Monday, March 12, 2012

411 The Fed's junk assets - Maurizio d'Orlando

The Fed's junk assets - Maurizio d'Orlando

I put item 2 out a few weeks ago, but it was buried under another material

Mailstar is running slow at present, so I'm using my contingency system.

(1) QE2 - done to save the banks. The Fed's junk assets - Maurizio d'Orlando
(2) China, Japan & Germany did "QE" for years; QE2 is just playing
catchup - Peter Morici
(3) The misleading 'Chinese Professor' Ad - China has proven that
stimulus works
(4) Reagan Budget Director: GOP abandoned Fiscal Responsibility by Tax
Cuts for Rich

(1) QE2 - done to save the banks. The Fed's junk assets - Maurizio d'Orlando

From: Maurizio d'Orlando <> Date: 27.11.2010 12:53 PM
Subject: Currency wars and the Fed's demise's-demise-20027.html#

11/19/2010 20:23


Currency wars and the Fed's demise

Maurizio d'Orlando

Plans by the US Federal Reserve to buy up US$ 600 billion will lead to
the dollar's devaluation. The decision is one way to respond to China's
policy to keep the value of the yuan so low that it can colonise the
world economy. US economic policy now appears directed at sacrificing
the Federal Reserve in order to implement a world currency.

Milan (AsiaNews) – The Federal Reserve has decided to buy US Treasury
bills for about US$ 600 billion in all, in monthly instalments of about
US$ 75 billion over eight months, until June 2011. However, this action
will not achieve the desired goal of economic growth, nor will it change
the US labour market, this according to most analysts and security
traders surveyed by Bloomberg in its quarterly "Global Poll". In fact,
more than half of 1,030 experts who took part in the survey, expressed
doubts about the Federal Reserve's move. For more than 70 per cent of
them, the Fed's second round of quantitative easing (QE2[1]) is largely
an attempt to adjust the exchange rate of the US dollar against other
currencies. Thus, according to such set of views, the Federal Reserve
(de facto but not de jure the US central bank) wants to redress the
trading disadvantage US manufacturers have accumulated over the last few
decades and cut the US trade deficit.

For many, the QE2 is seen aimed at contrasting by design those economies
which have set their manufacturing structure upon an export-driven
growth model. It is no accident that the sharpest critics of the Fed's
QE2 have come from China and Germany, both of which reiterated their
positions at the recent G20 summit in Seoul, South Korea. The huge
injection of liquidity in the US system conceals, in reality the desire
to manipulate the US dollar exchange rates, said Donald Tsang, president
of the Executive Council of Hong Kong. For him the risks are much
higher. "International investors should tighten their seat belts and get
prepared for unprecedented turbulence in currency markets, bond markets,
stock markets and the property market," said Tsang.

The end result could be something similar to the Asian crisis of 1997
and 1998. However, such criticism is too often self-serving in nature.

Currency wars and trade deficits: China's QE

The US trade balance has been in negative territory since 1980 (picking
up speed in 1985) against countries like Canada, Japan and Germany who
have seen their trade surplus against Uncle Sam grow. The negative
balance (for US goods) accelerated further in 1997, two years after
China's yuan was devalued, and customs duties began to be progressively
removed, easing the way of Chinese products into the US market. The US
trade balance, then, fell down the cliff when in December 2001 China
joined the World Trade Organisation (WTO), the international body
imposing regulations to world trade with the general aim to remove (or
at least reduce) tariff barriers within a framework of binding
agreements and treaties .

When it joined the WTO, China was allowed to keep a highly undervalued
currency, as well as tight controls on capital movement and the exchange
rate[2], as we had pointed out back in 2003. AsiaNews was one of the
first media to estimate the yuan's undervaluation (about 40-45 per cent)
by using a specific reference point, i.e. its purchasing power parity
exchange rate with the US dollar. In practice, we observed, the
exemptions have "enabled China to maintain the devaluation at a [more or
less] constant level as it was established by the Chinese monetary
authorities on 1 January 1994".[3] We said it years ago, and little has
changed since then.

China has been doing for all these years what the Federal Reserve did on
3 November. It has artificially kept its currency below its
(theoretical) market value, printed yuan and bought dollars (from
Chinese exporters) in order to buy (so far) US Treasury securities. It
is quantitative easing, Chinese- style, as Prof Morici shrewdly
noted[4]. This has given Beijing the means to accumulate surpluses
uninterruptedly and maintain an average 10 per cent growth even in this
phase of the current depression. Today, China's QE is reflected in the
country's distorted domestic demand. Instead of profiting hundreds of
millions of underpaid workers, such huge liquidity has been hoarded,
placed in shelter investment assets by Communist Party apparatchiks,
which explains the mainland's current real estate bubble and the many
empty buildings dotting the country's urban landscape.

Chinese responsibilities

Those, who in the past sang the praise of "globalisation" (based on such
rigged exchange rates formula) and said that it would have cushioned
against difficult economic times, today should be rather quiet, hold
their peace and meditate about today's crisis, which is for all intents
and purposes the first Global Depression. However, we cannot blame only
the Americans; the fault is global and there is enough to go around. For
at least ten years, the rest of the world accepted Chinese goods, sold
at a 40 per cent discount, in order to subvention a soft transition for
the Asian giant as it tried to replace a Stalinist command economy with
today's ‘Communist-Capitalist' system. Under the circumstance, China is
not in a position to lecture others.

The Fed's responsibilities

Having said this, there is nothing that justifies the Federal Reserve's
decision to start a currency war by launching its QE2 as a way to
redress America's trade imbalance. In fact, Donald Tsang's argument is
not very plausible. Even if this were QE2's final outcome, the Fed's
move was not started off or triggered by the need to redress trade
imbalances, but rather from a domestic imperative, namely the survival
of the US banks and financial system. All one needs to do is read
Bernanke's speech[5] to find out.

The table below, which is a modest examination by this author of the
Federal Reserve's balance sheet[6], makes this clear right away.
Undoubtedly, this table does not pretend to be an exhaustive analysis
and reclassification of the original balance; for that to be the case,
it would have to be more comprehensive.

4 March 2009 3 November 2010 increase
US Treasury Securities (total value) (a) $ 474,607 $ 839,990 76.99 per cent
of which of which of which
Federal securities, notes and bonds $ 412,914 $ 772,975 87.20 per cent
Federal agency debt securities (b) $ 38,252 $ 149,681 291.30 per cent
Mortgage-backed securities (c) $ 68,862 $ 1,051,037 1426.29 per cent
Total (a) + (b) + (c) $ 520,028 $ 1,973,693 279.54 per cent
Total Federal Reserve balances $ 1,943,478 $ 2,340,440 20.43 per cent
Proportion of (a) + (b) + (c)] out
of total Federal Reserve balances. 26.76 per cent 84.33 per cent

Figures are in millions of dollars. The chosen date, 4 March 2009, is
the last one referable directly the previous Bush administration after
President Obama and his administration took office in early February
2009. The date of 3 November looks at the situation before this month's

For the sake of understanding, when we speak above about federal notes
were are not talking about ordinary bank notes, but securities in large
figures that, unlike bonds cashable on due date, are cashable at any
time. As for the federal agencies that issued debt securities, we mean
organisations like Fannie Mae and Freddie Mac that issued subprime loans
(but not AIG, whose debt titles are registered separately).

A frightening US public debt

Looking at these numbers, certain things come to mind right away. With a
portfolio of US$ 773 billion, the Federal Reserve is on its way of
becoming the main holder of US Treasury securities. Within about one
month from the start out of QE2, it will overtake China, which currently
holds US$ 868 billion.

This is a patent economic inconsistency. What it means is that the Fed
is unable to sell a good chunk of its securities (failing to attract
both US and foreign investors) to meet, if nothing else, the federal
government's current spending commitments. This is not surprising though
since the US government debt is not "60 per cent of current gross
domestic product, "but rather "840 per cent," according to Laurence
Kotlikoff (a little less according to this author, but of the same

Secondly, one does not have to be a graduate in economics to realise
that the increases in ‘federal securities, notes and bonds' (+ 87.20 per
cent) and federal agency debt securities (+ 291.30 per cent) are huge
for such a short period of time (12 months). As for mortgage-backed
securities (+ 1,426.29 per cent), the jump is frightening and deserves a
closer look, which we shall do below.

In the meantime, if we take these three items together, we see that they
have represent the largest part of the total Federal Reserve Balances,
going from 26.76 to 84.33 per cent in the period under consideration.
The Fed' balance sheet has thus been completely turned around. What this
means is that what Ben Bernanke had said would not happen when he
appeared before the US Congress has actually happened, namely the
monetisation (conversion) of government debt into currency.

The scandal of mortgage notes

As for, mortgage-backed securities (MBSs), they saw a 14-fold rise. As
of November of this year they constitute 44.91 per cent of the total
Federal Reserve assets side of the balance sheet (albeit this not
exactly so). However, don't be fooled by the name. We are not talking
about securities that are backed by mortgages on real property. We are
talking about what journalists call "cash for trash".

First, most MBSs are not directly issued by big financial institutions,
but by ad hoc companies (SPV, special purpose vehicles), empty boxes
that contain hundreds of thousands of mortgage notes of various kinds. A
huge scandal is brewing right now, one that the main US media have
chosen to ignore so far. At the core of it are thousands of mortgage
notes signed by officials who were not entitled to sign them and who
practically had no control over the documents. In one case[7], at a
court hearing, one official said under oath that after she left high
school she went to college for a year but never graduated. Yet, despite
her lack of training in either economics or law, she was appointed
"notary" after a couple of years. And all she did was sign papers she
did not read and that were full of material and factual errors. Notes
such as these are worthless, and it would not take long for lawyers to
prove it. Up to now, no one knows what proportion of the Fed's portfolio
is constituted by such MBS, how many worthless mortgage notes it has, or
how big its percentage of risk of insolvency is. Any private company,
whether financial, commercial or industrial would have to make financial
provisions in its balance sheet for such a situation. However, on the
Federal Reserve's balance sheet, these mortgages are recorded at their
full nominal value. Putting aside the doubts that Kotlikoff (and more
modestly by AsiaNews[8]) raised about the sustainability of the US
federal debt and the solvability of the United States, mortgage-backed
securities represent almost half of the Federal Reserve's balance sheet,
and that is scary.

Sacrificing the Fed

It is very likely that "turbulences" will hit currency markets once the
QE2 is implemented. Contrary to what China, Germany and Hong Kong's
Donald Tsang claim, namely that QE2 is part of a deliberate and planned
currency war, we at AsiaNews think otherwise. Our criticism is no less
damning however when it comes to the health of the US financial system
or forgiving towards what the Federal Reserve has done.

For us, the Fed's decision to initiate a second round of quantitative
easing was not really motivated by a desire to lead the United States
and the world out of the current economic crisis, but rather from the
need to save US banks and their top officials from the consequences of
an unimaginable mess (or deceitful system), which was built up over at
least the past decade. The only deliberate thing here is the decision to
sacrifice precisely the very same Fed itself. This was decided not only
to save big financial corporations and their leaders, but also to lay
the ground for either a world Federal Reserve, a sort of SuperFed, or
(if the former fails) at least one for a North American Fed that would
rise out of the ashes left by the existing Federal Reserve, now destined
to explode as a result of hyperinflation.

Who controls the priests of money?

Last but not least, let us not forget the Fed's gold stock , all
261,635,072 ounces of them. In the Fed's balance sheet, their relative
value is given as US$ 11.04 billion, based on US$ 42.3 per ounce.
Altogether, they represented 0.57 per cent of the Fed's assets on 4
March 2009, and 0.47 per cent on 3 November 2010. If however, we look at
gold's actual market value (US$ 911 per ounce in March 2009 and US$
1,350 per ounce in November 2010), the value of Federal Reserve's gold
stock changes. Thus, they were worth US$ 238.5 billion on 4 March 2009
(12.26 per cent of balance sheet assets), and US$ 353.3 billion on 3
November 2010 (15.09 per cent).

A balance sheet should correctly reflect economic reality. By contrast,
the Federal Reserve's Statistical Releases are pure fantasy. The same
can be said for almost all other central banks with the power to print
money with legal tender. Many of them do not even release a balance
statement. Of course, all this is perfectly legal, but is it right and
legitimate? Is it right that an obscure esoteric sanhedrin of private
bankers, under no one's control but their own, can issue money, a public
good like few others?

[1] Quantitative Easing or QE. See Maurizio d'Orlando, "Squandering more
public resources," in AsiaNews, 3 November 2010.

[2] We have held this view since 2003, see Maurizio d'Orlando, "I
successi economici apparenti; la schiavit├╣, i fallimenti," in AsiaNews,
11 November 2003.

[3] See ibid., "Economic crisis: US, China and the coming monetary
storm," in AsiaNews, 9 December 2008.

[4] See Peter Morici, "QE2 and G20 Hypocrisy," in FOXBusiness, 8
November 2010.

[5] See Maurizio d'Orlando, "A global financial disaster is imminent,
says Bernanke," in AsiaNews, 13 October 2010.

[6] See Federal Reserve, "Factors affecting reserve balances," in
Federal Reserve Statistical Releases 5 March 2009
<>, and "Factors
affecting reserves balances," in Federal Reserve Statistical Release, 4
November 2010 <>.

[7] See Tyler Durden, "The Nine Most "Inconvenient" RoboSigning
Admissions BofA Would Love To Disappear," in Zero Hedge, 13 November
2010. All the officials who spoke said that they signed piles of paper,
thousands in fact, without checking what was on them. They only made
sure that they were putting their signature where their name was.

[8] "Real numbers show that the (real) ratio between total public debt
and GDP, depending on how public debt is defined, stands at between 450
and 900 per cent of GDP," in Maurizio d'Orlando, The world's economic
crisis, the real global warming," in AsiaNews, 10 June 2010. See also;
ibid. "This year, US public debt could reach end game," in AsiaNews, 3
March 2010; ibid., "As the world waits for hyperinflation and a world
government, Bernanke becomes "Person of the Year," in AsiaNews, 29
December 2009. See also by the same author, "Clashes between US, China
and Iran may account for record gold prices," in AsiaNews, 12 May 2006;
"War scenarios: Iran, oil embargo and the collapse of the world's
financial system," in AsiaNews, 7 August 2006; "Chinese stocks and the
risk of economic crisis," in AsiaNews, 22 May 2007. See many other
articles published on AsiaNews dealing with subprime, toxic securities,
bank rescue, etc. See again Maurizio d'Orlando, "Subprime lending to
trigger world's worst financial crisis since 1929," in AsiaNews, 19
September 2007; ibid., "Depth of the abyss of economic, social,
political chaos," in AsiaNews, 30 September 2008; ibid., "Paulson plan:
useless and harmful to democracy," in AsiaNews, 6 October 2008; ibid.,
"The way out of the crisis is neither Left nor Right," in AsiaNews, 25
November 2008; and ibid., "Economic crisis: US, China and the coming
monetary storm," in AsiaNews, 9 December 2008.

(2) China, Japan & Germany did "QE" for years; QE2 is just playing
catchup - Peter Moric

Morici: QE2 and G20 Hypocrisy

By Peter Morici

FOXBusiness Published November 08, 2010

As President Obama heads for the G20, Germany and others cry foul about
U.S. Quantitative Easing--QE2 in popular jargon.

Seldom has the G20 been treated to such hypocrisy.

On Nov. 3, the Federal Reserve announced plans to purchase $600 billion
in U.S. Treasury securities. Pushing liquidity into bond markets will
lower interest rates on mortgages and business loans, and hopefully
boost demand for U.S. goods and lower unemployment.

Since 1995, China has done the same on a grander scale. To keep its
currency about 40% below its market value against the dollar, it prints
yuan to purchase dollars, and then purchases U.S. Treasuries. That makes
Chinese exports artificially cheap, and powers a huge trade surplus and
10 percent economic growth.

Inexpensive Chinese goods at Wal-Mart (WMT) come at a steep, hidden
cost. Those destroy U.S. factory jobs that are not replaced by new
employment to make exports.

At the October IMF meetings, Germany and Japan rebuked U.S. requests for
help in persuading China to stop intervening in currency markets. That
was hardly surprising, as both profit from currency mercantilism too.

Through the 1980s and 1990s, the Bank of Japan intervened in currency
markets to keep the yen, and auto exports, artificially cheap.
Subsequently, it imposed near zero interest rates, and encouraged
private investors to borrow yen, convert those to dollars and then
purchase higher yielding U.S. Treasuries—a disguised variant of China's

After the Federal Reserve moved to near zero rates, too, Japan made
clear that it will intervene in currency markets should the yen fall too
far, spooking speculators from betting on yen appreciation.

The German scheme is more complex.

Exchange rates translate the whole register of prices for goods and
services in each country into the dollar, which is the international
yardstick for pricing products and debt.

Germany is in the euro-zone with Portugal, Ireland, Greece, and Spain,
whose economies are less efficient than Germany and sovereign debt is
suspect. The risk one of their governments will default pulls down the
value of the euro.

Were the Euro zone to split up, the value of the new deutschemark—and
resulting dollar prices for German products on world markets—would be
much higher than the current euro-dollar rate implies. Conversely,
dollar prices for the new currencies of Greece and others would be much
lower, and competitiveness of their products much stronger on world
markets, than the current euro-dollar rate indicates.

The euro-zone permits Germany a de facto undervalued currency and huge
trade surplus, and to lecture Mediterranean nations and the United
States about the virtues of Teutonic thrift.

Meanwhile, weaker euro-zone economies labor under de facto overvalued
currencies and punitive austerity.

U.S. consumers and businesses are spending again but too much goes into
imports instead of creating American jobs. Since the recovery began, the
combined U.S. trade deficits with China, Japan and Germany is up 127
billion and now totals $448 billion.

With the Gang of Three stonewalling on currency talks, the U.S. economy
is growing well below potential and unemployment hovers near 10 percent.
Now, the United States has resorted to QE2.

The United States should tax purchases of yen, yuan and euro used to
import goods from those three economies. Set it at about 40 percent
until the Gang of Three agrees to acceptable exchange rate reforms.

At a recent dinner for western financial ministers, Secretary Geithner
was told the Americans don't matter anymore.

Such a tax would inspire a different tune—perhaps, "God Bless
America"—and a pilgrimage to Washington to strike a deal.

Peter Morici is a professor at the Smith School of Business, University
of Maryland School, and former Chief Economist at the U.S. International
Trade Commission.

(3) The misleading 'Chinese Professor' Ad - China has proven that
stimulus works

The Phenomenal 'Chinese Professor' Ad

OCT 21 2010, 11:07 PM ET

Via Ben Smith of Politico, this amazing ad from "Citizens Against
Government Waste," which is the first spot from this campaign season you
can imagine people actually remembering a decade from now. "I'm not a
witch" might be remembered as a novelty; I think this will be remembered
-- like "Morning in America," "Willie Horton," the "Daisy Girl" ad from
the 1960s, and perhaps even "3am Phone Call" -- as a notably effective
introduction of a new theme. (You don't have to agree with any of these
ads to recognize their power.) Watch, marvel, and learn.

CAGW, a descendant of J. Peter Grace's 1980s-era anti-wasteful spending
commission, is in principle bipartisan, though in this election its
campaign about the menace of "stimulus spending" has an obvious partisan
tilt. And if you know anything about the Chinese economy, the actual
analytical content here is hilariously wrong. The ad has the Chinese
official saying that America collapsed because, in the midst of a
recession, it relied on (a) government stimulus spending, (b) big
changes in its health care systems, and (c) public intervention in major
industries -- all of which of course, have been crucial parts of China's
(successful) anti-recession policy.

In case you're wondering, the banner that appears briefly behind the
speaker says "?????," or "Global Economics." I could be wrong, but
something about the look of the students -- haircuts, teeth -- makes me
doubt that this was actually filmed in China. [Update: Ahah! Suspicions
justified! They are DC-area college students. Their skin and teeth are
different from what you'd see in a big Chinese college lecture hall.
Though perhaps in 2030...] The main point is, this is the ad of the
cycle so far. Now, if these skills could only be applied to helping the
public understand real budget and economic tradeoffs once the election
is over.

Also: a "reply" from Campus Progress, with the same Chinese narration
but somewhat different English subtitles.

UPDATE: Someone who knows about the Chinese economy writes with this caveat:

 >>Very interesting advert but I feel uncomfortable praising the
technique over the fundamental lack of truth in the message. Yes, skill
is admirable but when someone uses a skill in a harmful way - say to
mislead or misinform, I can't muster praise for it. There have been
masterful propagandists in our past that have achieved terrible outcomes
- I'm thinking Nazi Germany for example.

As you point out, the message of this ad, that some future China
surpassed America by not using stimulus spending intentionally misleads
the viewer. China has successfully out-stimulused (sp?) us and proved
that it works.<<

(4) Reagan Budget Director: GOP abandoned Fiscal Responsibility by Tax
Cuts for Rich

Date: 29.11.2010 09:18 AM

November 28, 2010 02:30 PM

Stockman: Bush Administration and Paulson Destroyed Last Vestige of
Fiscal Responsibility We Had in the Republican Party

By Heather

As William Cohen noted, David Stockman continues to make the rounds
after bucking with the Republicans on tax cuts for the rich last summer.

A Republican for Higher Taxes:

David Stockman has never been one to shy away from a roaring
economic-policy debate. The former boy-wonder budget director in the
first Reagan administration and the architect of Reagan's supply-side
economic policies, Stockman has been very busy lately rejecting the
tax-cutting recommendations of Republicans in Washington and arguing
that we must get our fiscal house in order or watch our way of life
continue its decline. As an "imperialist power," he says, America is in
danger of being at "sundown." Stockman, who turned 64 on Wednesday, has
always been ahead of the curve on tax and fiscal issues, and it appears
that he is ahead of it again this time, too. Read on...

Stockman continued his media appearances with CNN's Fareed Zakaria and
went after the GOP for their single minded devotion to tax cuts.

Reagan Budget Director: GOP Has Abandoned Fiscal Responsibility By
Adopting ‘Theology' Of Tax Cuts:

As Congress prepares to take up extension of the Bush tax cuts during
its lame duck session, Republican lawmakers have been unanimous in
demanding that the cuts for the richest two percent of Americans be
extended, claiming they are necessary for economic growth and that tax
cuts (miraculously) pay for themselves.

While independent economists have shown these arguments to be false,
today on CNN's Fareed Zakaria GPS, President Reagan's former budget
director took on his own party for pushing this faulty logic. David
Stockman, who led the all-important Office of Management and Budget
under Reagan and was a chief architect of his fiscal policy, criticized
today's GOP for misreading Reagan's legacy by adopting a "theology" of
tax cuts. Stockman has spoken out before, but took perhaps his strongest
stance yet against his own party today, saying "I'll never forgive the
Bush administration" for "destroying the last vestige of fiscal
responsibility that we had in the Republican Party."

Transcript below the fold.

ZAKARIA: And we are back with David Stockman, Ronald Reagan's Budget
Director, the architect of the Reagan tax cuts. We're going to talk
about what to do now.

You say the only solution, logically, is you have to cut spending and
raise taxes.

STOCKMAN: That's correct.

ZAKARIA: That simply that the hole is too large that you could - you can
indulge in the fantasy that you just do one or the other, but part of
what you want to do is you really feel very comfortable raising the
taxes - raising taxes substantially on the rich because you feel that
there has been a real divergence in the fate of - of Americans over the
last 25 years.

STOCKMAN: Yes, because this wasn't a real solid, sustainable,
productivity, technology-based prosperity. Much of this was a debt-
fuelled money - easy money bubble. In fact, it was a serial bubble.
First, the dot-com and then the housing and consumer credit and the ATM
machine and everybody buying, you know - borrowing from their house in
order to buy things they couldn't afford.

So all of this ended up, strangely enough, shifting wealth and income to
the very top strata of our society in a way that we've never seen in
history. Because it wasn't real, sustainable, mainstream economic growth
and prosperity. One number that I think is shocking is that in 1985 the
top five percent of households had $8 trillion of net worth. By the peak
of this bubble in 2007 they had $40 trillion.

ZAKARIA: So from $8 to $40 trillion.

STOCKMAN: Eight to 40. Five fold in 25 years.

ZAKARIA: And the economy didn't -

STOCKMAN: A $30 trillion gain.

ZAKARIA: Right. And the economy didn't grow five fold.

STOCKMAN: The economy didn't grow five fold, and it was because of the
bubble valuations of assets, stocks and bonds and real estate and all of
the other speculative classes.

I'm saying that it is now so distorted that to get the economy back to
health, we're going to have to reset some basic parameters of our
economy, and one of them in this environment would be a higher tax
burden on the upper income than a conservative, like myself, would
ordinarily advocate.

But right now, this isn't about growth. This isn't about Morning in
America in 1980. This is about solvency. This is about cleaning up the
mess the morning after from a 30-year binge that wasn't sustainable as
we've learned.

ZAKARIA: And one of the problems at the Republican Party, it seems to
me, is, as you say, is tax cutting has become a kind of theology and so
that when you - when you bring up the fact that if you do extend the
Bush tax cuts or if you have further tax cuts, you will lose revenue.
People say, no, no, no, that's not how it works. You know, if we cut
taxes, we will get more revenue. Reagan did it, and they often point to
the Reagan tax cuts.

STOCKMAN: Yes, and, unfortunately, that was one of the unfortunate
legacies of the 1980s that I don't think was really intended. After
1985, the Republican Party adopted the idea that the tax cuts had solved
the whole problem and that, therefore, in future deficits didn't matter
and the tax cuts would always be the solution of first, second, and
third resort.

And I think once that got embedded and a whole generation of new
Republican congressmen and senators became drilled in that catechism and
then became positioned politically on that proposition, it really led
the party out into the wilderness.

And then when Dick Cheney, who should have known better, in the 2001
debate, I think it was, about the Bush - first Bush tax cut, it was
totally not need. He said, well, Reagan proved that deficits don't
matter. Reagan proved nothing of the kind, and, yet, that became the
mantra and it just led the Republican Party away from its traditional
sound money, you know, fiscal restraint principles that were really the
heart of the Republican Party and its job in our system.

The Republican Party's job as the Conservative Party is to be the party
that says no, the party of restraint, the party of fiscal
responsibility. The others can be the party of, you know, dealing with
social issues and so forth, and that's necessary as well. But when you
have both parties playing the Santa Claus and you have no one willing to
spend political capital on fiscal and financial restraint, we end up
with the situation we had by 2008.

ZAKARIA: You're pretty critical of the bailouts themselves. You think
that they did a lot of damage. I mean, Warren Buffett said we should
thank the United States that it intervened, saved the system, but you
are very concerned about it, and I say - and you say this as a Michigan
congressman who voted against the Chrysler bailout.

STOCKMAN: The first one in 1979 and I think history proved that that was
correct. I am strongly opposed to bailouts, but particularly bailouts of
Wall Street. And the idea that Wall - that the government ought to be
thanked as Mr. Buffett said last week, for the bailouts as just so much

The panic that occurred in September, 2008 was not in main street
America. It wasn't businesses about ready to close their doors because
they didn't have cash to meet payroll. That is all urban legend. It's
mythology. The panic that was going on was in the fifth floor of the
Treasury Building. It was in the Eccles Building where the Federal
Reserve and Bernanke reside, and they created the panic. They stirred up
Congress. They were so concerned about where the stock price of Morgan
Stanley and Goldman was that they didn't look at the bigger picture.

If a couple more banks had gone under, they would have gone under. If
the Golden stock had gone down to $10 and stayed there for a couple of
years, it wouldn't have been the end of the world. But when we did that,
that was the waterloo for fiscal policy because how can you ever tell a
congressman from Alabama to cut cotton subsidies after you have bailed
out every one of the major banks and not only bailed them out, but
within a year they were back to a picture of rosy pink health and paying
bonuses which they will this year of $144 billion, nearly the highest in

And I'll never forgive the Bush administration and Paulson for basically
destroying the last vestige of fiscal responsibility that we had in the
Republican Party. After that, I don't know how we ever make the tough

ZAKARIA: David Stockman, pleasure to have you on.

STOCKMAN: Thank you.

ZAKARIA: We will be back.

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