On Stockman & Liquidation

David Stockman’s New York Times Op-Ed has ruffled a lot of feathers. Paul Krugman dislikes it, saying Stockman sounds like a cranky old man, and criticising Stockman for throwing out a load of meaningless numbers that sound kind of scary, but are less scary in context. Krugman is right on both counts, but what Krugman overlooks is Stockman’s excellent criticism of crony capitalism, financialisation, systemic rot and Wall Street corruption of Washington, something Stockman has seen from the inside as part of the Reagan administration.

The important part:

Essentially there was a cleansing run on the wholesale funding market in the canyons of Wall Street going on. It would have worked its will, just like JP Morgan allowed it to happen in 1907 when we did not have the Fed getting in the way. Because they stopped it in its tracks after the AIG bailout and then all the alphabet soup of different lines that the Fed threw out, and then the enactment of TARP, the last two investment banks standing were rescued, Goldman and Morgan Stanley, and they should not have been.

As a result of being rescued and having the cleansing liquidation of rotten balance sheets stopped, within a few weeks and certainly months they were back to the same old games, such that Goldman Sachs got $10 billion dollars for the fiscal year that started three months later after that check went out, which was October 2008. For the fiscal 2009 year, Goldman Sachs generated what I call a $29 billion surplus – $13 billion of net income after tax, and on top of that $16 billion of salaries and bonuses, 95% of it which was bonuses.

Therefore, the idea that they were on death’s door does not stack up. Even if they had been, it would not make any difference to the health of the financial system. These firms are supposed to come and go, and if people make really bad bets, if they have a trillion dollar balance sheet with six, seven, eight hundred billion dollars worth of hot-money short-term funding, then they ought to take their just reward, because it would create lessons, it would create discipline. So all the new firms that would have been formed out of the remnants of Goldman Sachs where everybody lost their stock values – which for most of these partners is tens of millions, hundreds of millions – when they formed a new firm, I doubt whether they would have gone back to the old game. What happened was the Fed stopped everything in its tracks, kept Goldman Sachs intact, the reckless Goldman Sachs and the reckless Morgan Stanley, everyone quickly recovered their stock value and the game continues. This is one of the evils that comes from this kind of deep intervention in the capital and money markets.

There are plenty of other writers who have pointed to this problem of propping up casino finance, including myself. But very few of them are doing so on the pages of the New York Times. So while it’s rather disappointing to see Stockman railing against deficits when the evidence shows capital and labour markets are still very slack even with large deficits, and while it’s rather disappointing to see him making technically-incorrect claims about the United States being “bankrupt” — sovereign lenders controlling their own currency cannot go bankrupt — we should not throw the baby out with the bathwater. Stockman is a cranky old man — but when it comes to drawing attention to real-world problems with crony capitalism, he’s doing a fine job.

Many will say that just letting the banks liquidate was not an option. I tend to disagree — depositors could have been protected, and a new part-nationalised banking system could perhaps have been built and capitalised just as quickly as the old dinosaurs were bailed out — but even if we assume liquidation to be impossible there are plenty of other options to bring the financial sector to heel. It is extremely disappointing to see the Obama administration fail to go after the banks in any meaningful way. The administration could have tried to break up the TBTF megabanks, reimpose Glass-Steagall, impose the Volcker Rule, fire failed management. Perhaps even try to impose the Chicago Plan. Without Fed liquidity, the US banking sector is toast, so almost any reform is possible.

Instead the banks took their bailouts without any discipline, and guess what? We’ve had even more systemic corruption, carrying on in the same pre-2008 mould — the London Whale, Ina Drew, Kweku Adoboli, the theft of segregated deposits by MF Global, even while financial sector stocks have soared. Central banks have reinflated the markets, but with the same people who created the last bust still in charge, it looks much more like a reinflated bubble than a road to lasting prosperity. Papering over the cracks…

The result of that is soaring corporate profits while employment and wages remain depressed. Feast for Wall Street, famine for Main Street. Obama may deploy plenty of populist rhetoric, but outcomes speak for themselves:

fredgraph (19)

Stockman has actually gone further in the past, criticising the toothlessness of Dodd-Frank in dealing with the problem of Too Big To Fail, and even endorsing a return to Glass-Steagall and the banning of corporate campaign donations. This 30-minute video is really worth watching:


In the long run, I think it will become patently clear that throwing liquidity at the financial system won’t solve anything other than immediate liquidity concerns. The rot was too deep. The financial sector needed real reform in 2008. It still needs it today.

38 thoughts on “On Stockman & Liquidation

  1. But the ATMs would have stopped working. Letters of Credit would not have been trusted. See my FDIC document I sent you.

    The laws have been changed to deal with TBTF collapses, and depositors with balances over insured amounts will be treated as capital of last resort, as they should be. Wealthy depositors will do their due dilligence as they should. High returns is acceptance for the bank’s lending officer’s lending decision, at the appropriate rate I may add.

    This will limit our Minsky moment in the future.

    I see a debt capitalisation crunch coming. Everybody not living hand to mouth, is an equity investor now.

  2. The markets are a dodge, a slick subdivision of organized crime. That they use insider information, ultra-high speed computers, algorithms, and sophisticated mathematical equations are secondary considerations. They are simply dishonest, and the odds always lie with the house.
    To make money the market must move neither up nor down, but simply move. Sometimes people like Michael Milken can make it move in a desired direction by colluding with others.
    The profits from such maneuvers can be enormous.
    It doesn’t make sense to most investors because they are operating in an information vacuum, and no one knows what goes on inside corporate board rooms except people like Geoffrey Skilling and Andy Fastow. Neither corporate executives nor board members are usually held personally accountable. Fines are paid, the thugs promise to eat their broccoli, and the game resumes.
    Corporations are engaged in illegal activity each and every day. A wink and a nod, for the purposes of profit making, can confer as much information as direct statement from the CEO about future profitability. Accounting standards are considered negotiable, and banks often compete for their share of the lucre.
    Calling it investing is something like calling Jesse James an entrepreneur.

  3. Pingback: On Stockman & Liquidation ← gold is money

  4. Krugman failed to acknowledge or appreciate that Stockman was making a political statement rather than putting forth an economic plan (He must just be a cranky old man).

    Stockman makes a case pointing out the expedient nature of government. This is what he has always done during his career in government. ( taken to the woodshed by Reagan on several occasions)

    I hope the Occupy Wall Street (OWC) movement reads between the lines and gets the real message. OWC needs to broaden their view and do the expedient thing…. Make the summer of 2013 the occupation of Wall Street and Washington…

    • Well I would certainly have preferred it if Stockman was putting forward a real economic program backed by data in his NYT piece instead of just complaining.

      • Considering that his primary purpose was to promote his book release, a well thought out economic plan would have been just one of dozen or so well thought plans currently in publication. He did not claim to be beyond expediency, be an economist or even a successful business-man. He was a face and voice used to flesh out the Reagan economic agenda…. I will read his book…

    • My epithany, that will drive my philosophy forward from this day on, was that any position of power is inherently prone to corruption, and if one assumes all people in power are corrupt, then it is up to those holding such positions of power to prove otherwise.

      If laws or procedures are not in place to root out corruption or cronyism, then the fundamental decision for all voters giving their vote is. 1. Is this person corrupt? Let the politicians tremble in their boots.

      The current economic and central banker system facilitates this corruption, as did the church in times of Kings.

      I am tired of using the tools of our system to bring justice. They do not work due to corruption and self interest. I will point the finger of accusation to those in position of power. If they cry “you have no proof” I will cry, “you destroyed the proof”.

      The democractic system relies on the gullibility of the people. The evilness pervades our system because these intelligent criminals rely on the system to protect them.

      I will reduce my political attack on the elite to simple slogans. “THEY ARE CORRUPT”

      I have never met a rich man who has not made it immorally, illegally or through deceit.

      I have never met a Politician who kept their promise for my vote. Their contract with me is null and void.

  5. #The result of that is soaring corporate profits
    while employment and wages remain depressed.

    what soaring profits ? according what data series?

    its all FAKE PROFITS. gaap pro -form. WHY? cause according daily/monthly treasury statement corp taxes ( rolling 12 month sum) is still 50% ( fifty) below 2008y peak… THATS THE FACT..

    there is only one REASON WHy employment and wages are depressed. and only one.
    its ‘free/fair’ trade w/ countries where cost of labor 5 to 10 times less than in USA . its nafta, china , thailand , vietnam ,etc

    MAKE IMPORT TARIFFS 100 PERCENT, and you will see how fast jobs will be back
    and TAX 100% OF salary in excess of $ 1 mln for big shots working for multinational companies


    • I agree with you. As an Australian, my country would lose out under protectionism. However when Australia ran under protectionism we built our own Tractors, machines, food prices were lower, people had work and owned their own homes. 20 years ago I argued with my Socialist economics teachers whompeddled her party line that the dismantling of tariffs would improve the economy. I feel vindicated.

      The only people who benefitted are the other world economies. As they now reside in my country, own multiple properties and drive expensive foreign cars, while my people struggle, I feel that the Party Elders who facilitated this should be imprisoned. Criminals. Corrupt. BTW the Party Leader, Prime Minister Bob Hawke who ushered in this protectionism dismantling is now a highly paid consultant facilitating the sale of Australian assets to the Chinese. With a tax payer funded pension and free travel for life. CRIMINAL!

  6. what soaring profits ? according what data series?

    See the above graph from the St. Louis Fed — blue line labelled CP is corporate profits. We can call current corporate boom unsustainable, built on sand, but we cannot say that the profits are “fake”. The total profit level as a percentage of the overall economy is at an all time high, above even 2008 levels.

    there is only one REASON WHy employment and wages are depressed. and only one.
    its ‘free/fair’ trade w/ countries where cost of labor 5 to 10 times less than in USA . its nafta, china , thailand , vietnam ,etc

    This is a massive simplification. It’s definitely one issue, but you’d need a lot more evidence to say it is the only reason.

    • Can you strip out Banking profits? Mark to fantasy has supported profits. I am sure Bank of Cyprus had a wonderful reporting season over the last 5 years.

    • sir, you obviously have no idea what you are talking about ..

      ‘See the above graph from the St. Louis Fed’ comes from ‘bea’ . its called ‘(corporate profits with inventory valuation and capital
      consumption adjustments) ‘ http://www.bea.gov/newsreleases/national/gdp/2013/gdp4q12_3rd.htm

      basically its fantasy profits . corporations have 2 sets of book, for investors – gaap fantasy profits, and for IRS – real profits and real dollars.

      AGAIN, IF GDP IS AT HIGH POINT, and ratio profits/gdp is at highest point, why again ‘real paid corp taxes’ are 50% below 2008 y peak?

      alx west

      and please stop writing ‘WE’ like royal we. its not polite.

      • You make an excellent point, being a CPA and having prepared GAAP accounts, with Tax Effect accounting adjustments, taxation rules, apart from accelerated depreciation or R&D benefits, better reflect cashflow. GAAP manipulates earnings per share. I am going to look into this further.

      • ‘See the above graph from the St. Louis Fed’ comes from ‘bea’ . its called ‘(corporate profits with inventory valuation and capital
        consumption adjustments) ‘

        No, I was using the unadjusted figure. They are two different series:


        According to the actual data, we can see that the level of corporation tax paid has almost recovered its 2008 peak:


        Even using CPI-adjusted numbers (and assuming that levels of corporate tax avoidance haven’t risen, which is a probable explanation for this disparity) current levels are still far higher than at any point before 2000, suggesting that relative to labour earnings (which are still massively depressed) corporate America is doing very much better:

        Or, if you like we can use corporate net cash flow adjusted for CPI, which is far-and-away above the pre-recession numbers:

        My point is that there has been no such recovery in labour’s share of income (it’s fallen) or the employment-population ratio (it’s still massively depressed) not even on the surface, not even in an illusory way. That’s the point. You can go on making irrelevant points about levels still being below the 2008 peak, but that’s not the point. The point is that the trajectory has been upward for corporations and financiers since the 1970s (and especially since 2000), and downward for everyone else. This is why the CPI/GDP vs WASCUR/GDP data is probably the most illustrative.

        Corporate America is not only making record profits, it’s sitting on a record pile of cash:

        • That is the Baby Boomer’s cash and my possible inheritence. Everybody has a chance to invest in stocks.

          Productivity gains are meant to transfer wealth from labour to owners of capital. Workers need to by stocks or miss out. Workers once picked wheat by hand, then scythe, now a single worker drives a combine harvester. This applies in manufacturing and now services.

          But things are getting cheaper too, so the worker is better off today, unemployed, then the busiest worker of yesteryear.

          By the way, how does that Fed get the data? In Australia, not all Corporations report, but they file tax returns.

        • sorry pal, you still dont get..

          EVERYTHING YOU’RE USING IS FAKE.. all data series from ‘bea’ is junk…

          you mentioned
          “According to the actual data, we can see that the level of corporation tax paid has almost recovered its 2008 peak: http://research.stlouisfed.org/fred2/series/FCTAX

          no its not. according bea corp taxes in 2012y were : 372.3 Billions of Dollars, well its a lie.
          here’s sept 2012 monthly treasury report , you know its END OF FINANCE YEAR .

          Click to access mts0912.pdf

          SEE PAGE 5 , CORP INCOME TAXES.. ITS 245 bln .. not 372 bln according BEA..

          #2 top was in 2007 y..
          see http://www.fms.treas.gov/mts/mts0907.txt it was 370 bln ..

          === 2
          as far as corp cash concerned.. well for fair/balance point of view you should have mentioned debt accumulated .. you see , you can have cash by 2 ways , selling w/ profit
          or just issues debt in this ultra low rate enviroment…

          read latest from mish ( http://globaleconomicanalysis.blogspot.ru/2013/04/cash-cow-of-50-largest-us-companies-who.html )

          ‘As you can see, actual cash on hand at non-financial corporations is a net negative $850 billion. ‘

          good luck

          alx west


          I don’t know where this disparity between Treasury figures and BEA figures is coming from on this one specific metric, but all I can assume is that the two figures are different series, and that the larger one includes some income from what the Treasury report refers to as “off-budget receipts”, which totalled $569billion YTD. There is no reason whatever to assume that the pre-recession BEA data was not using the same methodology.

          Certainly, the full BEA series is consistent with the Treasury receipts figures, which allays my fears almost completely:

          As for Mish, well, his failure to include financials in his estimations is almost as hilarious as it is myopic, because they are sitting on the biggest cash piles of all by far not least in the monstrous levels of excess reserves:

          Generally, I do think that this huge growth in corporate profits is unsustainable and probably a bubble, but I don’t think that it’s a result of fake statistics. If you want to believe all this Unskewed Polls and ShadowStats-esque stuff about the books being cooked, then that’s up to you but personally I like to have hard evidence before I start calling fraud.

  7. It is possible that Stockman may finally be getting a clue. However, i have to read his book first. Why I say possible, because he still thinks the politicians control the process of financialization. They don’t, the FED controls this process. It’s the FED that took the USA off the gold standard and into a pure fiat currency, not Nixon as Stockman says. The FED has caused everything and will continue to do so. Why, because austerity does not work and the people are waking up to inflation. The only other solution, war, has already been tried and has left us even worse off. The money, the savings belongs to the people, not the FED, or the government, the banks or Wall Street. Stockman still does not show he gets this.

  8. I’ve always felt for David Stockman because he could never say what he really wanted to say [even to this day]. Obviously [being in the White House], he intimately understood serious power, but must have had this raging debate going on in his head between the forces of good [acting in the interests of the electorate] and the forces of evil [acquiescing to TPTB].

    Now he can only feel guilty as he lives off the very same funds plundered, attempting to make some sort of intellectual restitution by criticizing those who stole more than he.

    • Show me an honest Politician, and I will show you an ex-politician.

      The system is corrupt, because the human nature of these psychopaths must be in power at all costs. That makes them inherently corrupt.

      Unless the system is changed to attract Statesmen, men who have achieved in life, who become Politicians because they want to leave an honest legacy, then I am sorry but things will never change.

      Democracy as a construct was fundamentally flawed from the beginning, because psychopaths usurped the King’s power for their own perverted power. They just used lies and the gullibility of the people togive them the ‘muscle’ to oust the King. If the King set up the system to root out corruption, then voluntarily handed power to the people, then we would not have the situation we are in today. When I say people, I say learned people without self interest.

      This is not possible, due to human nature. Selflessness is a higher ideal, rarely attained by people. A benevolent Monarchy is the only real solution. But due to genetic throwbacks, this balance gets thrown around every generation.

      Thus the US constitution was the only real solution to this age old problem. A framework to control power. I thoroughly support defenders of the Constitution. Due to the inherent rot in the US system of democrcy, secession of states with a populace who have the intellect and moral fibre to save this system, is in my opinion, the only beacon of light for moral man to look towards and support.

      There is only one generation left to advise the next generation to save their future. The Libertarian movement must act now to have the economic power to compete as equals with the new world order, controlled by the BRIICs. For the sake of truth, justice and the freedom of honest men, this must happen as soon as possible.

  9. Aziz,
    While I agree that corporate profits are at a high point according to your charts, I would like to know if the same is true for SME`s and even smaller companies – the sole traders or people with just a couple of employees, my guess would be that their profits are not soaring, and they make up a very significant part of the overall economy – I`d be interested to know either way, as SME`s and the like make up a very significant part of the economy, and are where I beleive the bulk of new jobs and economic growth will come from

    • Unincorporated businesses (Sole Traders and Partnerships) incomes come under Individual incomes not Corporate Profits, As we have seen this is declining. Big business is consolidating to achieve economy of scale, monopolising and handing big dividend payments to the owners of capital. Unless one buys the stock of these businesses one does not participate. Over the last 20 years one would have been better off participating in employee share plans. The DOW and SP500 is rarely displayed to include returns including dividends. Unfortunately the privatisations and rampant monopolisation of business was initially participated in by the wealthy and connected, and with money printing via low interest rates and leverage, the middle class has been decimated.

      It would have been lovely and benevolent if the architects of this legal transition advised the general public, provided low interest loans to them, and warned them that IF they don’t participate, they will be worse off. Sadly, due to the inherent corruption and evilness of the people in power, this never occurred.

      • And it is a form of a default, as they pay fraction back in real terms. Like the companies and nations do when they go bankrupt, so in that respect Stockman isn’t wrong to say that the US is bankrupt.

        • I find the misuse of the term “bankrupt” annoying. Yes, treasuries are probably in a bubble. Investors in treasuries today may end up taking a steep inflation-related haircut. But that’s not “going bankrupt”. “Going bankrupt” would be a 100% haircut due to literally running out of money. Like Greece, who don’t control their own currency.

          Lenders should do their due diligence. If you’re lending in a fiat-denominated currency against the historical background of a 2013 dollar having the equivalent purchasing power of 4 1913 cents, it is only prudent to expect to see some of your principal inflated away. Negative real interest rates are the norm today. People or organisations who don’t like that should invest their money in something other than deposits, treasury bonds or money market funds. The options for assets that haven’t yielded a negative real return are wide.

        • I thought bankruptcy was eroded purchasing power. I do not mean offense, I enjoy your site, and Altfeed.com often links to your posts. But is sovereignty really absolute control over markets?

        • Why would you associate the term “bankruptcy” with “eroded purchasing power of a single nominal unit of currency”?

          I mean, the key difference is that with a true bankruptcy a country on the gold standard might run out of gold and not be able to honour its pledges and so default forcing a haircut on creditors.

          Under inflation, creditors get a full nominal return of their fiat-denominated principal, while the purchasing power of that principal is eroded. This can occur under a gold standard (gold has experiences +20% yearly inflation in some periods!) as much as it can under a fiat regime, and whether or not you will end up losing money via a negative real interest rate is a gamble that currency lenders inherently accept when they lend money, especially when they lend money to a monetary sovereign.

  10. As Plato ( a type of proto fascist) said ordinary voters in democracies are generally ignorant of government policies so have no idea what type of candidate is best. End. This facilitates political corruption in democracies and currently almost everyone is corrupt. People at the top are corrupt and the people at the bottom are corrupt trying to hustle each other…women cheating the men and men cheating the women…..me me me.

    • ” People at the top are corrupt and the people at the bottom are corrupt ”
      A true and painful reality of being human. If it were any other way we would not be here to observe it, thus the creation of the creator.

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