‘The Single Most Drastic Error in Policy in Modern History’
by ilene - February 8th, 2010 12:38 pm
‘The Single Most Drastic Error in Policy in Modern History’
Courtesy of Michael Panzner at Financial Armageddon
PBS Newshour has posted a brief but fascinating interview with David Stockman, Director of the Office of Management & Budget during the Reagan era. Despite — or, perhaps, because of — his political and financial industry background, he pulls few punches in his remarks about the financial crisis and its aftermath. Here are a few excerpts:
On the relationship between Wall Street and Washington --
DAVID STOCKMAN: …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.
On the AIG bailout --
DAVID STOCKMAN: The fact is, the heart of the bailout was AIG. That was $80 billion worth of CDS that was going to go sour.
[PBS Newshour business and economics correspondent] PAUL SOLMAN: CDS meaning?
DAVID STOCKMAN: Credit default swaps, OK? And we weren’t bailing out AIG. We were bailing out the banks, because the banks had bought a lot of low-caliber or subprime loans, wrapped some insurance around it from AIG, and said, presto, we have a AAA, a security on our balance sheet.
They didn’t. They had garbage on their balance sheet. And the bailout was to make sure that they didn’t suffer multi $10 billion write-downs on that AIG-supported loan.
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
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site