David Stockman, the former budget director under President Ronald Reagan, says the economy will not improve until the United States rethinks its habits of borrowing, spending and money printing. His new book, “The Great Deformation: The Corruption of Capitalism in America,” argues that Washington has enabled Wall Street to fuel financial bubbles and alter the markets, all while crushing middle class families.


  • David Stockman Former Republican Congressman from Michigan and budget director during the Reagan administration.

Read An Excerpt

From “The Great Deformation: The Corruption of Capitalism in America” by David A. Stockman. Published on April 2, 2013, by PublicAffairs. All Rights Reserved.


  • 11:06:56

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. As Congress continues to argue over the federal budget, David Stockman says Washington needs to take a new approach to fiscal policy. He was President Regan's budget director. He says the economy will not recover unless the country rejects its old habits of borrowing, spending and printing money.

  • 11:07:22

    MS. DIANE REHMStockman's new book is titled "The Great Deformation: The Corruption of Capitalism in America." David Stockman joins me in the studio. You're welcome to be a part of the program. Call us on 800-433-8850, send us your email to drshow@wamu.org, follow us on Facebook or send us a tweet. Good morning to you, David. It's good to see you.

  • 11:07:53

    MR. DAVID STOCKMANGood morning, glad to be here.

  • 11:07:55

    REHMGood to have you here. First of all, explain the word deformation.

  • 11:08:04

    STOCKMANWell, it's the opposite of a good thing. It's not a reformation. It is, this book covers a lot of ground, 80 years of history and it's not meant to be a history though but a diagnosis of how we got to the tremendous, risky, dangerous mess that I think we're in today because we have massive public debt that we can't seem to deal with.

  • 11:08:29

    STOCKMANWe have massive speculation and windfalls being generated on Wall Street that basically benefit only the one percent and we have a massive disconnect between a failing economy on Main Street and a periodic boom and bust on Wall Street. None of these things are good, they have a deep history. They go back a long way, their roots, and really that's what the book is about.

  • 11:08:57

    REHMAnd you said the book originated back in 2008 when you were flabbergasted with the tarp. How come?

  • 11:09:10

    STOCKMANBecause it was an udder, you know, reputation of every principle of free markets, fiscal rectitude and small government that one, I thought Republicans stood for. Two, I know that Ronald Regan stood for because I spent all those years in his administration.

  • 11:09:31

    STOCKMANAnd I was stunned that a Republican Treasury secretary and a Republican president would be putting the taxpayers in harm's way in order to bail out some big hedge funds, they called themselves investment banks but they were really noting but high trading, fast trading, highly leverage hedge funds, for no good reason of public policy.

  • 11:09:58

    STOCKMANIf Goldman Sachs had gone down, so be it. The world could live without Goldman Sachs. If Morgan Stanley ended up the same place that Lehman Brothers did or Bear Stearns before it, so be it. That's the free market. When people make mistakes there have to be consequences.

  • 11:10:15

    STOCKMANPaulson and his gang of Goldmanites on the third floor of the Treasury Building basically were running the country. It was almost a coup d'état by Wall Street because Bush was clueless as he sat in the White House wondering what was happening and all the action was being driven by this, what I call this occupation of the Treasury Department, by Goldman Sachs.

  • 11:10:44

    REHMAnd so you call this subtitle "The Corruption of Capitalism in America." What's happened to capitalism?

  • 11:10:55

    STOCKMANWell, we've developed a variant which is a very deformed variant, we're again back to the title, that I call crony capitalism. And crony capitalism is not like free market capitalism where if you invent a new mouse trap, if you're really good, if you work hard, if you build a company you get the rewards and if you make mistakes or you have too much leverage or your product fails or you have competitive disadvantages, you pay the cost.

  • 11:11:25

    STOCKMANThat's free market capitalism. What we have now is capitalism for the winners and socialism for the failures and that will totally disable the ability of capitalism to work and also it will cause the public to lose faith, belief in our free enterprise system. When they see people bailed out on Wall Street, families in America, millions of them have had their homes, you know, they defaulted on their loans and they had their homes foreclosed.

  • 11:11:56

    STOCKMANThey didn't see any bailout and I'm not saying they should've had one. But the point is the inequity of leaving Main Street in the reel of free market, you know, winners and losers take their consequences and Wall Street having constantly a safety net, a safety blanket, put underneath by Washington and the fed, that's the problem, that's corruption.

  • 11:12:18

    REHMNow, is there any similarity to the criticisms you're making now that led you to resign from the Regan White House?

  • 11:12:31

    STOCKMANYes, there is a connection because part of this whole deformation that we've drifted into was when we lost, what I call, fiscal rectitude. Now, I know that's kind of a fussy, fuddy-duddy kind of phrase, but it is true, that governments should not be borrowing in massive amounts year after year when it's peace time and there isn't an emergency.

  • 11:12:56

    STOCKMANBecause the only thing we do when we do that is bury our children. They're going to have to pay the interest forever and the problem of massive chronic deficits started under Regan. And he meant well in 1981 but the program fell apart. In other words, the defense budget got too big, as I lay out in the book and everybody knows that, it was catastrophe what happened.

  • 11:13:20

    STOCKMANThe tax cut got into a bidding war in Capitol Hill and so instead of being let's say a moderate size tax cut it became gigantic. And then when it came to cut domestic spending we didn't get very far because the interest groups dominated both parties. The Republicans, you know, they didn't want to cut farm subsidies for instance.

  • 11:13:37

    STOCKMANThe Democrats didn't want to cut social security, so nothing happened. And as a result of that we got an era of permanent deficits, that's the real legacy of the Regan era. Republicans then came to believe that deficits don't matter, that's what Bush said, that's what Dick Chaney said. It was utterly wrong, it's heresy.

  • 11:13:56

    STOCKMANIt's rank heresy from a sound government point of view and then when you have both parties thinking deficits don't matter. If we can't make ends meet we'll keep everybody happy, we get into trouble.

  • 11:14:10

    REHMSo you said Ronald Regan meant well when he did what he did. Did George W. Bush and Hank Paulson mean well when they did what they did?

  • 11:14:25

    STOCKMANYes, I'm sure they do. I mean, my approach is about bad ideas not bad people or bad men. But good people possessed with bad ideas can lead to some very dire results. Now, there are a few points in my book where I think occasionally there's a bad man that came along too.

  • 11:14:44

    REHMSuch as?

  • 11:14:45

    STOCKMANRichard Nixon. I think he was really a bad guy and he basically thought the office of the presidency was there to be used in whatever form he could, and this is Watergate, but in economics to get re-elected. And so we did a lot of things which were totally adverse to the Republican tradition, that were harmful to the economy and it sowed the seeds of what, after decade after decade, became this free money policy that we have at the fed today.

  • 11:15:15

    REHMOne of the people you do not criticize is Bill Clinton because you say he was able to bring some balance to the budget. Now, you have President Obama, you have Ben Bernanke in charge of the fed, who is keeping interest rates at zero or below. What is that doing to the economy in your view?

  • 11:15:44

    STOCKMANWell, I think the zero interest rates are crushing millions of people who save or trying to save, millions of people who are on fixed income, spent their whole life doing the right thing. You know, they didn't buy a new car every year. They saved some money, they have it in the bank account. Maybe someone saved a half a million dollars over a lifetime by being frugal, doing the right thing and today, thanks to Ben Bernanke, they're making nothing, zip, on that entire $500,000 they saved in interest.

  • 11:16:18

    STOCKMANAnd that is so wrong. You know why? Because the interest rate a half of percent is not normal, that's not the free market. That's entirely a rate administered set by the fed and they're taking it out of the hides of the saver so that the banks can pocket the spread.

  • 11:16:37

    STOCKMANIn other words, the interest rates the banks are paying your deposit cost them noting. They take your deposit, they invest it in something earning two, three, four, 10 percent, they're pocketing all the profits. Then they say we're virtuous. We're now making money again, our balance sheets are repaired, we paid back the TARP, out of the hides of savers by the way.

  • 11:16:56

    STOCKMANAnd now, why don't you let us use all this earnings, which is phony earnings, in order to go out and buy our stock so our stock price will go up so the CEO's can get more stock options. I think it's outrageous that they are not effectively what I call, this kind of a flamboyant phrase, under economic house arrest.

  • 11:17:14

    STOCKMANIn other words, all these profits should be stuck on their balance sheet, sequestered on their balance sheet, they shouldn't be paying dividends. They should be buying back stock until we're sure that all is clear. That we're out of the financial crisis entirely and that never again will the taxpayers be called upon to bail out the banks.

  • 11:17:34

    STOCKMANThat's what we should be doing but you know what, the banks run policy. Wall Street banks run the Congress, the fed is afraid, scared to death, of a hissy fit on Wall Street and as a result of that this is insane. That you have J.P. Morgan buying back its stock when, you know, the banking system almost went under.

  • 11:17:56

    REHMWhat should the interest rates be that the fed is charging right now?

  • 11:18:02

    STOCKMANThey should be what the free market says they ought to be, supply and demand. You know, this isn't about doctrine, this isn't about ideology, you can't possibly set the right interest rate when there's billions of transactions going on every day. Let savers put their money in the market, let borrowers, you know, decide how much they want to borrow and let the interest rate come out of that massive interaction.

  • 11:18:27

    STOCKMANI think it would be four or five, six percent. It wouldn't be...

  • 11:18:30

    REHMBernanke says he's worried about inflation. We're going to talk about that after a short break. David Stockman was President Ronald Regan's budget director. He's a former Republican Congressman from Michigan. His new book is titled, "The Great Deformation."

  • 11:20:06

    REHMAnd welcome back. David Stockman is with me. He's got his first book in how many years, 25?

  • 11:20:14

    STOCKMANThirty years actually, yeah.

  • 11:20:16

    REHMWow. David Stockman who was President Ronald Reagan's budget director. he's got a new book. It's titled "The Great Deformation: The Corruption of Capitalism in America." And you started out this conversation talking about our deficit. Talk about how important you see those deficits to be to our overall economy now and to our overall economy ten years hence.

  • 11:20:55

    STOCKMANThat's the problem. In the very short run you can say, isn't this great. Let's borrow some money, pass it out to consumers like they did in the stimulus. People spend money, maybe this helps. The problem is the debt sticks with you forever. And it's a great black dark overhanging cloud that's getting bigger and bigger. And that means that someday, maybe not today but someday we're going to have to pay taxes -- higher taxes in order to service all that debt. And as we pay higher and higher taxes there will be less left for government to do some of the things that it should do.

  • 11:21:29

    STOCKMANAnd that, you know, connects to your earlier guest. You were talking about this brain mapping program. You were talking about the NIH. As a father I am so proud my daughter is going into a Ph.D. program at Columbia and will be working on the brain mapping program. But I wonder...

  • 11:21:45

    REHMI'm so glad.

  • 11:21:46

    STOCKMAN...you know, but this is wonderful and she's going to do great things but I wonder 20, 30 years down the road, as we're carrying debt that is unimaginably big, whether there's going to be any revenue left, you know, after we pay the interest to fund important projects of this sort.

  • 11:22:06

    REHMWhere do you lay the blame for all of this?

  • 11:22:11

    STOCKMANWell, I think it starts with the bad idea that came out of the Reagan era. Republicans before that -- and I was a congressman, you know, in the 1970s -- we were afraid to death of deficits. No one had seen big deficits in peacetime. You had them in war but that's different because there are price controls and nobody has any money to spend anyway. So we were scared to death of them. I still was when I was in the Reagan White House.

  • 11:22:35

    STOCKMANAnd when they broke out to this enormous magnitude, you know, I did everything I could to try to convince the president we got to raise taxes, cut defense and so forth. We did a little of it. I finally left because I knew I wasn't getting through and I couldn't justify what was going on. But what came out of that was a bad idea that got implanted in the Republican Party that deficits don't matter. And the main thing you ought to do is cut taxes whenever, however and as you can.

  • 11:23:04

    STOCKMANNow the danger of that is that in a democracy you have to have a healthy competition. And my model always was the Republican Party is the part of no, of fiscal rectitude of putting its hands up and slowing things down. The Democratic Party is the spending party, the party that wants to at least say they're going to help the people and so forth. And then you have a competition and out of that you try to balance what you can do if the government's going to have programs and how you finance it.

  • 11:23:34

    STOCKMANWhat happened after Reagan is we got two free-lunch parties. So the Republicans spent the next 20 or 30 years cutting taxes until we got revenue below the level that even Harry Truman had in 1948. And we had spending continue to grow. In fact, for all their anti-spending speeches Republicans, when they were in control of Congress under Bush, expanded entitlements, the Part D and so forth and a lot of other spending, more than any other administration in history. They were bigger spenders than Lyndon Johnson in relative dollars, if you could imagine that.

  • 11:24:08

    STOCKMANSo with two free-lunch parties competing to lower taxes and raise spending, we end up with this massive gap. And now they're stuck because no one wants to step forward and propose the drastic medicine it's going to take.

  • 11:24:24

    REHMThe drastic medicine being what?

  • 11:24:28

    STOCKMANWe're going to have to have tax increases...

  • 11:24:31

    REHMTo what extent?

  • 11:24:33


  • 11:24:34

    REHMWhat does that mean?

  • 11:24:35

    STOCKMANI think we need hundreds of billions a year of more revenue and also hundreds of billions a year in spending cuts in defense. We ought to go all the way back to something in my book I call the Eisenhower minimum. In other words, in constant dollars what did Eisenhower say we needed? He was the great general and we're way above that today. Go to Eisenhower. On domestic discretionaries I say go to the Bill Clinton standard. We could cut domestic discretionaries back to where Bill Clinton left them. And I don't think anybody though that he was underfunding real social needs.

  • 11:25:11

    STOCKMANAnd then we have to have big entitlement reform on Social Security. The affluent retirees have to have their benefits cut. We should save the money that we do have for the dependent retirees who have no other source of income. Now if you do those three things, massive cutbacks in defense, got back to the Clinton standard on domestic and big reform on the non-means tested Social Security and Medicare then you can still afford the safety net for poor people and disadvantaged people who've been left behind.

  • 11:25:45

    STOCKMANWe're not even close to any kind of agreement on that unfortunately because it's so unpleasant. Now the president said, I want to raise taxes but you can't do it just on the 2 percent. I was for what he did on the 2 percent. Hey, they should stop whining, okay. Let it go. But you're going to have to taxes on the whole middle class. And when he extended the Bush tax cuts permanently for the middle class I was scratching my head. What is he thinking? The Democrats have been against them for ten years and now there's a chance to let them expire. You didn't even have to vote.

  • 11:26:18

    STOCKMANRemember on New Year's Day, that was folly. And it's a measure of how our system is paralyzed and politicians are pandering and why we're getting in trouble.

  • 11:26:30

    REHMSo if you had a magic wand, what would the rate of taxation on the middle class and the upper income earners be now?

  • 11:26:44

    STOCKMANI don't think, you know, if you went back to the pre-Bush rates, they worked pretty well in the 1990s. Let's call them where Clinton left them. I'm not -- you know, Clinton is one of the policy heroes in my book. You know, I list a whole bunch of them who did the right thing. He did the right thing because he balanced the budget several years in a row. So we could go back to that. We're already there for the wealthy and we can be there for the middle class. It's not going to hurt them.

  • 11:27:10

    STOCKMANRemember, the Bush tax cuts only affected the top 50 percent of households because as Romney memorably told us, the bottom 50 percent don't pay income taxes anyway. So if we're going to put a burden on society, at least the upper half of the income distribution of the middle income household sector ought to be asked to pay. Now, no Democrat wants to tell the middle class that we've made the government so big that we're going to have to ask you for taxes. But that's what a real honest, what I would say, Clinton Democrat might do. But we don't have Clinton Democrats anymore. You know, we have Keynesians and big spenders and double talkers and other people that are not helping the problem.

  • 11:27:58

    REHMAll right. Here's what Paul Krugman wrote. He talks about your book. He says, it's full of big numbers that are scary because they're big numbers. He says, we've run a current account deficit of 8 trillion. So he says, we have a 16 trillion a year economy. America's net international investment position is a debt of about 30 percent of GDP, which is not that big. Our balance of investment income is still positive but it's $8 trillion.

  • 11:28:45

    REHMHe goes on to say your book is cranky old man stuff, the kind of thing you get from people who read Investor's Business Daily, listen to rush Limbaugh. And maybe if they're unusually teched up get investment advice from Zero Hedge.

  • 11:29:09

    STOCKMANWell, it's surprising that it took a Nobel Prize to come up with all of that vituperation. But my point I guess is that I remember well Professor Paul Krugman when he was a young man in the Reagan White House on the economic staff helping us work on the tax cuts. He was a pleasant astute young man. And the only thing I can say is over the last 30 years something went wrong or he changed his mind, or maybe he's right. The aging process takes its toll on everybody.

  • 11:29:42

    STOCKMANI can't answer his, you know, vituperation, as I called it except to say that Paul Krugman is a Keynesian, you know, unreconstructed, full bore Keynesian who believes there's never enough debt. Debt is the elixir, the magic elixir that will cause economies to grow and wealth to rise and people live happily ever after. That is a fundamental almost metaphysical question that people can disagree on. And I totally disagree. I think debt is a great heroin. It is a great drug that causes economies to fail in the long run, even as they have a party in the short run. We've had a huge debt party and I think it's coming to an end.

  • 11:30:30

    REHMHere's an email from Dale in Florida. He says, "Stockman is saying what Ron Paul has been saying for decades. Ron Paul also condemned both parties for unsustainable deficit spending and printing funny money, and the Federal Reserve for enabling this whole Ponzi scheme. So what are David Stockman's comments?"

  • 11:30:59

    STOCKMANWell, my comments are, one, I started as a SDS radical activist in the 1960s against the Vietnam War. And I never lost my antiwar commitments and beliefs. And I agree with Ron Paul that we've had too many wars, too much imperialism. The military establishment is massively too big and we ought to cut it back dramatically. Not this little sequester thing, but dramatically back to what I demonstrate in my book as the Eisenhower minimum. So I agree with him on that.

  • 11:31:31

    STOCKMANI agree with him the fed's out of control. The fed is crucifying main street on a cross of zero interest rates and helping Wall Street speculate its way through another bubble. I agree with him on that. I agree with him on deficit -- obviously on the massive deficits. So, you know, there is, you know, a mix of views. There are people in both parties who would agree to those three principles, sound finance, getting the fed out of Wall Street and cutting down to size this tremendous war machine that we have.

  • 11:32:05

    REHMAnd here's a Tweet from Gary in Maryland. "Is there anyone in politics today that you believe is willing to do what's needed to bring our economic house in order?

  • 11:32:21

    STOCKMANWell, you know, I can't really say that there's one individual but I do know this, that unless there's radical change in both parties, that individual, who might have somewhere quietly the convictions in the back of his mind but doesn't speak publicly because he wants to get -- he doesn't want to get drummed out of his caucus. I don't know who that person is. But I do know this. The parties have failed. The parties stand for nothing anymore, and that's true of the Democrats as well as the Republicans.

  • 11:32:52

    STOCKMANI call them glorified concierges. They're in the business of introducing politicians to money. They're in the business of setting up a schedule to go to the political action committees and to the quarters of K Street in order to fund their next campaign. That's all they do. They reelect their incumbents, they stand for nothing. And so I can't see that statesman coming out of their of those parties at the present time.

  • 11:33:19

    REHMAnd you're listening to "The Diane Rehm Show." One last email from Michael in Gaithersburg. "The Reagan Administration's push for deregulation in general and Wall Street in particular caused the current economic nightmare we're in. Stockman's push for deregulation was the main cause."

  • 11:33:50

    STOCKMANWell, I think the history of this caller is a little erroneous. First of all, in my book I list all the policy heroes. Number one is Carter Glass. He happened to be the author of Glass-Steagall.

  • 11:34:04


  • 11:34:05

    STOCKMANOkay. So I do not agree that we should have deregulated banks because I don't think banks are legitimate free market institutions. They're awards of the state. They get deposit insurance. They get to go to the fed and borrow money cheap. And if that's the case, than we have to regulate them or they'll get out of control. What we deregulated in the Reagan Administration that I was behind was oil prices. And I think we should have because you can't regulate the world oil market.

  • 11:34:30

    STOCKMANWe got out of regulating airlines fares. That was a good idea. You couldn't regulate all these, you know, short hops, long hops and so forth in the air traffic system. So we got out of economic regulation but the error is in the '90s. They took it too far when they took the idea of regulation in free markets where it works, in energy and industry and agriculture and applied it to banks. It doesn't work for banks.

  • 11:34:59

    STOCKMANNow if the banks wanted to be free enterprise institutions and give up deposit insurance, give up their right to go to the fed when they get in trouble and say, oh Mr. Fed, please give me some cheap money so I can bail out of, you know, my bad investments and loans, then that would be a different matter. But we don't have free enterprise banks in this country. We have awards of the state.

  • 11:35:23

    REHMSo if you separated the functions of banks from taking in the deposits to making these kinds of investments, would that help?

  • 11:35:41

    STOCKMANBig -- it would be a...

  • 11:35:42

    REHMBig time.

  • 11:35:43

    STOCKMANThat would be big time big help because one of the recommendations that I have in the end -- I do have a pretty pessimistic diagnosis, I agree -- but I do have some ideas that could be pursued at the end. And one of them I call super Glass-Steagall. And what that means is one, break up the big banks regardless. No bank should be more than 1 percent of GDP. That's $150 billion. That's big enough for a bank. There's no advantages beyond that. So the banks that are a trillion or 2 trillion today would be broken up.

  • 11:36:14

    STOCKMANSecond, if you want to get deposit insurance or the discount window at the fed you can only be in lending to households or business and taking deposits. No trading, no underwriting, no asset management of any kind, no prop trades, no London whales and none of the rest of the stuff. We need to stand firm and do that instead of this stupid Dodd-Frank thing.

  • 11:36:43

    STOCKMANThe Dodd-Frank thing is -- no one can understand it. It's incomprehensible. It's obscurantism that is going to keep lawyers, accountants and consultants in business forever. And they will find one way after another to work around it, to work through it, to riddle it with loopholes. They've already done that to the so-called Volcker Rule. You know, they've basically massacred the Volcker Rule. It's not going to have that big of effect.

  • 11:37:06

    STOCKMANSo if they're too big to exist -- or if they're too big to fail they're too big to exist. And let's have some real banking reform or the next crisis is going to be far worse than what scared the living daylights out of us last time.

  • 11:37:21

    REHMAnd you do point out in the book that you believe we're on the way, in the stock market, to yet another bubble. Short break here. David Stockman. His new book "The Great Deformation." We'll be right back.

  • 11:40:02

    REHMAnd we'll go right to the phones for David Stockman. His new book titled, "The Great Deformation: The Corruption of Capitalism in America." First to Arlington, Va. Good morning, Ed. You're on the air.

  • 11:40:21

    EDThank you, Diane.

  • 11:40:22


  • 11:40:23

    EDMr. Stockman, you said that you didn't favor the TARP, which was intended to halt the banking crisis and prevent deflation and economic depression. Do you think if more banks had failed and no action had been taken there wouldn't have been any worse consequences? Or would you say that your principles were more important than the risks of a global depression?

  • 11:40:44

    STOCKMANA good question, great question. I don't think there was a risk of a global depression. I think the meltdown was entirely in the vertical canyons of Wall Street. It would have taken down a couple more of the big Wall Street speculators, as I said, Goldman or Morgan Stanley, but it wouldn't have spread to main street banks because the main street banks did not own all this toxic securities and all of these assets that were plunging in value.

  • 11:41:14

    STOCKMANThey had been relatively prudent and there was deposit insurance in place. There was not going to be a retail run. And I demonstrate in my book--and we can't go into all the details now--that the idea of a Great Depression 2.0 stemming from the failure of Goldman Sachs is utter urban legend mythology. It's the economic equivalent of WMD. It never would have happened.

  • 11:41:41

    REHMSo how did that get promulgated into belief?

  • 11:41:49

    STOCKMANOne man, Mr. Bernanke, who claims to be a scholar of the Great Depression. I think he was totally wrong because he simply copied or carried further the work of Milton Friedman, who blamed the whole Great Depression on an alleged error in micromanaging the money supply of the Fed in 1931. I dispute that entirely. The Great Depression was the hangover from the catastrophe of World War I, where every country got in debt and then we had a fake boom in the '20s and finally the chickens came home to roost.

  • 11:42:25

    STOCKMANSo Bernanke was wrong about his scholarship of the 1930s and then in a state of panic he said it's happening again. I've got to flood the market with money, this time, like the Fed allegedly didn't do last time. And that is the sole source of that mythology. It never would have come up from other sources. I don't think congressmen were sitting around saying oh, my God, if Goldman fails were going to have Great Depression 2.0. I don't even think Paulson thought that. He just wanted to save his fellow banksters. I think it was one man who had a profoundly erroneous belief.

  • 11:43:04

    REHMLet's talk about the stock market. It's on a high. You fear another bubble.

  • 11:43:16

    STOCKMANYes. Because this is the third time we've been here. In other words, people somehow, you know, we have this recency bias. We don't remember what has happened over the last decade or two decades, but when the market hit the record in the last couple of days, we were at that point, give or take 1 percent or 2 percent, in March 2000. Now, that's 4,750 days ago. And in the interim we had a massive crash called the Dot Com Bust. Five trillion dollars was lost by main street America, who believed it was for real and it wasn't. And then Greenspan came in and reflated the bubble, drove interest rates, as you remember, to 1 percent, started the craziness of the housing boom that happened, and then the credit boom and then the LBO boom and the junk bond boom.

  • 11:44:06

    STOCKMANWe got to 207, 208. There was rot everywhere in Wall Street. It crashed. We went all the way back to where we started. Seven trillion was lost this time by the households of America, as they got taken to the cleaners for the second time. And the next thing you know, Bernanke's in there reflating the third bubble. And after a couple years of trying, he's got the stock market back to where it was, as I said, 4750 days ago.

  • 11:44:32

    STOCKMANThis is dangerous because I'll tell you one thing, the economy is not much better off after 13 years of this boom and bust and Wall Street bubble-making, than it was in 2000. We haven't created jobs. We haven't had much growth. We haven't had real business investment. The net worth of the bottom 90 percent of American families is 25 percent lower today than it was the first time we hit this level in the stock market in March 2000.

  • 11:45:03

    REHMAll right. To Chapel Hill, N.C. Good morning, Evan.

  • 11:45:07

    EVANHi, Diane. Thanks so much for taking my call.

  • 11:45:10


  • 11:45:11

    EVANAnd, Congressman Stockman, thanks so much for making this a lot clearer. My question is this, given America's size and diverse population and wealth, are there any other countries in the past or presently who have encountered similar problems that we can use as examples or models to follow? Or are there any policies they've implemented that have gotten them out of similar situations?

  • 11:45:35

    STOCKMANIt's a great question. And I wish I could say that there are examples in the past, but what my book argues, and I'll succinctly say now is no. We are in unchartered waters. No one has ever printed money for a sustained period at the rate the Fed has been doing. Maybe this little statistic will help, you know, help it be understood. It took the Fed 94 years of its existence, the first 94 years to get its balance sheet--that is how much money it printed--to 900 billion. Bernanke doubled that in seven weeks. Doubled in seven weeks the 900 billion that carefully and under deliberation the Fed had created in its first 94 years.

  • 11:46:20

    STOCKMANNow, when you go to that--and then he continued. So today the balance sheet is 3.2 trillion, compared to, you know, it was only 500 billion when we were back at this level of the stock market in March 2000. So therefore, none of this has ever been done before. If you went back and got some economic commentary from 1987, when Ronal Reagan was still in the White House, you wouldn't have found 1 in 100 economists who thought this was anything but lunacy.

  • 11:46:47

    STOCKMANNow, were the people totally benighted in 1987? You know, were we all stupid? Did we not know anything? Did we not realize that the Fed could make everybody wealthy just by printing money and going crazy with his balance sheet buying bonds? No. I would say the wisdom of the earlier generations and the wisdom of literally decades and centuries has been kicked in the garbage can by a couple of people on the Fed who think that they can save the world.

  • 11:47:16

    REHMSo what's going to happen when the Fed stops putting money into the banks?

  • 11:47:22

    STOCKMANWell, that's the great danger. The stock market and Wall Street is not an honest market today. They're all simply front-running the Fed, which means they're trading things based on the belief the Fed will keep interest rates on the floor, that it will continue to prop up the stock market, that it will continue to make it necessary for retired widows to buy junk bonds, you know, rather than their savings deposits, if they want to have enough money to pay for their food.

  • 11:47:56

    STOCKMANNow, that is cruel. That is the consequence of what the Fed is doing. And when it stops everything will come unwound.

  • 11:48:04

    REHMAll right.

  • 11:48:04

    STOCKMANBecause nobody believes that, you know, you're getting a good deal buying the Treasury bond with 2 percent interest.

  • 11:48:11

    REHMLet's go to Louisville, Ky. And, Kenny, you're on the air.

  • 11:48:17

    KENNYJust a quick question. I wish I would have been able to read the book prior to this, but how does he compare Obama to Bush? Because in my opinion they're one in the same.

  • 11:48:26

    STOCKMANThat's exactly my answer. I couldn't approve. I mean, they've made errors for different reasons. Bush, I don't know what he was thinking. This idea of the wars in the Middle East, what was he thinking? You know, most people who are looking at this never believed that that made any sense. And then he didn't want to ask the people to pay taxes to finance them and so forth.

  • 11:48:55

    REHMMight put him off the books.

  • 11:48:57

    STOCKMANYeah, yeah. So Obama's disappointing because he should have come in and cleaned this up. He had a mandate from the people. He was the peace candidate. He should have come in and really shut down this massive military machine and began to radically reduce the defense budget. He hasn't done it.

  • 11:49:16

    REHMAnd why do you think he did not?

  • 11:49:18

    STOCKMANI think that, like a lot of so-called progressive Democrats, they're afraid that the military industrial complex is going to accuse them of being soft on, you know, foreign policy. Now, who are our enemies? I don't think it's Russia, you know, it's a kleptocracy. They like to steal from each other. I don't think they're going to invade any neighbors. I don't think it's China. China's an export machine. They're going to bomb the Wal-Mart stores? That's how they survive.

  • 11:49:46

    STOCKMANSo who are we defending our self from? Oh, I know there's a bunch of terrorists running around, but you can't have a war machine invading every country of the world in the remote regions and deserts and God forsaken badlands and hills to find two or three terrorists. You have to do it through police powers and homeland protection. So I think the Obama administration is like other progressive Democrats, unwilling to take the flak from neocons and the warmongering professional class that has made a living out of big defense budgets and an aggressive imperialist foreign policy.

  • 11:50:34

    REHMTo Nantucket, Mass. Good morning, Borislav.

  • 11:50:38

    BORISLAVGood morning, Diane. Great to be on the show.

  • 11:50:40

    REHMThank you.

  • 11:50:42

    BORISLAVAnd I have a comment to Mr. Stockman about capitalism. And my point is that it's unsustainable and very much so because it's based on limited resources. And we're just about exhausted all the resources that we have. So if we're talking about virtual or physical resources we are talking about Wall Street and then the internet boom and bust. So all of those, they don't improve your living standard, you know. Like, okay, you get money from Wall Street, but then you want to turn it into a physical resource, if you want a bigger house, a bigger home, a bigger, you know, whatever greed leads you to, you know, something bigger and better.

  • 11:51:25

    BORISLAVSo both resources, the physical resources are exhaustible and we've just about exhausted them, including, not only oil, but, you know, that's water and air and pretty much everything.

  • 11:51:38

    STOCKMANWell, you know, that's an interesting observation and that's why I think the corruption of capitalism is such a shame, such an unfortunate development. Because free enterprise and free markets can deal with the problem that you articulate well. When resources get scarcer the price starts to rise. As the price rises or even soars, it causes invention that causes demand to shift to other activities. And as a result of that we can continue to raise our standard of living and grow. But if you don't have free market prices working effectively and honest financial economics in the system, the great virtue of free markets is entirely lost. And therefore, you know, people are giving up on capitalism when they shouldn't.

  • 11:52:32

    REHMLet's talk about the federal investigations into JP Morgan Chase. What do you think's going to come out of that?

  • 11:52:43

    STOCKMANI don't expect much. You know, these investigations go on. This is about the 8th or 9th one. These banks will say, okay. Well, you know, they'll contest this. There will be, you know, all kinds of hearings and documents produced by the--not only millions of pages, but tens of millions of pages. And they'll end up paying $1 billion fine or $3 billion or half a billion. And they'll say to Wall Street, hey, don't count that. It was only a one-time thing. It doesn't affect our future prospects.

  • 11:53:18

    STOCKMANAnd here's a fact in my book, the big banks, since the crisis, have paid $100 billion in fines and settlements and the touts on Wall Street say, oh, none of this counted. They paid the money, you know, the issue is behind us.

  • 11:53:33

    REHMBrushed it aside.

  • 11:53:33

    STOCKMANYou know, let's look at their adjusted pro forma go-forward earnings. And I say to these brilliant people, if they did this to this degree once, why do you think it's not going to happen again?

  • 11:53:47

    REHMAnd you're listening to "The Diane Rehm Show." Let's go to Gainesville, Fla. Good morning, Keith. You're on the air.

  • 11:54:01

    KEITHYour show is always wonderful, but I must say, this is one of the best programs that you've ever had.

  • 11:54:07


  • 11:54:08

    KEITHAnd thank you both.

  • 11:54:08

    REHMThank you.

  • 11:54:09

    KEITHI recall hearing Mr. Krugman say, jokingly, on the radio fairly recently, that what we really needed was a credible threat from space so that everybody banded together, the government built lots of infrastructure and it got everybody employed again and so forth. A few weeks later a meteorite blew up over Russia. But that sort of seemed to be the best plan that he had. What are your thoughts on that and what's your plan?

  • 11:54:35

    STOCKMANWell, it's an interesting observation and that's what we call Krugman Economics, but frankly, if we want to pursue that I don't think we have to wait for a comet or an asteroid or, you know, a mission from Mars to come at us. All we have to do is bury ourselves in debt building pyramids. And everybody would go to work. We'd build a pyramid in every state, massive. And everybody would go to work until all the pyramids were built and then the whole thing would collapse and we would have the debt left at the end.

  • 11:55:05

    STOCKMANSo we don't have to wait for a comet from deep space. Let's start the pyramid building program now. Now, obviously, every man and woman on main street knows that is a lot of bologna, but it is essentially, in essence, what is recommended by the unreconstructed Keynesians, like Professor Krugman.

  • 11:55:24

    REHMOkay. One thing I do want to ask you about. We're almost out of time. You've got 13 measures in the book that you believe would put the economy and the budget back on track, including raising the interest rates, abolishing FDIC and abolishing the minimum wage and the income tax. How is that going to get us anywhere?

  • 11:55:51

    STOCKMANIt's going to get us very far because I said abolish the income tax and replace it with a consumption tax that everybody will pay. I realize the idea of progressive income taxes is long standing, but in this world, it's almost impossible, really, to collect an income tax from the wealthy people who have all the lawyers, accountants, island havens and every other thing in a global economy. Corporate income taxes, totally a waste. You know, they evade it. They put all their subsidiaries in Ireland and every island that you've never heard of.

  • 11:56:22

    REHMSo we created--

  • 11:56:23

    STOCKMANSo I'm saying, we've created this monster. So I'm saying let's have a consumption tax where we tax at the point of sale. You can't avoid it there, everybody pays and if people need help, then we'll have an income transfer system for the low-income population on a means tested basis. And that’s why I get rid of the minimum wage. That helps no one. If someone can get a job at $6 an hour they should take it, and then we should supplement it with earned income tax credit to make them capable of supporting themselves or their family. But don't tell the market that if it wants to create a $6 job it shouldn't.

  • 11:57:04

    REHMDavid Stockman, his new book, "The Great Deformation: The Corruption of Capitalism in America." Great to talk with you.

  • 11:57:17

    STOCKMANWonderful to be here. Thank you.

  • 11:57:19

    REHMThank you. And thanks for listening all. I'm Diane Rehm.

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