the lion’s share.
“I think it’s monetary policy going back to Milton Friedman,” Stockman says, invoking the famed University of Chicago economist. “I think Milton Friedman is the evil genius here. He’s the one who basically told Nixon, ‘Close the gold window, throw out the old disciplines, eliminate the old rules, just let the Fed manage the money supply, let the exchange rate float, and everything will work out perfectly.’ Friedman was utterly naïve politically, and he didn’t recognize that once you threw the restraints away—of fixed exchanged rates, of a dollar tied to some metallic reserve—the Fed would be under enormous pressure politically and intellectually to make excuses to flood the market with easy money…Today we’re reaping the harvest.”
Stockman, a nominal tax-cutting supply-sider when he worked for Reagan, has been crusading in recent weeks for President Obama to let George W. Bush’s tax cuts expire—something that will happen automatically absent congressional intervention.
“The only thing Obama needs to do is say, ‘Gentlemen and Ladies of the Congress, don’t send me a tax bill because I don’t want one,’ ” Stockman tells me. “He can take the political hit. That’s his job. That’s change you can believe in. That would put $300 billion back into the coffers, beginning in 2011 and 2012, and it would erase one of the biggest policy blunders in history. The Bush tax cuts never should’ve been passed because, one, we couldn’t afford them, and second, we didn’t earn them…The lower half of American families don’t pay income tax, and they’re the people who ought to be given a break here. By allowing these tax cuts to expire, you’re putting the burden on the top half of the income earners. What is more fair than that? So why does Obama want to extend, as apparently the White House has been saying, the tax cuts for $150,000-a-year families? So the wife can buy her 19th Coach bag?”
Stockman is especially severe on his former House colleague Dick Cheney, who as vice president insisted: “Reagan proved deficits don’t matter.”
“There are big questions about how good Dick’s view of foreign policy was,” Stockman tells me, “but his possible errors there are nothing compared to how far off base he was in economic policy. That is a clueless statement, and symptomatic of why I hold the Republican Party so responsible for the mess we’re in. The Republican Party is supposed to be the conservative party. The Democratic Party is supposed to be the irresponsible party. But somehow we lost that.”
Yet Stockman hopes the Republicans gain the majority in the House and Senate next November, because “then the next Congress gets down to the business of trying to reform entitlements and cut spending. Also, while we’re at it, we have to get out of the imperialism business, okay? No imperial power has succeeded on the edge of bankruptcy.”
Which means: Get out of Afghanistan and Iraq right away—the same prescription touted by renegade Republican congressman Ron Paul.
“I’m totally in agreement with Ron Paul,” Stockman says. “I don’t think he can be elected president, but I think he’s the only guy who really understands monetary policy, economic policy, the proper role of the state, the proper role of the U.S. in the world. On the other hand, the world is changing pretty dramatically before our eyes. I wouldn’t rule out anything right now. But if you asked me who is speaking truth to power, it’s Ron Paul.”
And David Stockman, of course.
Lloyd Grove is editor at large for The Daily Beast. He is also a frequent contributor to New York magazine and was a contributing editor for Condé Nast Portfolio. He wrote a gossip column for the New York Daily News from 2003 to 2006. Prior to that, he wrote the Reliable Source column for the Washington Post, where he spent 23 years covering politics, the media, and other subjects.