08 February 2010

Bailout The Single Most, Drastic Error In Policy In Modern History

When Reagan's Budget Director comes out against the Bailouts and Wall Street, I took notice. The video is here. He also admits that the "starve the beast" argument -- that tax cuts will produce spending cuts -- has failed.

PBS Newshour Interview with David Stockman: With President Obama pushing a bipartisan deal on reforming banking regulations, Paul Solman talks with David Stockman, former Reagan budget chief and Wall Street "gunslinger," about the proposal to tax banks on their size and amount of risk.

DAVID STOCKMAN: Please, Wall Street banks, don't come and ask the taxpayer of this country who's out in Green Bay Wisconsin, can't pay his mortgage, can barely put food on his table, to have the safety net of the Fed and the Deposit Insurance and the Treasury of the United States. It's an outrageous ask, and they ought to be ashamed of themselves.
PAUL SOLMAN: Listening to you, I'm struck by the fact that I can imagine critics on the left saying exactly the same thing.
DAVID STOCKMAN: I'm mortified by that thought. But, at some point, you have to ask, what's good policy? And we have gotten into this syndrome, I think, over the last 20 years, where policy of the Treasury and of the Fed has been dictated by Wall Street, that, if Wall Street threatens to have a hissy fit, or the stock market is going to go down, the Fed has basically capitulated and is creating a very unstable and dangerous financial system in our economy.

PAUL SOLMAN: So, if you had been in the administration after Lehman Brothers, you wouldn't have supported bailing out AIG?
DAVID STOCKMAN: No, absolutely not. It was the single most, you know, drastic error in policy in modern history, going back to the 1930s. This was exactly the wrong thing to do.
It's destroyed any basis for fiscal discipline in the United States. I was a member of Congress, and I know how they think. And they think by analogy. If you did it for John, you have got to do it for Bob. There is no way that any congressman is ever going to vote against farm subsidies or ethanol subsidies or housing subsidies or anything else, refrigerator subsidies, once we have made this tremendous bailout for Wall Street, and we stepped into AIG.
PAUL SOLMAN: Well, spoken like a true gunslinger, but you would have been taking an enormous risk.
DAVID STOCKMAN: It's part of the capitalist system. You know, if an investment bank gets in trouble, it ought to fail. If a hedge fund gets in trouble, it ought to fail.
The idea that our system is so fragile that the failure of Lehman Brothers or even Goldman Sachs, which could have happened, allegedly, in the next few days, would have brought the whole system down, I think, is baloney. I think it's an urban legend that was created by Wall Street.

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