Wednesday, August 17, 2011
David Stockman's reluctant and embarrassing admission
I ran into David Stockman at Fox yesterday. Several months ago I bumped into him as well and we got into a conversation about the debt. Stockman was Reagan's budget director until he got fired, probably because he protested too much against the huge deficits that Reagan ran (which created an economic boom). After he left the White House he disappeared for quite a long time, but has since resurfaced as the new "debt Cassandra," warning everyone who will listen that the debt is going to bankrupt the country unless we get it under control, yada, yada, yada.
The last time I met Stockman I asked him what would happen if we didn't get the debt under control? He said interest rates would spike and it would be impossible for us to service our debt. I said that interest rates wouldn't spike, necessarily, so long as the Fed kept them low and even if rates did go up, the U.S. would have no inability to pay the debt service becuase it was simply a matter of the government crediting bank accounts in U.S. dollars, which it does all the time.
He took issue with my assertion that the Fed set the rates.
I asked him about Japan, which has a debt almost three times that of the U.S. yet yields on 10-year Japanese gov't bonds were only 1.0%. (Back in March 10-year U.S. Treasury yields were about 3.6%.) He said that Japan was "different" because it was "internally financed" as opposed to our problem of having external finance. When I countered that the U.S. was also "internally financed" because it's all in dollars, he got annoyed and basically walked out in a huff, shaking his head the whole time as if I was some ignorant fool.
Well, yesterday, Stockman was on Cavuto and he started in with his usual debt rant--unsustainable debt, bankruptcy, etc. But then he said this: "We should abolish the Fed."
Neil Cavuto looked at him and said, "Abolish the Fed? Why?"
He said, "Because the Fed is keeping interest rates artificially low and that is bad."
I couldn't believe my ears. Just a few months earlier this guy was arguing adamantly that the Fed did not control rates and that rates would spike and we wouldn't be able to pay the debt service. Meanwhile, over that short period of time, deficit spending has continued and the U.S. even had its credit rating dowgraded and interest rates had fallen even further. It was obvious that none of the things he had been predicting were coming true.
When he came back to the green room from his segment I said to him, "David, I thought you said in our last discussion tht the Fed didn't control rates and now you just said that it is keeping rates down?"
His face froze for a second and I could see he was trying to collect his thoughts and think of a comeback. Then he just said, "Yeah, but eventually rates are going to spike up. They have to. They can't stay low forever. The Fed will have to raise them to attract capital." (Notice, he says, again, the FED WILL HAVE TO RAISE THEM...)
Unbelievable. These are our policymakers. Clueless, arrogant, people who are so full of themselves and so deep into their club of false beliefs that it is mindboggling. If they weren't so destructive these guys would be truly laughable.