May 01

Is David Stockman right?

Posted by: Administrator in Business & Economy Print PDF
Tagged in: Untagged 

by Jay Douglas

David Stockman former President Reagan's director of the Office of Management and Budget has written a insightful new book titled 'The Great Deformation: The Corruption of Capitalism in America.'  He he suggests that Wall Street and the Federal Reserve have joined forces to harm the economy, penalize  savers, and fuel new financial bubbles that will soon burst. 

Stockman takes a non partisan view of how both political parties are to blame for the huge deficit. That in itself is refreshing, in this deeply polarized political world. But he also gives a thorough and detailed analysis of how we got into this mess and offers solutions on how we can get out of it.

He criticizes the George W. Bush presidency for reckless spending, especially on the unnecessary Iraq war and the huge tax cuts, which undid the surplus that his predecessor Bill Clinton left him.  Stockman says the bailout of the "too big to fail" financial institutions initiated by Treasury Secretary Henry Paulson in the fall of 2008 was a huge mistake. As a result Bush left Obama with a deficit in the trillions which Obama has recklessly  added to it.

He doesn't leave Clinton unscathed either.  While he credits him with the surplus, he says that his administration was responsible for eliminating Glass/Steagal which was the catalyst for the banks to make risky bets and the eventual mortgage and housing debacle.

He makes a strong case for one to agree on  most everything he suggests. The exception was in his recommendation that we abolish the FDIC.

He makes that case because if we reinstate Glass-Steagal then the banks will no longer be taking big risks, thus he infers that the FDIC is moot.

However having insurance on consumer deposits is important since banks may still make risky bets by giving loans to small business who may default. Granted that is less risky than pooling sub-prime mortgages, but the risk is still there.

Furthermore, it is important for consumers to know that the money they put in their bank accounts is protected, otherwise people will store their money under the mattress.
In 1929, Andrew Carnegie let the banks go broke, consumers weren't protected and this lead to the Great Depression.

That said, though, we will never know if the government had not bailed  out the banks and AIG in 2008 whether this would have  resulted in the collapse of our financial system.We do know this: As renowned NYU economist Nouriel Roubini known as 'Doctor Doom' said at the time: By bailing out these financial institutions we have created "socialism for the rich and capitalism for the rest of us."


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